New survey bites back at 'free lunch' seminar scams

I don’t know about you, but whenever I get one of those “free” lunch or dinner invites in the mail from some financial services outfit, I can’t throw it away fast enough. Sometimes I want to use tongs.

But lots of people apparently take up the offer. Some 6 million Americans have attended one of these cringe-worthy events in the past three years, according to AARP and the North American Securities Administrators Association (NASAA). 

Typically billed as educational seminars, the lunches and dinners often tend to be little more than sales pitches for inappropriate, high-commission products—or worse.  A joint survey released today by AARP and NASAA reports that 40 percent of respondents who attended one (all Americans 55 and older) said the presenter tried to sell them something during or after the seminar. And it doesn’t end with dessert: 46 percent said the presenter tried to make a follow-up appointment at their home.

If you or anybody you know are ever tempted to take up a free-meal offer, here's some food for thought: 

• The AARP/NASAA survey referenced above.
• Some related news from the Securities and Exchange Commission (SEC).
• Advice from Consumer Reports on avoiding investment scams, including those that involve a supposedly free meal.  — Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

Foreign-stock trading for the rest of us

Fidelity recently began offering some online customers–active traders, or those with at least $1 million at Fidelity–the opportunity to buy and sell stocks listed on foreign exchanges. They now join other online brokers who also provide this service, such as Interactive Brokers and E*Trade.

Don’t feel too left out if you don’t use Fidelity or similar brokers, or don’t make many trades. There are plenty of other ways for your investments to gain international exposure right here on our major exchanges. American Depositary Receipts (ADRs) have been around for some time, and are available for most of the largest foreign corporations.  And now exchange traded funds are numerous (probably too numerous, but that’s a topic for another day). You now have a choice of over 100 ETFs with which to invest in foreign markets.

Also, buying stocks like a local may not necessarily be more efficient, or profitable.  Recently, a study by a leading Indian business newspaper determined that the returns of Indian companies were actually superior if you bought their ADR instead of buying the stocks directly from the Bombay Stock Exchange.      

There’s also the tax men to consider, both ours and theirs. Many countries require a tax withholding on any dividends paid out, and it’s often at a rate that is higher than the maximum, 15-percent rate on qualified dividends currently in place for Americans. To avoid double taxation, you can retrieve the difference back from Uncle Sam via tax credits, but in the meantime you’re out of pocket. This credit, by the way, is also available to owners of mutual funds with holdings abroad. You should receive a 1099-DIV form from the fund by the end of January, indicating the share of foreign tax you’ve paid.–Chris Horymski

Variable annuities may be getting even worse

Regular readers of Consumer Reports will know that we’ve never been big fans (or even small fans) of variable annuities, insurance contracts that promise you payments based, in part, on the performance of whatever mutual funds you pick when you sign up. 

So we were interested to see this Wall Street Journal article on variable annuities the other day, indicating that many insurers may be reducing the guarantees on their products, making them an even worse deal for consumers.

While annuities have a tax advantage over conventional mutual funds, in that your earnings are tax-deferred until you take money out, they also have some serious drawbacks. Those typically include high sales charges and considerably higher annual fees than regular mutual funds, plus punishing surrender charges if you need to get your money out early.  And don’t even get us started on the aggressive sales tactics often used to push them.

The only reasonable case we can see for buying an annuity is if you don’t have access to other tax-deferred accounts, such as a 401(k) plan or an IRA, or if you have already maxed-out on them. If you must buy one, be sure it’s from a really solid insurer. 

Subscribers to our Consumer Reports Money Adviser newsletter will find a more comprehensive analysis of variable annuities in their December issue.  

Buzzword: Fiduciary standard

What does it mean? Financial advisors who follow a fiduciary standard are required to put the needs of clients first. They must fully disclose how they are compensated, and any conflicts of interest they might have. Registered Investment Advisors (RIAs) have such a duty, and are registered with Securities and Exchange Commission. Members of the National Association of Personal Financial Advisors and Financial Planning Association have taken similar oaths or adhere to codes of ethics. The vast majority of brokers, however, many of whom work for the large brokerage houses, have no fiduciary duty. The commissions they earn for selling investments may lead them to promote their own company's products or ones that earn them the most money. Their loyalty is to their company first, not to you. Advisors with a fiduciary responsibility, however, forgo commissions and often are fee-only, meaning they charge a flat fee or charge based on a percentage of assets under management.

Why the buzz: This slightly arcane subject has taken on new importance in light of the market meltdown of 2008. Some of the stock brokers or other investment professionals on whom people relied for guidance in making financial decisions may have not provided the best advice (one of the charges in lawsuits against Bernie Madoff was "breach of fiduciary duty"). Brokers have the duty to ensure the "suitability" of investments for their clients, but critics say that standard doesn't necessarily restrict fee-laden investments or place clients in investments that correspond with their tolerance for risk. As a result, Congress is this week discussing how to introduce more transparency into the world of financial advice as part of the Investor Protection Act of 2009 and potentially bring all people who dispense investment advice under a fiduciary standard. Whether the job of creating new regulations for investment planners will fall to Congress, the SEC, or independent regulator, FINRA, remains to be seen. For advice on screening a broker, check Consumer Reports' advice here.–Chris Fichera

Ways to improve college 529 plans

The Treasury Department's analysis of Section 529 plans, published this week, offers some useful recommendations for improving these state-based college savings plans, which have become increasingly popular financing vehicles for the middle class.

The report offers several ways states can improve their plans. Here are two we like a lot:

•Offer more age-based index funds. Funds that provide stock and bond allocations tied to a child's age are popular and well-suited for many middle-class families. That's because the proportion of stock gradually decreases over time, reducing risk of serious financial loss as the child approaches college age. But 5 of 48 state-based programs don't offer such funds. And while index funds have proved to be a cost-effective way to achieve good returns over the long run, only 23 of the 43 states with age-based funds offer them in index versions.

•Dump the home-state bias. Only Arizona, Kansas, Maine, Missouri, and Pennsylvania give a state income tax break to residents who put their money in the 529 plans of other states. If all states would do this, more parents could shop around for the least-costly plan that suited their needs.

Click here to read more of the Treasury's recommendations. Recently, Consumer Reports Money Adviser's Money Lab analyzed 529 plans, and found 5 that earned A's.  Click here for the report.

Buzzword: Media risk

The money world abounds with risks, as the past year  has vividly illustrated. And financial jargon has a name for most of them. There is, for example, “credit risk,” or the chance that a debtor won’t repay. Or “interest-rate risk,” the danger that interest rates will rise, causing investments like bonds to lose value. Or “currency risk,” when the value of an investment declines because of a change in the underlying currency. Just recently, via this article in a trade magazine for financial planners, we read about a new one: “media risk,” or the possibility of making a dumb move by overreacting to the financial news. Not that any of us would ever do anything like that, of course...

President Obama puts focus on retirement saving

In his weekly radio address yesterday, President Obama laid out what he called "several common-sense changes" aimed at bolstering Americans’ savings, especially for retirement.

The major one will encourage employers to enroll more workers automatically in a 401(k) or IRA plan.

Automatic 401(k) enrollment has been around for some time. The automatic IRA, which we covered here earlier this summer, would provide a way for employers without 401(k) plans to offer their workers something similar.

Enrolling employees automatically in a retirement plan, rather than having them elect to sign up for it, is intended to get people to save for retirement who might not otherwise be inclined to.

Of course, people fail to save for many different reasons. In some cases it may be procrastination or a lack of understanding of their options, which automatic enrollment should help address. Others, though, may not save for the future simply because they can barely ends meet in the here and now. So this initiative, well intentioned as it may be, isn’t going to do much for them all by itself. However, another Administration proposal, currently before Congress, would expand the saver’s credit, which could make it more practical for people in that situation to put some money aside.

Other initiatives mentioned in the radio address include:

• A check box on tax returns allowing people to receive their tax refunds in the form of U.S. Savings Bonds. Savings Bonds generally have to held for 12 months before they can be redeemed and for five years to be redeemed without penalty, so this could encourage at least short-term saving (assuming anybody actually checks that box).
• Making it possible for employees to direct payments from unused vacation and sick days into their retirement accounts, rather than taking them in cash. This could benefit workers with the financial resources, as well as the will power, to take advantage of it.

--Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

By the numbers: Economic indicators hit 50-percent benchmark

In money news, 50 is the magic number today. First, the Institute of Supply Management (ISM) announced that for July, its manufacturing index increased to 48.9 percent, which puts it on a pace to cross 50 percent this month. The ISM's index measures economic activity in the nation's manufacturing sector. A reading above 50 would indicate an overall expansion.

Also, today the S&P 500 surpassed 1,000, which is a 50-percent rise in value from its low of 666 in March. (The tech-heavy Nasdaq Composite Index today passed 2,000.)

Market historians point out that this is exactly how we would identify the end of this miserable recession. The ISM figure is usually coincident with economic recovery, and stocks, almost magically, tend to anticipate the recession’s end by running up in price.

The big question going forward is the unemployment rate, which, unfortunately, tends to lag the economic cycle. Unemployment peaks just after the end of most recessions, but the Obama Administration isn’t anticipating the fever to break before the middle of next year.–Chris Horymski

Should retirees pay off the mortgage?

It's a question many new retirees face: Pay off the mortgage and be done with it, or keep it and invest the money instead?

In fact, even more people seem to be in that situation these days, either because they're retiring earlier, moved around, or refinanced fairly recently. 

I've looked at the question a bunch of times in the past and come to the conclusion that it's often close to a toss-up in purely financial terms. However, the peace of mind many retirees get from not having that big debt hanging over their heads can be a powerful argument for paying it off. Today's scary thrill ride of a stock market might be another one.

More support for that point of view appears in a new paper, "Should You Carry a Mortgage into Retirement?" by Anthony Webb, a research economist at the Center for Retirement Research at Boston College. He concludes that virtually all retirees who have the money to pay off their mortgage would be better off if they just sat down and wrote a check.

If you're facing that decision now or will be soon, Webb's very readable, five-page paper would be worth a look. --Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

Foil that bank overdraft fee with online personal finance software

Forty-four percent of banks and credit unions make more money on overdraft income than on net income, says a new survey of banks by Moebs Services Inc., a consulting company serving the banking industry.

That's shocking but not surprising to many of us faced with bank fees and charges that are growing both in size and frequency.

New technological tools, however, can help you foil some of those fees, particularly overdraft charges. When we recently reviewed online personal finance services, we found several that will send you e-mails or messages to your cel phone so you know when your balance is in the danger zone. If you've got a smart phone, you can transfer money from one account to another without visiting the bank or logging on to a computer.

That feature is only one of many that make these services useful. If you want to know your net worth or get an idea of how much you're spending on entertainment, these services can let you know quickly. Unlike the old standby Quicken, however, you've got to be willing to share some account information with an online server. Click here for advice on vetting the security of the service you're considering.–Tobie Stanger