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

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

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

Is the proposed Consumer Financial Protection Agency elitist?

Why do consumers need consumer protection when choosing financial products? Because many financial products are hard to understand, and deceptive marketing that exploits that complexity can lead even smart consumers to make bad choices.

That sounds like common sense. But opponents of the proposed Consumer Financial Protection Agency (CFPA), say such protections could be "elitist" because they would effectively restrict the sale of innovative and potentially beneficial products only to the most sophisticated buyers. "Conservatives have long argued that liberalism reflects a paternalistic desire on the part of elites to control and limit others’ choices while leaving themselves unaffected," stated Peter F. Wallison of the American Enterprise Institute in his comments yesterday before a Senate subcommittee. "The [proposal] seems to validate exactly that critique. Providers will be at risk if they offer some products to ordinary consumers but could feel safe in offering the same products to those who are well educated and sophisticated."

Harvard Economist Sendhil Mullainathan, who specializes in behavioral economics–the melding of economics and psychology–has an answer to that. Sophisticated or not, educated or not, we can't all be experts in everything. And without some protections, many people make very damaging mistakes. 

In his testimony yesterday, he illustrated by comparing how we shop for paint and how we buy digital cameras and mortgages. Though Benjamin Moore has 140 types of white, the process of selecting white–or any other color–doesn't necessarily require expert skills (apologies to interior decorators). 

Madoff's 150-year sentence doesn't mean the end of financial scams

Unless you were among his many victims, you might think the 150-year sentence Bernie Madoff received today would put an end to big investment frauds on Wall Street.

But sadly Madoff is not the only swindler out there who would be happy to part you from your cash. One recent reminder: the indictment of R. Allen Stanford, the Texas financier who pleaded innocent last Thursday to federal criminal charges of stealing $7 billion in an international Ponzi scheme.

Check out who is likely to be taken by a scamster, and the details on investment schemes and how to avoid being ensnared by them.–Mandy Walker

What would a new Consumer Financial Protection Agency do?

President Obama yesterday unveiled his 89-page blueprint for Financial Regulatory Reform. Here's a summary, supplied by the Wall Street Journal, of proposed consumer financial protections:

For regulations protecting consumers and investors, the proposal:

• Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.
• Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.
• Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.
• Creates an outside advisory panel to keep an eye on emerging industry practices.
• Says the new agency should play “a leading role” in educating consumers about finance.
• Gives the new agency authority to ban or restrict mandatory arbitration clauses.
• Improves transparency of consumer products and services disclosures.
• Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.
• Proposes the government “do more” to promote these simple products.
• Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.
• Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.
• Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
• Promotes access to credit in line with community investment objectives.
• Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.
• Requires non-binding shareholder votes on executive compensation packages.
• Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.
• Urges exploration of ways to improve participation in 401(k) retirement plans

While it remains to be seen whether this agency will actually see the light of day, every one of its proposed activities is designed to benefit consumers and individual investors, for whom fine-print disclosure statements and current state and federal safety nets have been insufficient. For an example of the ways lenders, credit card companies and other peddlers of financial services and products take advantage of consumers, check our recent article, "Financial Traps are Flourishing."

Needed: Protection from bad financial products

A bill recently was introduced in the Senate by Sen. Richard Durbin (D-Il), and co-sponsored by Sen. Charles Schumer (D-NY), and Sen. Edward Kennedy (D-Ma), to establish the Financial Product Safety Commission, a single federal agency to oversee the myriad financial products that bombard consumers.

"The Nation’s multiagency financial services regulatory structure has created a dispersion of regulatory responsibility, which in turn has led to an inadequate focus on protecting consumers from inappropriate consumer financial products and practices," the bill says.  "The absence of appropriate oversight has allowed excessively costly or predatory consumer financial products and practices to flourish."

Defend Your Dollars, a Web site sponsored by the advocacy arm of Consumers Union, offers an amazing gallery of people who've been victimized by financial fraud and chicanery. After reading some of them, you'll understand why CU and many other organizations support the establishment of such an agency. Click here for CU's fact sheet about the bill. And if you have faced or are facing foreclosure, share your story with us.—Tobie Stanger

Buzzword: Green shoots

What the phrase means: Hints of economic recovery. This phrase is turning up in all manner of blogs, speeches, news reports and commentaries of late.

Why the buzz: While the economic news is decidedly mixed, a number of signs, including an increase in pending home sales, a reduction in initial jobless claims (based on a four-week moving average), and a continuing stock market rally are giving some observers of the economy reason for optimism. In statements on Monday before the Congressional Joint Economic Committee, Federal Reserve Chairman Ben Bernanke presented a mixed economic view. But beside all continuing gloom, he mentioned some hopeful signs.

The term "green shoots" already has spurred a backlash. However, many of us seeking relief  in this economy may be just as happy to let it take root.--Tobie Stanger

Fed chief: Stabilize economy first, then overhaul regulation to minimize the next crisis

There are ways to fight off the nation's next financial crisis, Federal Reserve Chairman Ben Bernanke said today, but before we worry about that governments must get financial systems working again to stabilize the economy.

Speaking at the Council on Foreign Relations, Bernanke said the U.S. government will continue to pour money into financial institutions if necessary.

"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," he said. "In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn."

He went on to say that new regulations could "make crises less frequent and less virulent."

First among his four reform proposals was to deal with companies that are "too big to fail" before they fail. The government already has Citigroup and AIG on life support--costing hundreds of billions of dollars--and Bernanke, without mentioning any company by name, said the Fed's "commitment to avoiding such a failure remains firm."

"Looking to the future, however, it is imperative that policymakers address this issue by better supervising systemically critical firms to prevent excessive risk-taking and by strengthening the resilience of the financial system to minimize the consequences when a large firm must be unwound," Bernanke said.

The second step would be to strengthen the rules under which the financial markets operate, making sure the infrastructure remains strong in times of stress.

Third, Bernanke said, regulations need to be flexible so as not to "overly magnify the ups and downs in the financial system and the economy," such as allowing banks to lend more money in a bad economy than in a good economy.

Lastly, Bernanke proposed a government group that would monitor and address large-scale systemic problems.

Bernanke said his own agency may or may not be able to do the job but should certainly be involved.

"As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," he said.

The stock markets reacted well to Bernanke's comments, particularly about not letting big banks fail. Financial stocks rallied in the morning, climbing around 10 percent after weeks of declines.

Did the president tell us to buy stocks?

If you were half-listening to the president speaking this morning, you might have gotten the impression that he was telling Americans the financial markets had hit bottom and it was time to invest in the stocks again.

"What you're now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," Obama said. "I think that consumer confidence ... as they see the American Recovery and Reinvestment Act taking root, businesses are starting to see opportunities for investment and potential hiring, we are going to start creating jobs again."

But not so fast. That was the second part of the president's answer on why stock prices shouldn't matter.

During a meeting with British Prime Minister Gordon Brown, a reporter had asked about Obama's economic policies and the plummeting markets, which closed at 12-year lows on Monday.

The first part of Obama's answer was this: "What I'm looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."

Later in the day, the president's chief spokesman, Robert Gibbs, said his boss wasn't cheerleading for the stock market. Rather, Gibbs said, Obama was reassuring Americans that the economy would recover, as he has done many times before.

"I don't think ... what he did today was markedly different than what he's done in the past," Gibbs said.

"The president has on many occasions talked about the fact that brighter days for our economy are ahead, if we take important steps and make important decisions now about addressing many of the problems and challenges that we face."

The White House press secretary also made it clear that the president was not doling out stock tips.

"It’s not his job to comment on or react to what the market does up and down on any given day, but instead to look at the longer term, at the longer horizon at what can be done in this country to meet those challenges," Gibbs said.