Trading discussion: Nov. 7, 2003
|
Anatomy of a stock trade
KAREN GIBBS: So just how does the New York Stock Exchange work? Well, let’s start at square one. How is stock traded on the New York Stock Exchange and who gets a piece of the action? Here is the anatomy of a stock trade.
(videotape package begins)
LINDA JAY: Okay, SBC, ($23.62) for 44 at ($23.63), take 44 trade at ($23.63). Sold. 15,000 trade at $63. I just sold him 15,000 at ($23.63), and I still have two other buyers here. I’m going to sell you 10,000 at ($23.63) on dot. 11,000, that’s fine. 11,000 cleans him up. 10,000 is dot.
GIBBS: Whoa. That was 30,000 shares sold in 20 seconds. But how did we get to that? What happens first?
Your stock trader makes the call. Your trader is the middleman in the stock purchase. Andy Brooks of T. Rowe Price walks us through how the purchase gets started.
ANDY BROOKS: Well, what we do here is we buy and sell stocks, securities for our clients, our mutual fund clients and our separate accounts.
GIBBS: Walk me through it. What is the first thing you do?
BROOKS: So let’s say I get an order to buy 50,000 shares of SBC, and that’s going to come to our trading desk and it’s going to come to us electronically on a blotter, so if you follow me we’ll go through the process. I’m going to send you an order to buy 50,000 shares of Southwest Bell, and what I’d like to do is, I’m good to buy it right here.
GIBBS: So who is on the other end of that call? A floor trader. The buy and sell process really slows down here. The floor broker is sort of the middleman for your broker. Twenty-year NYSE veteran Joe Cangemi's company takes the call from the broker.
GIBBS: Joe, can you take me through a trade? Let’s talk about SBC Communications. What happens? You’re an institution, say my mutual fund company calls you, which phone do you pick up or who picks it up, that simple.
JOE CANGEMI: My account managers are right here in the booth, right here on the trading floor. They’re talking directly to institutions, mutual funds, it may be very well, it could be your mutual fund. So, for example, my account manager, Danny, head trader, Danny is requesting a look in exactly SBC. I look at my handheld. It says give me a look in SBC for Karen.
Customers have that power of choice. They have the ability to call a firm like ours right here on the trading floor, talk to an account manager who’s managing their interest right from the trading floor, using experienced brokers in the trading crowd. Hopefully that’s where I kind of fit in. You’re going to see they can send me orders electronically out from here to my handheld, and I travel to the point of sale, interact with the specialist, the electronic order flow, the specialist book to make investment decisions. My job is to head into that direction of SBC.
GIBBS: But wait. The NYSE says they use latest technology to keep track of buy and sell orders. But just like it did 100 years ago, the order actually gets walked over to the specialist. And the trade still gets made face to face.
CANGEMI: As the order flow comes in from the customers, you’ll see them in the booth facility, and it travels wirelessly from my handheld and we’ll move from one location to the other. Mining that information, executing orders. As it is right now, we’re heading to SBC. The customer would like to look in the stock.
GIBBS: Okay. That’s Southwestern Bell.
CANGEMI: Southwestern Bell. A customer of mine would like to look in the stock, so we’re going to head out to the point of sale where we’re going to interact with a specialist out there.
GIBBS: And Linda’s the specialist that covers SBC. Linda Jay started on the trading floor in 1984. A mother of two, Linda became one of the first female specialists five years ago.
JAY: I’m a specialist for LaBranche. I work here on the floor of the New York Stock Exchange, and I’m making a market today in SBC Communications.
GIBBS: Wait a minute. Okay, so far you called a middleman, who called a middleman who still needs to talk to one more person before the stock actually gets bought. And remember, all of these people get a commission, a cut of your trade.
Now this where the really big problems exist. The whole idea of specialists has come under fire.
Wall $treet Week with FORTUNE has learned that the SEC is investigating whether several companies illegally made trades by "trading ahead" of customer's existing orders: The specialists would see interest in a stock, hold customer orders and buy the stock for themselves; then the specialist waited for the price to go up and quickly cashed out at a profit to one of the waiting customers. The specialist's firms might only make pennies by cheating on a large stock trade, but those pennies add up. The SEC says the illegal trades cost the investor -- you and me -- $155 million dollars.
SBC Communications, the stock is so deep, it’s so liquid, why do we need a specialist to do that?
JAY: No, I completely understand. I mean that’s been probably the most-often-asked question lately. Here’s the thing in the stock with SBC Communications, and it’s very, very liquid. You get a stock like this and it has bad news. Let’s just go with the bad news scenario for today. Let’s say you have eight or 10 sellers. If you only have two or three buyers, without a specialist in that scenario, SBC is going to trade much, much lower. If a specialist steps in and buys stock on the way down and makes that ride a little less bumpier, okay that’s what we’re here to do.
Now, again, and a stock as liquid as this, a lot of people just assume, I mean of course there’s more than 10 buyers in SBC, but see the 10 buyers and the 10 sellers are seldom here at the same time. So what you would have is, with just 10 sellers and no specialist, a stock trade very, you know, at a deep, deep discount and then once you’ve found the level for the buy side, then it would trade directly back up. And that would make it a very, very volatile situation, and that’s not good for the individual investor and that’s not good for our list of companies either.
GIBBS: Does LaBranche have an inventory of SBC or are you working from a zero sell position and are trying to buy and sell like everybody else is?
JAY: Well, in a perfect world, a specialist likes to start every day with no inventory and sort of go with the flow. I mean at this moment in time I do have, I’m long 50 or 60,000 shares of SBC.
GIBBS: And there’s a risk to that in...
JAY: There absolutely is a risk for that. Now you have to keep in mind that SBC is already up 14 cents, so I could very well be buying this at the high of the day. But at this moment in time, I actually have a bigger sell side here than a buy side. Now one of the, if I’m anticipating the buy side coming back, which I am, I can’t very well take that sell side down 10 or 15 cents because first of all that’s not the right thing to do, and secondly I have to get on the phone and account for my actions to the people at SBC. This is a buyer, TWP. He bid for 25,000.
GIBBS: The floor traders you see here want to buy shares of SBC. Linda follows the rules and promptly sells the shares she has on hand.
JAY: He bid for 25,000. I sold him 10. Half of that was out of my inventory. Now we’re going to make it a $62 bid. At this moment, if you can see my book, I actually do not have a big sell side here. And now I’m getting a little, a buy here in the system. So let’s do this.
GIBBS: So you’ve actually got more people wanting to buy the stock than people selling. Linda then closes the gap between the current price and the asking price by matching buyers with her inventory.
JAY: Exactly. Offer it at ($23.64). Oh, that’s even better. Okay, SBC, ($23.62) for 44 at ($23.63), take 44 trade at ($23.63). Sold. 15,000 trade at ($23.63). I just sold him 15,000 at ($23.63), and I still have two other buyers here. I’m going to sell you 10,000 at ($23.63) on dot. 11,000, that’s fine. 11,000 cleans him up. 10,000 is dot. Now, I just sold 30,000 shares there.
GIBBS: The specialist's assistant then sends notice of the transaction to the firms placing the orders. And that's it. It took a lot of people and lot of expensive technology, but the deal is finally done, and the stock is traded.
(videotape package ends)
A better way to trade
GIBBS: Do we really need all those people? Is this the best way to trade stocks? Jerry Putnam, CEO of the electronic trading exchange Archipelago, says this is absolutely not the best way. New York Stock Exchange president Robert Britz obviously disagrees.
Well, Jerry, we just saw how many people it takes to make a trade. Tell me why this isn’t the best way, the best system, and it doesn’t serve the interests of all investors.
JERRY PUTNAM: I think I probably actually would answer that in a different way. It is a system for trading large volumes of stocks. But, for example, ArcaEx, our exchange system, is all electronic. There’s no specialist, there’s no intermediaries, and there’s no one that actually joins together in that process.
I think Linda was describing how she would step in –- Linda, I think was her name –- how she would step in and fill in for orders. Well, on our system, I’ll give you a good example, yesterday Microsoft probably traded, I bet, at close to 80 million shares. We executed roughly half of those trades, and no specialist. I mean it’s a heavily traded, liquid stock. We didn’t need anybody to fill in. I think that from my view, the role or the value of that role is overblown. But then again, it’s just, it’s the New York Stock Exchange’s business model, and they’re free to pursue that model. Ours is un-intermediated: Everyone gets the same deal, a level playing field, fast executions, and it’s just a different choice.
GIBBS: Bob, it appears that half of those traders wanted to buy Microsoft stock through your exchange. Your thoughts on the specialist system.
ROBERT BRITZ: Well, I want to come back to your earlier question. I actually agree with Jerry. I think there is no best way to trade stocks other than the way investors want to trade stocks. And clearly with an 82 percent share of market in NYSE-listed stocks, they’ve embraced our value proposition, and that value proposition is very straightforward. We provide investors with the best price. We provide them with the greatest certainty of execution. We have the highest fill rates in the industry. We provide them with the lowest cost of trading anywhere in the world. And we give them the greatest choice in terms of how they want to do business.
When you were on the trading floor, you were actually watching six-tenths of 1 percent of our orders being executed and 30 percent of our volume. The other 99 percent of our orders and 70 percent of our volume is executed electronically, including an execution that is fully electronic with a turnaround time of one second. So the question is, provide investors with as many alternatives as can support reasonable execution strategies and let investors decide how they want to trade.
GIBBS: But, Bob, even you have to admit that the New York Stock Exchange did find some problems with the specialist system and fined five of those companies, and the SEC is conducting an investigation. So something seems to be a little off kilter there, and the individual investors’ interests aren’t being best served.
BRITZ: Well, I don’t mean to correct you, Karen, but in fact no charges have been brought against any specialist firm, either by the stock exchange or by the SEC. There is absolutely a pending investigation to see whether or not some specialists acted inappropriately. Having said that, and it’s a very serious issue, whether it involves $1.98 or $100 million, if what is alleged to have happened -- i.e. that specialists interposed between natural buyer and natural seller where they should not have -- that’s a very serious matter. Having said that, we looked at three years’ worth of transactions -- not a sample -- every single transaction, and we found substantially less than 1 percent of the transactions that even had a question mark attached to it.
GIBBS: Jerry, ArcaEx is also owned by broker/dealers who have their own interests at heart. Who’s looking out for the best interests of the individual investor?
PUTNAM: Well, in our system, since again, I mentioned earlier, we have a very flat, fair, open system, there’s actually a software program. It’s an algorithm that dictates how the orders are going to be bought and sold, and there’s no one self interest that can cause the software to modify the way it does a trade. So when you put an order in, you know why it got filled, you knew, or why it didn’t. It was only because you were at the best price, you were next in line. There isn’t any self interest that can interfere with that.
If I could go back for one second about one thing Bob said, though, and Bob, I’ll challenge you on the 81 percent market share. I mean I know it’s there, and New York does trade the vast majority, over 80 percent of the volume in their stocks. (But) on the over-the-counter side of the business, where Cisco and Microsoft and Dell, I mean some of the most active securities in the world trade, there is no one participant that has that sort of dominant market share, and it’s not because there’s a difference between the way Dell Computer trades and the way IBM trades. It’s the fact that New York has had a monopoly. There are certain rules and regulations that protect New York’s floor-based system that makes it impossible, almost impossible for a system like us or an exchange like ours to compete with it, because we’re always forced to the lowest common denominator, which is that human system on the floor.
And believe me, I mean when you watch on that tape people walking back and forth on the floor, I mean, Karen, I know you’re way too young for this, but way back when, when the operator was pushing those buttons in to connect telephone calls, I mean that’s what you were watching on the floor of the New York Stock Exchange. Competition changed that. Competition, a lack of competition is what keeps things the way they are, in my view, at 80 percent market share on New York.
GIBBS: Bob, your response?
BRITZ: Karen, it’s all about what investors want. We have an electronic execution not unlike Jerry’s execution, one second turnaround time. Seventy-five percent of our orders are eligible to transact that way day in and day out, and yet only 6 to 7 percent of our orders choose to do that. So to deny the other 93, 94 percent the opportunity to choose to execute a different way, we don’t want to dictate how investors trade. We don’t want to guess how they will trade. We simply want to blanket the landscape with execution products and let the investor decide how he wants to do business with the New York Stock Exchange. And given our market share, that tells me that investors are validating our business model.
GIBBS: Bob, how can investors be sure that they are getting the best price in the system?
BRITZ: Because it’s published, Karen, and 94 percent of the time the New York Stock Exchange has the best bid and the best offer. So you’re talking about a small window where the other so-called competing markets will have a better bid or better offer, and that’s why the markets are electronically linked. They’re effectively, every market in the national market system is a portal or a gateway to every other market, and orders flow to wherever the best price is. As it happens, better than 94 percent of the time that best price is going to be on the New York Stock Exchange. And you’ll forgive me, Karen, if I don’t apologize for the New York Stock Exchange providing investors with the best price.
GIBBS: Jerry, your thoughts?
PUTNAM: Karen, I mean it’s kind of, you know this point that less than 1 percent of the time a specialist may have (a conflict of interest) -- It’s like Coca-Cola saying, you know, only 1 percent of the time someone dies from drinking poison Coca-Cola, and it’s really pretty good. So, and investors get to speak their mind and they come here. You have to understand, the system, there’s an old system of rules in place that dictate, that dictates how we trade stocks. We’re trying, as we compete with one another, we are trying to get those rules changed so that we can compete in the way and bring the service that we bring best or what we deliver best to our customers to the marketplace.
The New York Stock Exchange stands in the way every chance it gets when those rules are challenged or attempted to be modified. They have a monopoly power over those rules. The SEC chairman right now is considering a proposal to change those rules. But up until now, every chance that New York or another member in its self interest has had a chance to block a rule change that would allow competition to flourish, they block it. Again, the best example, in 1996 when the new order, when the order-handling rules came in, Nasdaq had basically 100 percent market share in its marketplace. As a part of those rules, Nasdaq was forced to open itself to competition.
Today there’s roughly three players: ArcaEx, Nasdaq, and Instinet that trade the dominant share of Nasdaq stocks. It’s not one player. Once they were open to competition, people like us showed up and the market share changed. I’m telling you it’s just this monopoly power that’s in place that prevents others from doing better. And, Bob, you know what? Go ahead. We’ll go to the meeting, vote for the rule that allows us to compete, and I’ll come back on here and I’ll tell you how we did.
BRITZ: The bar is significantly higher in the listed marketplace than it is in the over-the-counter marketplace. And the ECN is to compete. There’s only one way to compete, and that is to provide what investors have come to expect in the listed marketplace. And if you’re not going to compete on best price and you’re not going to compete on certainty of execution, you’re simply not going to get it done in the listed marketplace.
GIBBS: All right. Bob Britz, that’s got to be the final word. Thank you very much for joining us. And Jerry Putnam, thank you.
BRITZ: Thank you, Karen.
PUTNAM: Thanks a lot, Karen. Thanks, Bob.
BRITZ: See you, Jerry.
PUTNAM: See you.
GIBBS: Bob Britz, Jerry Putnam, thank you very much for joining us.
PUTNAM: Thanks, Karen.
BRITZ: Thank you, Karen.
Investigating misconduct
GEOFF COLVIN: America’s top cop in protecting investors is Stephen Cutler, chief of enforcement for the Securities and Exchange Commission. He’s on the hot seat in both the New York Stock Exchange reform controversy and the spreading mutual fund scandals. He joins us from Washington.
Mr. Cutler, a report from your agency, the SEC, obtained this week by The Wall Street Journal said New York Stock Exchange specialists routinely trade ahead of their customers, enriching themselves at the expense of investors in violation of exchange rules. Is it time for the SEC to investigate the specialists?
STEPHEN CUTLER: Well, I can’t comment on a particular investigation, even whether we are investigating something, but I can say that the role of the specialist is critical. Essentially he stands in the middle of two transactions: a buyer and a seller. And that’s got to be done correctly and appropriately, and if it’s not, we’re going to step in and make sure that it is.
COLVIN: Is there any need for the specialists in today’s day and age?
CUTLER: Well, and I’ve heard arguments about that, and certainly over the years the specialist has played a very important role. I’m not the policy maker. I’m just the enforcer. If they’re breaking the rules, if they’re breaking the law, we’ll go after them and ensure that they’re brought to justice. I’ll leave it to others to determine whether that’s the right kind of structure for our marketplace.
COLVIN: A sort of larger question is this SEC report seemed to suggest that the New York Stock Exchange may be unable to regulate itself. Do you think it’s up to the job?
CUTLER: Well, I know the head of enforcement at the New York Stock Exchange, Dave Doherty, and I know that he is a terrific prosecutor and regulator, and I have great confidence in him. But part of our job is to ensure that the self-regulatory organizations are doing what they’re supposed to do, and when they’re not, we will step in. We did it recently with the Chicago Stock Exchange, and if folks at the American Stock Exchange or the New York Stock Exchange or whatever stock exchange aren’t doing their job, again we will take appropriate action.
COLVIN: John Reed, the interim chief of the New York Stock Exchange, this week proposed an overhaul of how the place is governed. Do you think his proposals will work?
CUTLER: Well, I certainly think that they are a first step, and what remains to be done after that first step, we’ll just have to wait and see. I know again that the chairman of the SEC, William Donaldson, is very focused on what the right and appropriate structure of governance is at the New York Stock Exchange.
COLVIN: Switching to the mutual fund scandal, Senator Peter Fitzgerald of Illinois said this week:
"The mutual fund industry is now the world’s largest skimming operation, a $7 trillion trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation’s household, college, and retirement savings."
Is he right, and what’s the SEC doing about it?
CUTLER: Well, we’ve certainly found a disturbing level of misconduct, misconduct that makes me, as a prosecutor, outraged, but also, as a citizen and an investor, makes me outraged as well. And sometimes you get the feeling these days that if it’s Tuesday, it must be yet another enforcement action against another mutual fund or another mutual fund executive or another brokerage firm. What we’re doing about it is using a tremendous amount of resources, scarce though they are, to pursue every one of these cases, along with our regulatory counterparts on the state side, Mr. Spitzer, Mr. Galvin, and others.
COLVIN: These mutual fund practices -- late trading, market timing -- have been going on for years, if not decades. Why is the SEC only now taking action?
CUTLER: Yeah, I think that’s a fair question, and I would start by saying, do we wish we had discovered these practices earlier? Of course we do. You’re talking about an agency that over the years was really cash starved and was forced to prioritize where it was looking for things, where our inspectors, where our examiners were going.
And the one thing I think that we probably weren’t doing was assuming that mutual funds -- who were complaining to the SEC, boy, there are market timers out there, give us tools to combat that -- were themselves complicit in those practices, that they were engaged in them. We now know better. We now know that they were engaged in those practices, they were complicit. And we’re going to ensure that where they broke the law, they will pay for it.
COLVIN: So far I think the SEC has filed charges against only one mutual fund company, Putnam. Do you expect more charges to be filed?
CUTLER: I do, I do. More will be coming. This is a very wide-ranging investigation. It’s very broad. And there will be other cases.
COLVIN: Individual investors have always regarded mutual funds as a trustworthy place to put their money. I mean funds go up, they go down, but it’s a trustworthy place to put their money, or so people have always thought. Now investors want to know: How can they know that they’re putting their money in an honest mutual fund?
CUTLER: Right, and I think that’s one of the more disturbing aspects of this thing. I think that mutual funds have always been viewed as that safe haven for the individual investor. And if I were to give any advice here, and that’s not what I do for a living, I’d say ask questions. Ask your mutual fund, what policies do you have in place to protect me? What’s my board of directors of my fund doing for me to ensure that there isn’t late trading, that there isn’t market timing going on at my fund?
COLVIN: Stephen Cutler, thanks so much.
CUTLER: Thank you for having me.
Fees, funds and compliance
COLVIN: The mechanics of the mutual fund scandals may seem baffling, but they really aren’t complicated.
In an old episode of The Twilight Zone, a man gets every investor’s fondest wish: He can read tomorrow’s newspaper today; things go great until the day he picks up tomorrow’s paper and sees his own obituary. So let’s say important news about a company breaks after the closing bell, certain funds allowed favored investors to buy or sell based on that market moving news, then pretended the transactions were made at the price before the market closed that day at four o’clock.
How could this and other abuses have happened, and who can America’s 95 million mutual fund investors trust now? Mercer Bullard is founder and president of Fund Democracy, a non-profit advocacy group for mutual fund shareholders. He joins us from Oxford, Mississippi, where he teaches at the University of Mississippi law school. Arthur Levitt was chairman of the Securities and Exchange Commission from 1993 to 2001. He joins us from West Palm Beach, Florida.
Chairman Levitt, Eliot Spitzer said this week, every time we turn over a rock, there are more vermin crawling beneath it. You regulated the mutual fund industry for eight years. How widespread do you think these problems are?
ARTHUR LEVITT: I think they are extremely widespread. These are a heritage of the euphoria of the ‘90s. Spitzer has done a great public service. He had a whistle blower that came to him after coming to the SEC, and he took advantage of it. Every regulator has had whistle blowers that came that they wished they had listened to. The Commission during my years brought lots and lots of mutual fund cases. What’s happening today, in my judgment, is the most outrageous of any of the violations of any of the frauds we’ve seen in this century. More people were involved, and the nature of the violation was an absolute rip-off of the public.
COLVIN: These things apparently were going on all through the ‘90s. Why didn’t the SEC go after them when you were in charge?
LEVITT: The SEC went after lots of mutual fund cases and brought many cases, and I spoke time and time again about the failure of boards of directors to do anything but act like absolute lambs in the face of their management companies. But every regulator faces crimes that his predecessor, went on during his predecessor’s years, otherwise we wouldn’t need any regulators. If a given chairman of the SEC could cure all fraud during his time, you’d need no further (regulation). Certainly there are things that I wish I had done while I was there and that I would have done differently. But I think the Commission has acted in a very effective and an aggressive way and will work very collectively with Eliot Spitzer to address this very serious problem.
COLVIN: Mercer Bullard, Richard Strong, founder of the Strong group of funds, is accused of market timing in his own funds to make $600,000 for himself. A lot of money for most of us, but in light of his enormous wealth, not even every significant. Now maybe he’s an egregious case, but is that behavior indicative of a culture in the fund industry?
MERCER BULLARD: It’s indicative of what’s been a really systemic breakdown in compliance. What’s most shocking about this is not so much what were really plain vanilla frauds, but the fact that over such a widespread segment of the industry, fundamental compliance procedures obviously were not in place that would have and should have caught this kind of abuse.
COLVIN: Meaning compliance procedures within the funds themselves or within the regulatory mechanism or what?
BULLARD: Well, you know, it starts with the fund’s directors, and something as simple as an order coming in at eight o'clock at night begs the question of what procedures are in place to make sure that order originated before four o'clock (p.m., when the U.S. market closes). And there are two things you do. You make sure there are procedures, and then you do spot checks. And you’re going to miss some fraud. You can’t hold the directors and managers responsible for individual cases of fraud. But the overwhelmingly widespread nature of these frauds suggests that there has been a fundamental breakdown in compliance, and we need to think about some structural reforms in how to deal with this.
COLVIN: Well, that gets to a very important question, and Arthur Levitt, let me ask you about this. Senators have been all over this issue, understandably. Do we need new laws?
LEVITT: I think we need new rules. I think we need some new laws. I think Mercer is absolutely right. I think in the first place we need to change the ‘40 Act law, which says that mutual funds are out there for the benefit of investors, for shareholders. We should precede that with the words, "It is the fiduciary responsibility of mutual funds."
I think we also ought to have boards of directors with only one inside director, and the rest of them should represent investors. And I think we need those directors each year to justify why they chose a given management company rather than other competitive management companies which might have done a better job.
COLVIN: Mercer, certain funds through their behavior now have effectively tipped their hands. I mean they’ve shown that they will put their own interests ahead of the customers’ interests in these matters. Are they doing it in other matters as well?
BULLARD: Well, that’s what you always wonder, is when a fraud like this comes up, whether we’re really looking at an iceberg and you need to multiply what you’ve found by some factor in order to figure out how much real fraud is going on. And that’s what really concerns me most, is maybe there are things going on we don’t know about. And that’s why the industry’s and the SEC’s current proposals to impose a four o'clock cutoff in redemption fees may be good measures, but they aren’t getting at the real problem, which is to make sure that other types of fraud aren’t going on and the directors are doing what they need to do to protect shareholders.
LEVITT: I think Mercer is absolutely right that funds today are being sold like you sell soap and beer. In the past, funds were havens of security for investors. It’s unconscionable today that funds pay for shelf space the way soap companies do. In other words, when an individual goes to a firm and asks, "Which fund should I buy?" the firm will say, "Well, these are our seven favored funds." They don’t go on and tell that investor that each of those seven funds have paid them -- paid them -- for shelf space to be among their favored funds, rather than other funds which might be better for them.
COLVIN: Well, and in fact a lot of people say that the various fees and expenses that funds pay, all of them, is sort of the next big area to be exposed. Do you think it’s an area that is ripe for exposure?
LEVITT: Absolutely. I think the fact that so much money has flown, has gone into mutual funds and that fees and expenses have gone up, and also that those expenses have been largely hidden from investors by gobbledygook prospectuses that just simply don’t tell it the way it is.
COLVIN: Mercer, should investors still put their money in mutual funds?
BULLARD: Well, for better or for worse, mutual funds are still the best option for most investors. What they need to think more carefully about is the kind of fund family they’re entrusting their money to. And certainly we’ve found out enough information about at least some of these complexes that that’s probably not a good place to put your funds. And you need to look for the ones who, based on proxies for good relations with investors, are a better place to put your money.
COLVIN: Can you be specific?
BULLARD: Well, the group I recommended, I’m still crossing my fingers hoping that they won’t be implicated, are Vanguard, Fidelity, T. Rowe, TIAA-CREF, and American Funds. And that’s not an exclusive list, but I’m betting my money that they’re going to come out of this pretty clean.
COLVIN: Arthur Levitt, what do you say?
LEVITT: I think Mercer has spent a lot of time in this area, and I’m inclined to agree with him. Certainly Vanguard has done a very fine job for investors, and there are other funds. But investors have got to focus on expenses above and beyond everything else.
COLVIN: Mercer Bullard, Arthur Levitt, thanks for being with us.
BULLARD: Thank you.
|
