How to Keep Account Problems to a Minimum
Have you ever had a major problem dealing with your mutual fund company? Chances are the answer is no. The industry has a pretty good record of delivering reliable, capable shareholder service. Horror stories of widespread inefficiency or ineptitude are rare. “I don’t think mutual funds would have grown like they have if the service was lacking,” observes Don Phillips, editor of Mutual Fund Values, an advisory publication based in Chicago.
Even so, there’s always the possibility of error or oversight, either on the fund’s part or the investor’s. Some people run into trouble when trying to switch, redeem or transfer assets. Knowing how to deal with--and even prevent--these difficulties can pay dividends, so to speak, down the road.
Suppose you saw the October, 1987, stock market crash coming or the slide that began in July of this year. If you had applied for telephone-exchange privileges when filling out your account application, you would have been able to switch out of stock or bond funds into safe money-market portfolios--all with a simple phone call.
Some people neglect to apply for this option or fail to make sure that the fund company has credited them with it. Others don’t pay attention to the firm’s switch limitations. Several fund companies either limit the number of switches you can make within a year, require a waiting period between transactions or impose a nominal fee.
Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in Hastings-on-Hudson, N.Y., suggests that you switch a small amount of money from one fund to another when you set up your accounts--just to make sure everything works smoothly. Keep in mind, however, that each exchange out of a stock or bond fund, whether by phone or mail, is a taxable event. You will have a gain or loss to report (except for switches inside IRAs and other tax-sheltered retirement accounts).
As for the accuracy of telephone exchanges, be aware that transactions conducted over the phone are routinely recorded by fund companies. This reduces the chances for errors or misunderstandings. Bruce Behling, president of Strong Funds in Milwaukee, recalls a case in which an investor who had switched from a money-market to a stock fund just before the October, 1987, crash tried to claim the transaction was an error. “He tried to pull a fast one on us,” Behling says. “But we found the recording and played it back to him.”
Of course, recordings can also help correct a mistake that a fund company commits. It’s smart to jot down the particulars of a telephone exchange when you make one--the time, date, name of the person who took your order, account number and dollar amount involved. Some companies assign a transaction number to each telephone switch order. Making a note of it can speed up action on a complaint.
Redeeming shares--as opposed to simply moving assets from one portfolio to another--can also present problems. You can sell a mutual fund whenever you want. But before releasing your money, some companies require a signature guarantee from your bank or brokerage, not a notary public. Although there’s nothing difficult about this procedure, it can take a week or two, possibly more, for you to get the guarantee, mail in your redemption letter and wait for the fund company to process your request and dispatch a check.
Signature guarantees might seem like an unnecessary hassle, but fund companies say they reduce the potential for foul play.
Behling provides the following example: Suppose someone found your current account statement, listing the funds you own, your account balance, Social Security number, address and other sensitive information. “That person could call up, claiming to be you, and ask for the money,” he says. “But unless we also received your signature guarantee with a letter directing us to send the check to an address that’s not on the statement, we wouldn’t.”
Sometimes, however, you might need your investment proceeds quickly. If you fill out the appropriate forms when completing your fund application, you can arrange to have your money transferred by wire to your bank.
Alternatively, Jacobs offers this tip: Make a telephone switch to a money market fund at the same company, then write a check against that account. This way, you will have access to your cash at virtually a moment’s notice--providing you applied for check-writing privileges when you opened the money fund.
If there’s one area where mutual funds (and other financial institutions) have room for improvement, it’s in making timely transfers of IRA money from one firm to another. When all goes well, a transfer can be accomplished within two or three weeks. But that’s not always the case.
“Some delays are unexplainable,” says Mike Foster, Strong’s vice president of shareholder services. Despite industrywide improvements in recent years, “It can still take four to six weeks--sometimes even three to four months.”
Simply put, the company that’s losing your IRA business might not consider a transfer a top priority. If your transaction isn’t completed within two weeks, start making some calls (or have your broker do so, if you’re working with one). Check on the status of the transfer with the company losing the account. “If the paperwork has been received and it’s in order, the money is legally required to be out of that institution within seven days,” Behling says.
You should also contact the firm to which you are making the transfer. This outfit should be more sympathetic to your plight. “In this situation, we would call our competitors and try to speed things up,” Foster says.
You might find it faster to make an IRA roll-over than a transfer. With the former, you actually receive a check for the proceeds in your account, then mail it off to the new trustee of your choice. Transfers, by contrast, are always institution-to-institution transactions. The drawback with roll-overs is that you may make only one a year or risk an IRS penalty. There’s no such limit on transfers.
If you feel overwhelmed by account applications, shareholder options and the like, take heart in the fact that most fund companies stand ready to help. “We’ll take your information over the phone, fill out an application for you and mail it back. All you have to do is sign,” says Jane Ginsburg, a spokeswoman for Benham Capital Management in Mountain View, Calif.
Brokers, of course, will also do the paperwork for you. “The biggest reason customers trade funds through us is convenience,” says Dave Hunter, vice president of mutual funds for Charles Schwab & Co. in San Francisco. At Schwab, all fund transactions are listed on a single statement. “And you don’t have to fill out an application for each,” he adds.
But assuming you buy mutual funds directly, don’t neglect the paperwork. Make sure you apply for all of the features you might need and validate that the information is correct, advises Linda Warriner, vice president of customer service at American Capital Research & Management in Houston. “When an account is set up correctly from the beginning, errors and problems are kept to a minimum.”
PROSPECTUS POINTERS You can find just about everything you need to know about a mutual fund and its shareholder services in the prospectus, a type of owner’s manual for investors. Unfortunately, prospectuses are legal documents and thus don’t make for easy reading. Rather than try to scrutinize a prospectus from cover to cover, keep it on hand and refer to it as needed. When you’re considering a fund for purchase, the Investment Company Institute, the national mutual fund association, recommends that you at least check for the following:
* The date: Make sure you have the most recent prospectus since information can change.
* Minimum investment: The dollar amount you need to make an initial purchase.
* Investment objective: Usually a combination of growth, income and stability (capital preservation).
* Performance: Information on dividends and total returns is presented in the “per-share” table. Another table might compare the fund’s performance to a benchmark such as the Standard & Poor’s 500-stock index.
* Risk: A discussion of the risks associated with the types of securities that the fund buys and sells, typically found in the section on “investment risks” or “investment policy.”
* Services: Tells whether the fund offers check writing, telephone exchanges, retirement pans and similar features. A separate section explains how to redeem shares.
* Fees: The fee table lists both sales charges, or “loads,” and operating expenses.
The Investment Company Institute puts out a helpful pamphlet, “Reading the Mutual Fund Prospectus.” For a free copy, write to the ICI at 1600 M St., N.W., Suite 600, Washington, D.C. 20036.
