Crackdown Targets Investment Ads
New York City’s Department of Consumer Affairs on Thursday filed deceptive advertising charges against Charles Schwab, the nation’s largest discount brokerage, and two leading mutual fund companies, Dreyfus Corp. and Franklin Distributors Inc.
The department charged that all three companies made “misleading” claims in national advertisements “that can trick investors into taking risks they are unaware of.” If the allegations stick, the companies face fines of up to $500 for each time the ads ran in New York City.
San Francisco-based Charles Schwab and New York-based Dreyfus denied the allegations; Dreyfus Chairman Howard Stein said the city’s consumer affairs regulators “need more education” about financial terms. San Mateo-based Franklin said it had been in touch with New York authorities and “expected to resolve the matter quickly.”
Specifically, New York regulators alleged:
* that Dreyfus’ claim that its Growth and Income Fund does not invest in high-risk “junk bonds” is inaccurate because the fund invests in convertible securities that are below investment grade. Dreyfus maintains that convertible securities--bonds that are convertible to stock--are not commonly referred to as “junk bonds.”
* that Franklin’s Valuemark II annuity cannot provide “retirement income guaranteed for life,” because the annuity is only as secure as the insurance company issuing it, and there is no underlying “guarantee.”
* that Schwab’s claim that mutual funds sold by the brokerage have “no load, no fee” was inaccurate because 15% of funds mentioned in a Schwab ad had loads, or transaction fees.
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Music Club Offer: “8 Compact Discs or Cassettes for the Price of 1,” says the solicitation from BMG Music Service, the mail-order unit of the German media and entertainment conglomerate, Bertelsmann.
The solicitation offers seven free CDs or tapes for people who agree to buy one. Four free recordings arrive before the purchase, and three after. “There’s no catch,” the letter said, noting that customers “pay only shipping/handling” for free recordings.
The letter didn’t indicate an amount for shipping and handling charges, so we contacted BMG Music in Indianapolis. A customer service agent told us those charges for eight CDs or cassettes would come to $14.27, considerably more than the $8.98 BMG charges for cassettes and about the same amount BMG charges for CDs.
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Here Comes Another Visa: Nordstrom said this week that it plans to issue a Visa card next year through a bank that it owns, becoming the first retailer in the country to do so.
Details about the card, to be issued next year, are sketchy. Interest rates, fees and enhancements have not been determined, a spokeswoman for the Seattle-based department store company said. The card won’t replace the Nordstrom store card, held by 6 million people in 11 states.
Introducing a Visa card gives Nordstrom the opportunity to turn its break-even credit card business into a profitable one. Unlike Nordstrom’s store card, the Visa can be used for purchases outside Nordstrom. As consumers run up Visa balances, Nordstrom can expect increased revenue on interest rate charges and fees. The trick will be persuading consumers to use the Nordstrom Visa in place of existing MasterCard or Visa cards. Analysts said Nordstrom will have to offer powerful incentives, including a low rate and no annual fee. (The interest rate on the store card in California is 19.8%.)
John Walgamott, president of Nordstrom National Credit Bank of Englewood, Colo., said the retailer is looking at other incentives. Among the possibilities: a point system that would reward consumers with discounts on merchandise.
Though federal banking rules prohibit Nordstrom from offering its Visa cardholders discounts on Nordstrom purchases, Walgamott said the company is exploring ways to offer “breaks on things that Nordstrom sells,” possibly through third-parties. He declined to say how such a reward system might work.
Analysts expect other retailers to issue bank cards. “I am sure we haven’t seen the last of it,” said Robert McKinley of RAM Research of Frederick, Md.
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Coupon Usage Clipped: Coupon redemptions for the first six months of 1993 are down 10% from a year ago, the marketing firm NCH Promotional Service of Chicago reports this week. The decline occurred despite no change in the number of coupons issued.
Jane Perrin, NCH vice president for marketing, said redemptions fell because the expiration period of coupons shortened, giving consumers less time to use coupons. During the first half of 1993, coupons were good for an average of 3.7 months, compared to 4.1 months for the same period a year ago.
Another reason behind the drop in redemptions, Perrin said, is Procter & Gamble’s decision to eliminate coupons in some popular categories, such as disposable diapers.
