By Steven E. Levingston
Washington Post Staff Writer
Friday, September 19, 2008
T he phones were jangling at financial advisers' offices across the Washington area yesterday. That was no different from the day before -- or many other days in recent weeks -- as the biggest financial crisis in years has average investors seeking answers to the most pressing pocketbook questions.
Money-market funds. Brokerages. Insurance. Stock market investments. Retirement accounts. This crisis has a breadth many investors have never encountered -- and the questions reveal a thirst to understand the dangers and the protections on the changing financial landscape.
"The word risk has a new meaning in today's world," said Barry Glassman, a senior vice president at Cassaday & Co. in McLean. "Families cannot just assume they're covered. They need to take the time to understand where the risks lie."
And they are reaching out. Barbara A. Warner, president of Warner Financial in Bethesda, heard from a client worried about his variable annuity. He had his whole retirement savings wrapped up in a single investment at American International Group, the giant insurer that got an $85 billion bailout from the government this week. Would he be living his retirement years in the poor house? Should he get out of the annuity and suffer the early exit fees?
Warner consoled him with the news that AIG is just the parent of the company that owns his annuity. Its troubles were not expected to hurt his retirement. "I told him he should be fine," she said.
Other questions center on the wobbly brokerage industry. First came Merrill Lynch, which fell into the arms of Bank of America. Now, Morgan Stanley is in distress, its stock price tumbling. Investors with accounts at Morgan Stanley wonder what will happen to their portfolios if the company goes under.
Steve Harbeck, president and chief executive of the Securities Investor Protection Corp., has some reassuring answers. The funds a brokerage holds for its customers must be kept separate from the money the brokerage uses to run its business. Strict controls are applied: Brokerages must report every week to the Financial Industry Regulatory Authority, a non-governmental regulator of securities firms, that they have properly segregated the funds.
If, for some reason, a brokerage has not kept sufficient funds separate to cover customer accounts, SIPC would then step in. It guarantees a customer's account up to $500,000.
The safety of money-market funds filled many conversations yesterday at the financial planning and investment management firm Fox, Joss & Yankee in Reston. Putnam Investments announced yesterday that it was closing a $12.3 billion money-market fund, a move that does not directly affect average investors. The Putnam fund was limited to institutions such as corporations and pension funds and required minimum initial investments of $10 million.
But the action came just two days after the Reserve Primary Money Market Fund took the unusual action of imposing losses on its retail investors. That raised questions about other money-market funds. Unlike certificates of deposit and money-market deposit accounts offered by banks, money-market funds are not insured by the Federal Deposit Insurance Corp., an independent agency of the federal government.
But trouble with the funds is rare. Marjorie L. Fox, a financial planner with Fox, Joss & Yankee, said the firm received reassuring e-mails from the custodians of its money-market funds -- Schwab and Fidelity -- stressing that investors were not facing losses in their funds. Fox said that Schwab's and Fidelity's exposure to Lehman Brothers' debt, which was behind Reserve's difficulties, is minimal. She added that large investment management companies typically stand ready to pump money into weakened money-market funds.
"Name institutions have come to the rescue of their money-market funds in the past," she said. "I see the stability of a Schwab or a Fidelity as a backstop."
As the financial brushfire spreads, no investment is immune to questioning. Worried investors are now turning their sights on stock mutual funds. There have been no signs of mutual fund companies in distress -- other than some of the funds suffering sharp declines in prices along with the stock market. Yet investors still are concerned about what would happen to their investments if their mutual fund company collapsed.
Mike McNamee, spokesman for the Investment Company Institute, the mutual fund industry's trade group, cited several layers of protection for investors' money. Among them: the fiduciary responsibility of the fund manager, oversight by the fund board and regulation by the Securities and Exchange Commission. Most important is that each fund is a company that's legally separate from the mutual fund company itself. Its assets are held in a trust account in a custodial bank.
"So if a fund company went bankrupt -- and even if the custodial bank itself went bankrupt -- the funds' assets are still held in trust for the shareholders," McNamee said.
Back in July, when IndyMac Bancorp collapsed, investors raced to the branches, fearing their money was lost. It wasn't so then and will not be so in any future bank closings, as long as the accounts meet the FDIC's insured specifications. The agency insures accounts of $100,000 or less in a single bank or savings association. Depositors who arrange their accounts under different categories can get more than $100,000 insured. The categories could be single accounts, joint accounts, some retirement accounts and revocable trusts. Individual retirement accounts, or IRAs, for instance, can be insured up to $250,000.
Warner fielded a call from a client worried about her savings account at the struggling savings and loan Washington Mutual. It wasn't a question of insurance -- the client had less than $100,000 in the bank. It was a matter of access. The client said she will probably need the money in the next couple of weeks, and she wondered how long it would take to get it if Washington Mutual collapsed.
The answer: It could take a while. So, Warner advised, better take the money and run.