MONEY 401(k)

How the Supreme Court Just Improved Your Retirement

The Supreme Court just ruled on an obscure aspect of ERISA. It could be great news for your retirement nest egg.

The Supreme Court just handed millions of retirement savers a helping hand.

You many not know much about ERISA, the body of rules that governs retirement accounts. But chances are you have a 401(k). That means Monday’s Supreme Court decision could indirectly lower investment fees you’re paying. And that’s great news.

On Monday the Supreme Court made it easier for 401(k) investors to sue employers over needlessly costly 401(k) investments. The actual point of contention in the case, known as Tibble vs. Edison, was pretty obscure. It involved how the statute of limitations should be applied to a breach of fiduciary duty.

But because ERISA law is so complicated, companies almost always choose to fight such suits on technical grounds. This time around, the typically business friendly U.S. Supreme Court decided in favor of investors, unanimously overruling the U.S. 9th Circuit Court of Appeals. As a result, employers will be forced to think a little harder about whether similar arguments are likely to prevail in the future.

But the fact is, employers have grown increasingly proactive about regulating plan fees. The reason: Tibble vs. Edison is just a high-profile example of a series of lawsuits launched in the past decade over employers’ failure to police exorbitant retirement plan fees. And many large employers have already reacted to the threat by urging investment firms to lower fees for their employees. As a result, 401(k) plan fees have come down, and investors have had greater access to low-cost options like index funds.

With the Supreme Court weighing in on investors’ side, you can expect that trend to continue.

 

MONEY fiduciary

If Humans Can’t Offer Unbiased Financial Advice to the Middle Class, These Robots Will

Wall Street says it can't be a "fiduciary" to everyone who wants financial advice. But the new breed of "robo advisers" is happy to take the job.

Fast-growing internet-based investment services known as robo-advisers have already begun to upend many aspects of the investment business. Here’s one more: Potentially reshaping the long-standing debate in Washington over whether financial advisers need to act in their clients’ best interests.

If you work with a financial adviser you may assume he or she is legally obligated to give you unbiased advice. In fact, that’s not necessarily the case. Many advisers—the ones who are technically called brokers—in fact face a much less stringent legal and ethical standard: They’re required only to offer investments that are “suitable” for you based on factors like age and risk tolerance. That leaves room for brokers to steer clients to suitable but costly products that deliver them high commissions.

The issue is especially troubling, say many investor advocates, because research shows that most consumers don’t understand they may be getting conflicted advice. And the White House recently claimed that over-priced advice was reducing investment returns by 1% annually, ultimately costing savers $17 billion a year.

Now the Labor Department has issued a proposal that, among other things, would expand the so-called fiduciary standard to advice on one of financial advisers’ biggest market segments, Individual Retirement Accounts. A 90-day comment period ends this summer.

Seems like an easy call, right? Not so fast. Wall Street lobbyists contend that forcing all advisers to put clients first would actually hurt investors. Their argument? Because advisers who currently adhere to stricter fiduciary standards tend to work with wealthier clients, forcing all advisers to adopt it would drive those who serve less wealthy savers out of the business. In other words, according to the National Association of Insurance and Financial Advisors and the U.S. Chamber of Commerce, a fiduciary standard would mean middle-class investors could end up without access to any advice at all.

(Why, you might ask, would anyone in Washington listen to business rather than consumer groups about what’s best for consumers? Well, that is another story.)

What’s interesting about robo-advisers, which rely on the Internet to deliver automated advice, is that they have potential to change the dynamic. Robo-advisers have been filling this gap, offering investors so-called fiduciary advice with little or no investment minimums at all. For instance, Wealthfront, one of the leading robo-advisers, has a minimum account size of just $5,000. It’s free for the first $10,000 invested and charges just 0.25% on amounts over that. Arch-rival Betterment has no account minimum at all and charges just 0.35% on accounts up to $10,000 when investors agree to direct deposit up to $100 a month.

Of course, these services mostly focus on investing—clients can expect little in the way of individual attention or holistic financial planning. But the truth is that flesh-and-blood advisers seldom deliver much of those things to clients without a lot of assets. What’s more, the dynamic is starting to change. Earlier this month, fund giant Vanguard launched Personal Advisor Services that will offer individual financial planning over the phone and Internet for investors with as little as $50,000. The fee is 0.3%.

The financial services industry says robo-advisers shouldn’t change the argument. Juli McNeely, president of the National Association of Insurance and Financial Advisors, argues that relying on robo-advisers to fill the advice gap would still deprive investors of the human touch. “It all boils down to the relationship,” she says. “It provides clients with a lot of comfort.”

But robo-adviser’s growth suggests a different story. Wealthfront and Betterment, with $2.3 billion and $2.1 billion under management, respectively, are still small but have seen assets more than double in the past year.

And Vanguard’s service, meanwhile, which had been in a pilot program for two years before it’s recent launch, already has $17 billion under management.

Vanguard chief executive William McNabb told me last week that, although Vanguard had reservations about the specific legal details of past proposals, his company supports a fiduciary standard in principle. Small investors, he says, are precisely the niche that robo-advisers are “looking to fill.”

 

 

 

 

 

MONEY Apple

CEOs Love Buybacks. But Should You?

apple sign
Toby Melville—Reuters

Like Apple, many American corporations favor stock buybacks over dividends. For investors things are little more complicated.

On Monday, Apple Inc. APPLE INC. AAPL -0.87% reported another knock-out quarterly profit and said it would return an eye-popping $200 billion to shareholders by March 2017 through a combination of dividends and share buybacks. Pundits have been debating whether that’s a smart strategy.

Apple shareholders—and other investors who can look forward to corporate goodies being announced this earnings season—may have a more immediate question: What’s better, getting a dividend check or letting management spend the money to snap up shares?

By earmarking $140 billion of the $200 billion for repurchasing shares, Apple appears to favor buybacks. That’s a stance popular across corporate America. Last year, companies in the S&P 500 spent $550 billion on buybacks vs. $350 billion on dividends. But it’s not necessarily clear buybacks are always the best option.

Keep in mind that, in an ideal situation, companies wouldn’t buy back stock or pay dividends. Instead, they’d re-invest profits to grow their businesses and generate even more profits in the future. But even the most promising companies can grow only so much for so long before they run out of highly compelling ideas for further investment—at which point they have an obligation to start paying out profits to shareholders, who can invest the money as they see fit. And it appears that Apple, having amassed nearly $200 billion in cash, is no longer confident it can profitably invest all that money.

Companies like Apple looking to hand cash back to investors have two basic routes. They can simply write a check to existing shareholders in the form of a dividend. Or they can use the money to buy out some of those shareholders—a so-called buyback—which essentially leaves each of the remaining owners with a bigger slice of the company and its profits.

In theory all companies should eventually aim to pay out profits directly. After all, the prospect of future dividends is the reason a stock has value in the first place. But in the meantime, buybacks can benefit investors by boosting the stock price—since every remaining share represents a bigger claim on the same pool of corporate assets.

So which route is better?

Economic theory suggests they should be roughly equivalent. But the tax code isn’t always based on economic theory—and it turns out the IRS gives buybacks a big advantage. When a company hands you a dividend check, you owe taxes on that income in the current tax year even if you plan to re-invest the dividend and hold the stock for years. By contrast, when a company buys back shares and the share price goes up as a result, you owe no taxes until you actually sell the stock, which could be years in the future.

But taxes alone don’t settle the question—and buybacks aren’t necessarily all they’re cracked up to be.

For one thing, many smart investors, including Warren Buffett, promote buybacks when management believes shares are undervalued. The problem is that most managers turn out to be just as bad as the rest of us at gauging whether the market has placed the right value on their shares. Case in point: Many companies went on buy-back sprees in the early part of the last decade, only to look like they’d squandered shareholders’ money when the 2008 financial crisis hit.

Another knock against buybacks: They give management too much discretion. Like Apple, many companies grab headlines by announcing the total amount they’ll use to buy back shares over a period of years. That gives managers the flexibility to buy the shares when prices look advantageous. A dividend, by contrast, is a less splashy quarterly obligation for a company’s managers, who know that the stock market doesn’t react well to dividend cuts. And just because management chafes at such restrictions, doesn’t mean you should. Especially in an era of push-over boards, many investors see a regular dividend as one of the few reliable ways to hold managers to account.

Finally, critics of buybacks argue that they ultimately benefit managers more than shareholders. The reason? Executive compensation is typically tied to share price, an effort to align the interests of management with those of shareholders. But it doesn’t always work because an executive can use buybacks to hit short-term stock price goals at the expense of his company’s long-term interests—by skimping, for example, on expensive but necessary research and development.

That’s probably not an issue for Apple, considering its $200 billion bank account. But research suggests it may be for the broader market.

The upshot: It’s easy to see why managements prefer buybacks. But investors—especially those with the bulk of their savings in a 401(k) or IRA, where taxes aren’t an issue—may be better off with an old-fashioned dividend.

 

 

 

MONEY ETFs

Humdrum ETFs Are Overtaking Racy Hedge Funds

Tortoise and the hare
Milo Winter—Blue Lantern Studio/Corbis

It's part of a gradual change in culture on Wall Street that's encouraging low costs and long-term thinking.

It’s like the investment world’s version of the race between the tortoise and the hare. And the hare is losing its lead.

Hedge funds, investment pools known for their exotic investment strategies and rich fees, have long been considered one of the raciest investments Wall Street has to offer, with $2.94 trillion invested globally as of the first quarter, according to researcher Hedge Fund Research.

Despite their mystique and popularity, though, hedge funds are about to be eclipsed by a far cheaper and less exclusive investment vehicle: exchange-traded funds.

According to ETF researcher ETFGI, exchange-traded funds — index funds that have become favorites of financial planners and mom and pop investors — have climbed to more than $2.93 trillion. ETFs could eclipse hedge funds as early as this summer, according to co-founder Debbie Fuhr.

In some ways the milestone is one that few people outside the money management business might notice or care about. But even if you don’t pay much attention to the pecking order on Wall Street, there’s reason to take notice.

The fact that ETFs have caught up with hedge funds reflects broader trends toward lower costs and a focus on long-term passive investing, both of which benefit small investors.

Exchange-traded funds, which first appeared in the 1990s and hit the $1 trillion mark following the financial crisis, have gained fans in large part because their ultra-low cost and hands-off investing style.

While there are many varieties of ETFs, the basic premise is built on the notion that investors get ahead not by picking individual stocks and securities but by simply owning big parts of the market.

Index mutual funds have been around for a long time. (Mutual funds control $30 trillion in assets globally, dwarfing both ETFs and hedge funds). But ETFs allow investors to trade funds like stocks, and they can be more tax efficient than mutual funds. Both ETFs and traditional index funds are known for ultra-low fees, sometimes less than 0.1% of assets invested. That means investors keep more of what they earn, and pay less to Wall Street.

Hedge funds by contrast exist for elaborate investment strategies. They are investment pools that in some ways resemble mutual funds, but they can’t call themselves that because they aren’t willing to follow SEC rules designed to protect less sophisticated investors.

Because of their special legal status, hedge funds aren’t allowed to accept investors with less than than $1 million in net worth, hence the air of wealth and exclusivity.

But hedge fund managers also enjoy a lot more freedom in how they invest, for instance, sometimes requiring shareholders to lock up money for months at a time or taking big positions in complex derivatives.

Hedge funds aren’t necessarily designed to be risky — they get their name from a strategy designed to offset not magnify market swings. But hedge fund investors do expect managers to deliver something the market cannot. Otherwise why pay the high fees? Hedge funds typically charge “two and twenty.” That is 2% of the amount invested each year, plus 20% of any gains above some benchmark. No that is not a typo.

Of course, hedge funds’ rich fees wouldn’t be a problem if they delivered rich investment returns. The industry has long relied on some fabulously successful examples to make its case. But critics have also suspected that, like the active mutual fund industry in its 1990s’ heyday, this could be a case of survivorship bias, with a few rags-to-riches stories distracting from more common stories of mediocre performance.

Hedge funds’ performance in recent years seems to be bearing that out. (By contrast ETFs, whose returns are typically tied to the stock market, have benefited from one of the longest bull markets in history.)

Why should you care if a bunch of rich guys blow their money chasing ephemeral investment returns? One reason, is you might be among them, even if you don’t know it. Pension funds are among the biggest hedge fund investors.

The good news: They too are embracing indexing, if not specifically through ETFs. Calpers, the giant California pension fund, said last year that it was dumping hedge funds, while also indexing more of its stock holdings.

Unlike ETFs, hedge funds — because they need to justify their rich fees — often suffer from short-term focus. In recent years, one popular strategy has been so-called “activist investing,” where a hedge fund buys a big stake in an underperforming company and demands changes.

While the stock market often rewards those moves in the short-term, many investors worry moves like cutting costs and skimping on research ultimately make those businesses weaker, hurting long-term investors. It’s no surprise then that one of activist investing’s most outspoken critics is BlackRock Inc. As the largest ETF provider, BlackRock represents the interests of millions of small investors.

And finally, there are those fees. The surging popularity of low-cost investments such as ETFs will inevitably focus more attention on fees, putting pressure on active investment managers — and even hedge funds themselves — to slash prices. And in the the end, that benefits everybody.

MONEY millennial

8 Gen X Favorites That Millennials Scorn

Millennials will probably never understand why Gen X, or anyone, was once so enamored of U2, Gap, and these six other things.

Last week the Wall Street Journal reported that — no matter what Run-DMC and the Beastie Boys wore 25 years ago — Adidas is not cool, with sales faring especially poorly among young people. It’s not easy for any generation to accept that the zeitgeist has left it behind. (The Boomers still haven’t.) But with the oldest Gen Xers having reached 50 and the youngest well into their 30s, that conclusion looks unavoidable. Here are eight other things that Gen X loved, but that millennials just don’t seem to care about.

 

  • Saab

    1989 SAAB 900i
    Bob Masters Classic Car Images—Alamy 1989 SAAB 900i

    Oddly shaped, with a pathetic engine and the ignition inexplicably located on the floor: The Financial Times described Swedish automaker Saab as “the anti-brand brand.” Could it be any wonder that Generation X loved them? Saab sales climbed steadily throughout the early 1980s and, after a drop off in 1986, rebounded through much of the 1990s. The car took a star turn in such slacker classics as High Fidelity and Sideways. But as the FT concluded, “the commercial drawback of being an ‘anti-brand brand,’ of course, is that many people drive Saabs precisely because other people don’t.”

    Saab sales hit a wall in first part of the last decade, in part because GM, which acquired the brand in 2000, watered down the car’s distinctive flavor in an effort to expand its appeal. Saab essentially stopped production in 2011. Millennials, lukewarm on cars to start with, don’t seem to notice what they are missing, at least according to AutoGuide.com.

  • Michel Foucault

    French philosopher Michel Foucault
    AFP—Getty Images French philosopher Michel Foucault

    If you went to college in the 1980s or 1990s, chances are you smugly obsessed about (or just as smugly avoided) abstract yet strident discussions of the way language shaped our perception of the world around us. It was kind of like “checking your privilege” through abstruse academic jargon. If “the theory wars” no longer rage, maybe it’s because there is no one left to fight them. In 2010, just 7% of college students majored in the humanities, down about half since the late 1960s. Yale, which graduated 165 English majors in 1991, had just 62 in 2012. So what exactly do college students get overwrought about these days? Apparently, it’s who’s going to get that internship at Facebook.

  • Gap

    1990s UK Gap Magazine Advertisement with Miles Davis
    The Advertising Archives 1990s UK Gap Magazine Advertisement with Miles Davis

    It now seems strange that a mall store known basically for T-shirts, khakis and other basics became a fashion icon. But it just kind of happened. Here is writer Lucinda Rosenfeld’s take in Slate: “It’s hard to overstate the importance of black pants to young women in the early 1990s. Once you found a pair that fit perfectly — and maybe a good square-toe black ankle-boot to match — half the work of assembling a sleek, confidence-building wardrobe was done.” She goes on to explain that, while her favorite pair cost “a week’s salary” back in the day, her second favorite pair, which she wore three days a week, came from Gap. How did Gap — or The Gap as we used to call it — lose its lucrative role as the workhorse of 20-somethings’ closets? Perhaps anti-fashion could only be in fashion for so long. And the company has faced plenty of low-cost competition from chains like H&M and Uniqlo.

  • U2

    U2 Fans
    Daily Mail—Alamy

    How long is any rock band’s shelf life? U2 managed to remain cool longer than most — from at least the early 1980s through the 1990s and into the oughts. They even made Christian rock seem cool. But the jig was finally up last year when Apple’s decision to gift U2’s new album to iTunes users sparked a backlash. One obvious explanation is age — Bono is past 50. Another is the decline of guitar-oriented pop. But don’t overlook changes to the brand of U2’s homeland. Once associated with post-industrial poverty and violence, the Irish Republic traded its troubled but defiant image for computer chip factories and real estate speculation. Maybe U2’s social justice street cred went into the bargain.

  • Cameron Crowe

    SINGLES, Bridget Fonda, Matt Dillon, Kyra Sedgwick, Campbell Scott, 1992.
    Warner Bros—Courtesy Everett Collection SINGLES, Bridget Fonda, Matt Dillon, Kyra Sedgwick, Campbell Scott, 1992.

    The New York Times called Cameron Crowe “something of a cinematic spokesman for the post-baby boom generation” in 1992. At the time Crowe had Fast Times at Ridgemont High and Say Anything already under his belt, and was just getting ready to release Singles. (If you haven’t seen it, let’s just say it’s aged far better than Reality Bites.) The former Rolling Stone writer later hit box office gold with Jerry Maguire and Almost Famous, which deliciously skewered Boomer narcissism from a vantage that’s somehow both younger and less credulous. Since then, however, Crowe has failed to match his ’80s and ’90s success. Elizabethtown, which inspired the mocking “manic pixie dream girl” trope, was widely seen as a disappointment. In 2011, Crowe managed something of come-back with We Bought a Zoo. The film, which earned about $75 million at the box office, was better than the title makes it sound. But it’s hardly going to inspire any garage bands.

  • Sony Walkman

    ca. 1991 Sony Walkman cassette player
    Dorling Kindersley—Corbis ca. 1991 Sony Walkman cassette player

    Just like millennials, Gen Xers put on their headphones on and tuned out the world. There were differences. Unlike today, fancy gadgets were never white but black or silver. (A notable exception was the youthful, yellow “Sports” model that made a cameo appearance in Hot Tub Time Machine.) And there were a lot more buttons, partly because music players came with a radio and partly because in an analogue world, more rather than less signaled connoisseurship. But there were similarities too: Gen X’s technological marvels were also conceived in a far off place whose special culture fostered unique capitalistic virtues that our betters admonished us to learn from and imitate. It just happened to be Japan rather than California.

    Sony managed to transverse the mid-1980s move from cassette tapes to CDs, with the Discman. It wasn’t as if digital music caught the company blind sided. Sony introduced something known as the “memory stick Walkman” in 1999, more than two years before the iPod appeared. But Sony’s reluctance to embrace the MP3 format and its struggles integrating hardware and software proved to be just the opening Apple needed.

  • NBC

    FRIENDS with Jennifer Aniston, David Schwimmer, Courteney Cox Arquette, Matt LeBlanc, Lisa Kudrow and Matthew Perry, (Season 1), 1994-2004.
    Warner Bros—Courtesy Everett Collection FRIENDS with Jennifer Aniston, David Schwimmer, Courteney Cox Arquette, Matt LeBlanc, Lisa Kudrow and Matthew Perry, (Season 1), 1994-2004.

    Young people tend to identify themselves more with music than with television, especially network television. But few would argue that in the 1990s NBC was the envy of its competitors. Jerry Seinfeld is a boomer. But Seinfeld’s quartet of ne’er do-wells, whose humor mostly involved aimless complaining, fit right in with Gen X’s celebrated ambivalence. As for Friends, well, Generation X may now be faintly embarrassed that they watched. But watch they did. The show was a top 10 series for its entire run, averaging 20 million viewers, according to Slate. It’s finale garnered more than 50 million. Since then NBC has had hits — even with millennials — like The Office and 30 Rock. But the rise of cheap-to-produce reality television, new competition from cable channels like HBO, and, of course, the Internet, mean networks just don’t enjoy the same cultural relevance or profits that they used to.

  • Major League Baseball

    Chicago Cubs' Sammy Sosa (L), shares a laugh with St. Louis Cardinals' first baseman Mark McGwire (R), after receiving a walk in the third inning. McGwire stayed at 63 home runs and Sosa stayed at 62 as neither had a home run in the 3-2 Chicago victory.
    Peter Newcomb—AFP/Getty Images Chicago Cubs' Sammy Sosa (L), shares a laugh with St. Louis Cardinals' first baseman Mark McGwire (R), after receiving a walk in the third inning. McGwire stayed at 63 home runs and Sosa stayed at 62 as neither had a home run in the 3-2 Chicago victory.

    The 1990s was a golden age for baseball. Or so it seemed in 1998 when Mark McGwire’s and Sammy Sosa’s race to surpass the home run record riveted fans. The long ball helped (along with a fashion for building new, smaller “bandbox” ball parks) to boost attendance and television ratings, making baseball seem secure in its role as the national past time, even in era of Michael Jordan. Today, the sport is still trying to cope with the fall out of what we now call The Steroids Era. Average attendance, which climbed from about 25,000 following the strike-shortened 1994 season to roughly 30,000 by end of the decade, has been more or less stuck there ever since. This year’s gambit — a clock to speed up the pace of play — is apparently designed to appeal to millennials. But many of them seem more excited about soccer.

MONEY Financial Planning

Would You Trust Your Retirement to a Machine?

150326_ADV_ROBOADVISOR01
Peter Yang

New websites called robo-advisers are promising smarter investment advice at a much lower cost. But are you really ready to give up the human touch?

Betterment looks like a startup right out of tech disrupter central casting. Its office, in an airy loft space, features a beer tap and Ping-Pong table. The founder, Jon Stein, favors open-necked shirts at work, not a suit and a tie. He is 35 years old.

But Betterment isn’t in Silicon Valley, and it’s not selling chat apps, cat videos, or cheap car rides. It’s in Manhattan and trying to make a splash in the very serious business of investment advice. Stein has a Wall Street résumé: He’s a former banking consultant and a chartered financial analyst. He also thinks that Wall Street charges way too much and that Internet-based companies can fundamentally change the way you invest for your retirement. “We’ve taken the friction out of the process. We’ve made [advice] accessible to everyone. That is the future,” says Stein, with the modesty you’d expect from a tech CEO.

What Stein calls “friction” other advisers call a good business. Advice can be expensive. You may pay about 5% off the top for a commission-based adviser who puts you in mutual funds. Or you might pay an annual fee—1% of assets is typical—but many advisers and planners often won’t bother with clients who don’t have a lot to invest. “It’s almost like there were two options: walking, or driving a Mercedes,” says Michael Kitces of Pinnacle Advisory Group.

Betterment and at least a dozen competitors, including Wealthfront and FutureAdvisor, think web tools and computer models can deliver advice much more cheaply. Known (sometimes pejoratively) as robo-advisers, they pick investments for you and monitor your portfolio. Many do it for 0.15% to 0.5% of assets a year and welcome tiny balances.

“Many financial advisers are going to get drummed out of the business,” says adviser Ric Edelman, a well-known industry figure. That’s a bold forecast: Robos manage $19 billion, a relative sliver. Charles Schwab alone runs $2.5 trillion.

Private venture capital investors are racing in—Betterment recently got a shot of $60 million. Using Betterment’s implied value as a yardstick, VCs think a robo may be worth about $30 for every $100 in client assets, vs. $3 per $100 for some traditional advisers. Robos “see themselves becoming the next Schwab,” says Grant Easterbrook, author of an industry report for the research firm Corporate Insight. “Based on the money they’ve gotten, the VCs believe them.”

A close look at what most robos do reveals a fairly cookie-cutter, if common-sense, investment approach—one many MONEY readers would feel comfortable doing themselves. And there are important things the services haven’t yet figured out how to do well.

Still, this could start to finally open up advice to a bigger chunk of middle-class investors, not just the wealthy. Even if robos aren’t for you now, you may soon benefit from the way they’re changing the business. Other sites, such as LearnVest and Personal Capital, are using technology to connect you to a human adviser or planner you just never happen to meet in person. Established players like Vanguard and, yes, the current Schwab are responding with their own low-cost offerings. (Schwab’s headline price: free.) The existence of the robo option puts pressure on everyone’s prices.

In other words, you don’t need to buy the Mercedes. “Now there are Kias. There are Fords,” says Kitces. “There are a lot more choices.” Here’s how those choices stack up today, and what they can do for you.

Continue reading the rest of this story here.

MONEY interest rates

Higher Interest Rates Are Coming. Here’s Who Wins and Who Loses

150319_INV_InterestRates
Getty Images

The Fed says rate hikes will be gradual, but they'll affect everything in the economy, from your mortgage to your job to your 401(k).

Federal Reserve chair Janet Yellen has signaled, by omitting the word “patient” from her latest statement, that the central bank could begin raising interest rates as early as this summer. On Monday, Stanley Fischer also suggested in a speech that rate hikes are likely before the end of the year.

The rise is likely to be slow and bumpy. Still, the Federal Reserve’s benchmark short-term interest rate has been near zero since the financial crisis in 2008, and it’s been a long time since investors, borrowers and consumers have dealt with a rising-rate environment. The Fed’s decision to move rates in the other direction, when it comes, is something you’re sure to feel in your wallet.

So here’s a primer on who is helped and who is hurt when the Fed makes borrowing more expensive.

Helped: Anyone looking a safe place to stash money

Savings and money market accounts today offer an average interest rate of only 0.44%, according to Bankrate, but the good news for savers is that rising interest rates should buoy yields across the board. One caution is that if the Fed moves slowly, that means the interest earned on your accounts probably won’t bump up very quickly either. So if saving more this year is a big priority for you, take matters into your own hands with these moves, geared toward powering up your savings.

Hurt: New borrowers, and anyone with an adjustable loan

Rising interest rates push up borrowing costs for home and auto loans. If you already locked in a 30-year mortgage at the ultra-low rates that have prevailed over the past several years, you were probably smart. According to Freddie Mac, 30-year mortgage rates are 3.7% on average today, compared with nearly 6% a decade ago.

But the millions of Americans who hold adjustable-rate mortgages could end up paying more. Mortgages are typically pegged to the 10-year Treasury bill. While the Federal Reserve doesn’t control this rate directly, long-term rates typically rise in response to the short-term rates the central bank sets. The good news? Since Treasuries are a safe haven for global investors, yields are generally being held down by high demand—which rises every time there’s bad news in, for example, Europe. So mortgage rates might rise comparatively slowly even after the Fed takes action.

Not so clear: Anyone looking for a job or a raise

One of the Federal Reserve’s mandates is is to maintain full employment. When unemployment rises, it can try to stimulate growth by cutting rates. The idea is that cheaper borrowing makes it easier for consumers to spend and for businesses to expand and hire new workers. The flipside is that higher interest rates and tighter money supply can make hiring less likely. That’s one of the reasons the Fed has been so hesitant to raise rates in recent years, and there’s a risk that a too-early rate hike will cut off job growth.

Of course, keeping interest rates low for too long can come with its own danger: inflation. If there’s no “slack” left in the labor market—meaning that basically everyone who wants to work and can work already has a job—the easy availability of money will stop creating jobs and instead show up in the economy as higher prices. Ideally, the Fed would wait to raise rates until the precise moment when employment tops out and before inflation takes off. But where exactly that point is can be a contentious issue. At the moment inflation is very low and wages have yet to take off (suggesting some slack is left.) But a series of strong jobs reports seems to have some on the Fed wanting to get ahead of the curve.

Hurt: Owners of bonds and bond funds

You likely have a portion of your money, in a retirement portfolio such as a 401(k), invested in bonds.

Rising interest rates mean falling bond prices. Bonds typically pay a fixed coupon, so when prevailing rates rise, the value of your bond portfolio falls until its yield matches what’s available elsewhere on the market. The size of your losses depend on how steeply rates rise and the maturity, yield and other characteristics of the bonds you own. Wall Street sums up a bond’s interest rate sensitive with a figure called duration. You can look a bond fund’s average portfolio duration at sites like Morningstar. In general, duration tells you how large a capital loss you can expect for each 1% increase in rates. So Vanguard Total Bond Fund, with an average duration of 5.6, would fall about 5.6% with a 1% increase in rates.

There’s good news though: If you own a bond fund, the decline in your fund’s value will be made up with higher payouts as your fund acquires new bonds with higher yields. You’re likely to be made whole in a few years. Future bond investors benefit, too.

Not so clear: Stock investors

Whether rising interest rates will help or hurt U.S. stocks is a more complicated question.

All else being equal, a hike should hurt. One big reason is many investors choose whether to put money into either stocks or bonds, as bond yields pay more stocks become comparatively less attractive. But there are lots of other things to consider. For instance, stocks typically reflect investors’ attitudes about the overall health of the economy. And the if the Fed is signaling that it might raise rates, then it also thinks the economy is healthy enough to handle it. Other investors might view this as a bullish signal.

What does history say? The record is mixed. Stock researcher S&P Capital IQ recently examined 16 previous rate tightening cycles since World War II and found that the Fed’s moves led to stock market declines of 5% or more about four-fifths of the time. However, a separate study by T. Rowe Price looked at the question slightly differently: T. Rowe examined nine instances since 1954 that the Fed has raised rates following a recession. It found an average market gain of 14% a year later. In other words, it’s hard to know exactly how the market will react—except to say that it could be bumpy ride.

Helped: Banks

Banks make money by borrowing at low short-term interest rates (think checking and savings deposits) and lending it out at higher, longer-term rates. In an ideal world, they’d love short-term rates to remain at rock bottom, as long as longer term rates are high too. So you might not think they’d be cheering for a short-term interest rate increase.

Their problem has been that long-term rates aren’t high, but low. Meanwhile short-term interest rates can’t really go below the zero they’re stuck at. That’s left them little room in the middle. A rate hike will could give banks a window of opportunity to earn more attractive “spreads” once the Fed moves.

Helped: Anyone looking to spend U.S. dollars abroad

When interest rates rise, it pushes the value of U.S. currency up. That’s good for American consumers who want to buy foreign goods (and go on European vacations) cheaply.

Hurt: Anyone looking to sell things to foreigners.

But there are dangers in a too-strong dollar. If our currency is too strong, it means it willll be harder to sell U.S.-made products globally—which would be bad for economic growth.

Not so clear: Foreign stock funds

Most international-stock mutual funds hold assets denominated in other currencies, like the euro. The strong dollar means those assets they are worth less, all else being equal. (Some funds “hedge” their currency exposure.)

Over the past year, the MSCI All-Cap World EX-USA index is up 14.6% in local currency terms through Feb. 28. But according to Morningstar, the average foreign stock mutual fund—with roughly half its assets in Europe —has falled 0.06%.

On the other hand, the a strong buck isn’t all bad for foreign stocks. Companies in countries with weaker currencies will be able to export more goods to the U.S, boosting their earnings. And while it’s no fun to see your market winning vanish, investors are usually better off riding out such currency swings. When the dollar next weakens, your foreign stocks will have a tail wind.

One special case is emerging markets stocks. Razor-thin U.S. interest rates have been a boon for them, as U.S. investors, frustrated by dismal yields at home, have shifted money abroad. Once that changes, much of that money could rush back home.

MONEY Currency

How the Cheap Euro Is Hurting Your Investments

150312_INV_WeakEuroInvest
Dieter Spannknebel—Getty Images

The plunging euro may be good for U.S. consumers. But it has all but wiped out returns of foreign stock mutual funds.

A weak euro could make it cheaper to take that long-planned trip to Paris. Just don’t sell your foreign-stock mutual funds to pay for it.

On Wednesday, the euro hit a 12-year low against the dollar—it’s getting close to $1-to-€1 parity (so figuring the exchange rate on that trip will be easier too.) The currency is tanking thanks in part to a weak European economy, as well as the European Central Bank’s efforts to stimulate growth with looser monetary policy.

Unless you are frequent currency trader, these exchange-rate ups and down may feel pretty remote from your portfolio. But they’re not. If you hold a foreign-stock mutual fund in your 401(k) or IRA, you will have significant exposure to European stocks. And since those stocks are denominated in euros, their value to a typical American investor has taken a hit.

Consider: Over the past year, the MSCI All-Cap World EX-USA index is up 14.6% in local currency terms through Feb. 28. But according to Morningstar, the average foreign stock mutual fund—with roughly half its assets in Europe —has pretty much sucked wind, falling 0.06%.

What gives?

Just as the falling dollar makes European hotel rooms and airplane tickets relatively cheaper when their euro-based prices are translated into dollars, foreign stocks get knocked down in dollar terms too. When a U.S. mutual fund calculates its value at the end of the day, it converts the euro price of European stock back into dollars. So if the euro is falling fast enough, you can see loss in dollars even if the stock is climbing on the local stock exchange.

The same effect holds for bonds, or any other asset traded in another currency.

To be sure, it is possible for canny fund managers to use financial instruments, such as futures contracts, to “hedge” away currency fluctuations. Some do exactly that. Pimco, for instance, offers both hedged version of its foreign bond fund (up 10.8% over the past 12 months) and an unhedged version (down 5.7%).

Does hedging make sense? With foreign stock funds, the answer is generally no—which is why comparatively few funds do it. It drives up cost, and over the long run currency fluctuations tend to be less important than the economic fundamentals driving stock returns. The Euro’s recent plunge may be dramatic, but it’s also relatively unusual.

It’s slightly more common with bond funds. Vanguard, for instance, hedges the returns of its flagship foreign bond index fund, but not its flagship foreign stock fund. The reason it has given for hedging bonds: Since the underlying returns of bonds are usually fairly steady, currency fluctuations can an have outsized impact on your final return.

Of course, whatever the investing strategy you pick, the thing to remember about short-term currency moves is that they are just that, short-term. Think of it this way: When the dollar starts to weaken again, those foreign stocks will look like winners. In the end, holding some funds whose stocks are valued in foreign currencies provides extra diversification, helping smooth the overall return of your portfolio in the long run.

Now, if you can just find another way to fund that trip to Paris.

MONEY financial advice

What Every Investor Should Know About Schwab’s “Free” New Advice Service

Charles Schwab logo on window
Paul Sakuma—AP

Robo-Chuck Has Landed! Do you want this free new online service to design your portfolio?

A new group of financial websites has been making investment advice cheaper and cheaper. Now the brokerage and mutual funds giant Charles Schwab is getting into the game, with a new online service called Intelligent Portfolios that can design a portfolio for you without charging any fee at all. You’ll need only $5,000 to open an account. But, as you might well have guessed, there’s an asterisk on that “free” price tag.

We’ll get to the asterisk in a moment. First, here’s why Schwab’s entry into online advice is such a big deal.

Every financial firm in America is fighting to offer investment advice to the middle-class, especially about what to do with their IRAs and rollovers from 401(k) retirement accounts. But the cost of getting a financial pro to sit down and help you design a personalized portfolio of stocks, bonds, and funds is often high—think 1% of assets per year or more—and the minimum required investment can be forbiddingly steep.

New web-based companies like Betterment, Wealthfront, and FutureAdvisor have lately been chipping away at this model. They don’t let you talk to a person. Instead, you go to their sites to answer questions about your age, financial position, and how much risk you are willing to take, and computer models generate a portfolio of stock and bond exchange-traded funds (ETFs). These “robo-advisers” often charge investors razor thin fees of 0.2% to 0.5% of assets per year, with low (or no) minimum investments.

The investment advice robo-advisers give isn’t terribly complicated. But for most people, that’s a good thing. You typically end up in a handful of broadly diversified index funds, which you buy and hold for the long run. This service can be a simple entry point to investing for those who don’t know how or where to get started, and they can automate chores like annual rebalancing and adjusting your mix as you age. And, again, they are cheap.

And yet, Schwab’s new version appears to undercut even the other robo-advisers’ slender fees by charging nothing.

Does that make it a sure winner? Not necessarily. As with all such programs, you have to take a look under the hood.

In addition to whatever investors pay for online financial advice, they also have to pay the fees of the underlying funds. The robo-advisers Schwab will compete with don’t offer their own mutual funds, but instead typically rely on Vanguard and iShares products. Those are very cheap funds that usually charge less than 0.2% of assets per year, so the net cost of investing with an online adviser stays low.

Schwab’s approach looks a little different. While Schwab is offering its investment strategy gratis, the company has said it plans to recommend some of its own funds, as well as third-party funds.

Schwab hasn’t made clear specifically what ETFs it plans to use with Intelligent Portfolios. Schwab spokesman Michael Cianfrocca told MONEY the investment strategies it uses “have nothing to do with generating revenue for the firm.” But a quick glance at the kinds of portfolios it recommends suggests that some of its underlying investment will be relatively costly.

For instance, Schwab appears to make liberal use of “fundamental” index funds. Some investors think this type of index fund, which tends to tilt its weightings toward value-priced stocks, may outperform the market in the long-run. But fundamental index funds are pricier than plain-vanilla stock index funds, which simply hold stocks in proportion to their market value. Schwab’s fundamental large-company stock fund charges investors a fee of 0.32% of invested assets annually compared to just 0.04% for the plain-vanilla index funds the company offers. (A 0.32% fee is still low compared to actively managed funds.)

Schwab also stands to earn money from investors’ cash positions, since they will be held in Schwab cash vehicles, which Schwab makes money on by collecting a spread between what it earns reinvesting the money and what it pays out to Schwab customers. In one scenario, for an investor in his or her 40s with a moderate risk appetite, the Schwab product recommended putting nearly 9% of the money into cash. The Schwab spokesman said that was typical for other types of accounts housed at Schwab. But it’s far more cash than some other investment managers recommend. To take one example: The Vanguard target-date fund designed for a similarly-aged investor would put less than 1% in cash.

In the long run, Schwab’s new product may prove a convenient tool for some investors. But don’t assume you’re getting something for nothing.

MONEY fiduciary

Obama to Wall Street: Stop Acting Like Car Salesmen

Obama at the podium giving a talk
Alex Wong—Getty Images

President Obama will push for a "fiduciary standard," which would require financial advisers to act in clients' best interests.

It’s an issue that’s pitted Main Street against Wall Street for years. Now President Obama is wading into the murky question of what ethical duties financial advisers owe their clients when they recommend products like mutual funds and annuities.

On Monday, President Obama plans to use an AARP event to tout something known as the “fiduciary standard,” which would require financial advisers to act in the best interests of their clients, much as a lawyer must do.

That may seem like a no-brainer. But in fact, investment pros who call themselves “financial advisers” currently are not required to give clients the best advice or products that they can offer. They never have been. In the eyes of the law, financial advisers—once more commonly known as stockbrokers—are like car salesmen or the guys selling TVs at the local big box store: They can and do tout products that offer the heftiest profits and commissions.

To be sure, investment advisers have never been allowed to recommend just any investment. Current law requires they sell investments that are “suitable” for their clients based on factors like age or risk tolerance. In practice, however, that often means actively managed mutual funds with hefty sales loads or annuities with complex and expensive guarantees. Compared to low-cost index funds and exchange-traded funds, these investments can end up costing savers tens of thousands of dollars over the years it takes to build a retirement nest egg.

Raising the legal standard to a fiduciary one might stop that practice. That’s a big reason that consumer advocates, including the AARP and the Consumer Federation of America, have been calling for years to require all advisers to act as fiduciaries.

Both the Securities and Exchange Commission and the Department of Labor, which has jurisdiction over 401(k) plans, have taken stabs at requiring advisers to become fiduciaries. The issue was a key point of contention in the debate of the 2010 Dodd-Frank financial reform bill. While the bill ultimately included language that appeared to authorize the SEC to implement the financial standard, five years later the proposal is still stalled. One key point of contention: Financial advisers that work on commission tend to take on less wealthy clients. That has allowed Wall Street firms—and especially big insurance companies whose agents sell annuities—to argue that tougher rules would deprive middle class investors of advice.

Of course, it may seem strange that members of Congress would listen to what big business thinks is best for middle class investors while ignoring AARP and the Consumer Federation of America. But that only speaks to the strange ways of Washington—and, of course, to the ingenuity and determination of the financial services lobby.

The White House push appears to focus on advice doled out to investors in retirement plans. While that’s a huge group of investors, it’s not clear what effect, if any, the proposal would have on advice regarding taxable investment accounts. Any new rules could also be crafted to permit brokers to continue to earn commissions, something that many investors advocates are likely to see as a potentially fatal loophole.

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