Investment Advisers

If you want to be a barber in Maryland, you need to demonstrate that you can cut hair. But if you want to offer investment advice for a living, you don't need to show that you know the difference between stocks and bonds.That will change next year.Maryland and other states that license investment advisers in January will begin requiring would-be advisers to answer questions about the causes of inflation, annuities, the risks and benefits of bonds and stocks, and how certain investments or strategies will respond in a healthy or sluggish economy.

THE GUTSY, "do-it-yourself" mutual fund investor is in the minority, contrary to popular belief.Only about one-third of the estimated 65 million people who invest in mutual funds do it without the aide of a professional such as a broker, money manager or financial planner, according to Strategic Insight, a New York-based mutual fund research firm.That is still a hefty chunk of people, but it is small considering the growth of the mutual fund industry and its ubiquitous message: Any "Average Joe" can manage his portfolio through mutual funds.

WASHINGTON -- Securities and Exchange Commission Chairman Arthur Levitt yesterday endorsed a bipartisan Senate bill aimed at reducing state regulation of mutual funds, investment advisers and companies' securities offerings.Levitt's testimony at a Senate Banking Committee hearing gives impetus to a bill that congressional aides predict will sail through the Senate after a committee vote in the next few weeks.A similar House measure with some additional sections favored by Levitt and Wall Street groups is expected to pass later this month.

IF YOU WORK with a financial planner, some valuable new disclosures will be coming your way. Thanks to a law just passed by Congress, plus a new initiative by state regulators, you'll be able to learn a lot more about the person who guides your investment decisions.The new rules cover investment advisers. That doesn't mean stockbrokers. You already have access to a stockbroker's background and disciplinary history, just by calling your state's securities commission.vTC Investment advisers manage your assets or advise you on how to manage them.

Iris Rounsaville made millions as a financial adviser working out of her Chesapeake Beach, Md., home.Both friends and investors from around the country were impressed with her story of being a star broker at E. F. Hutton and PaineWebber. But they were more impressed with her promises of huge returns by investing in European Bank Instruments.But the investments were bogus, and Ms. Rounsaville, who had spent two years in a California prison for investment fraud, bilked investors of almost $4 million.

WASHINGTON -- The United States and Japan reached a broad accord yesterday to open a range of Japanese financial markets to foreign competition, allowing U.S. investment firms for the first time to vie for the right to manage nearly $1 trillion in Japanese pension funds.The accord was reached just hours before Japan's first Socialist prime minister, Tomiichi Murayama, landed in Washington for a meeting with President Clinton today.Wall Street brokerage houses and investment advisers have complained for years about a web of government regulations and corporate relationships that froze them out of the world's second-largest pool of pension funds.

NEW YORK -- It can be enlightening not to read all your mail on time. Lately, I've been reviewing month-old reports from stockbrokerage firms and investment advisers. And guess what? Most were fundamentally bullish on stocks in the week before the big price slide. Afterward, most came down on the negative side -- and acted as if they had been there all along.This week, they're sounding positive again. From which you can conclude that half the investment advisers don't know where market prices are going, while the other half don't know that they don't know.

DRESDEN, Germany -- A year ago investing in Eastern Europe was the craze. A flood of foreign capital moved into these emerging free-market economies and pushed stocks to euphoric levels.Poland's stock market, for example, rose more than 800 percent in 1993. Hungary's market was up 200 percent in February of this year over a year earlier.Then reality set in, with rising interest rates, profit-taking and a flight of capital from these risky, barely regulated markets.Since March, investors have seen values plunge.

Buffeted early yesterday by news of the Orange County, Calif., bankruptcy and Federal Reserve chief Alan Greenspan's warning about a renewed inflation threat, the Dow Jones industrial average tumbled 28 points in the first hour, but regained part of its loss and closed down 10.43 points at $H 3,735.52. Bond prices also finished lower.DECEMBER DIARY: Speaking of stocks, Working Woman magazine says, "You're being 'taken' if your broker says, 'Trust me; it's too complicated to explain.' An adviser who can't or won't give clear explanations either doesn't understand the investment or doesn't want you to understand it for fear you'll say 'No' " . . . "42 percent of retirees say their main income is Social Security; 14 percent of non-retirees say they expect it will be their main retirement income."

It's a matter of trust. Americans worry about their money and wonder exactly whom they can trust with it.With about a half-million stockbrokers and 100,000 financial planners doing business in this country, finding the trustworthy isn't always easy.Sometimes steps must be taken to make sure professionals remain on the up-and-up:* In the brokerage industry, Prudential Securities has agreed to pay $371 million to settle charges that it defrauded 400,000 investors. Most of the money will go to individual investors who can prove they received false promises or were cheated.

It would be nice if Bernie Madoff's 150-year prison sentence would scare straight any financial adviser who ever thought of duping a client. But that's not likely. While most advisers are honest, there will always be some who will betray clients' trust for a quick buck - or billion. Last year's stock market crash devastated portfolios, causing many investors to realize they could use the help of a professional. Unfortunately, it coincides with the Madoff scandal and other high-profile cases of suspected fraud.

If you're looking to hire a financial planner or adviser, you're making a decision that likely will affect your entire life. And the vast array of choices can make the decision mind-boggling. Anyone can call himself a financial planner, says Jack Waymire, author of Who's Watching Your Money? So don't assume that having a certain title ensures skill or expertise. You also want to be objective - don't let a planner or adviser's personality or sales skills affect your decision. You want to objectively consider three factors: credentials, ethics and business practices.

ONLY 213 YEARS after the New York Stock Exchange's founding, the government has added regulation requiring many brokers to say this before they take your money: "Our interests may not always be the same as yours." No kidding! Besides enjoying commissions on stock and bond trades whether or not the trades help your portfolio, brokerages often receive what amount to legal kickbacks from sellers of mutual funds, variable annuities and other products. A broker might be tempted to sell you a mediocre fund with a big referral fee instead of a great fund with no fee. No, his interest is not the same as yours.

Allegations that American Funds arranged improper sales deals with brokers are posing a quandary for financial advisers, who have helped make the Los Angeles firm the nation's most popular mutual fund company in recent years. After 17 months of revelations that have rocked the fund industry, some advisers say it's difficult to find high-quality companies that haven't had their reputations sullied. "Quite honestly, where else do you go?" asked Emerson Fersch, a principal at Capital Investment Advisers in Long Beach, Calif.

INVESTORS learned some painful lessons in the last few years, from the importance of diversification to the discovery of a host of conflicts of interest on Wall Street. Or did they? Tech stocks came roaring back into favor earlier this year, as did the volatile emerging-markets stock sector. And independent stock research firms - those that don't derive revenues from investment banking business - have failed to catch on. Investor complaints to the National Association of Securities Dealers ticked up again last year after declining steadily since the bursting of the Internet-stock bubble in 2000, and arbitration case filings surged 16 percent last year.

CHICAGO - Morningstar Inc., a U.S. research firm used by 3 million investors to decide what mutual funds to buy, said yesterday that the Securities and Exchange Commission is investigating the company for publishing incorrect performance data for a fund. The SEC may sue the firm, founded 20 years ago by Joseph Mansueto, for violating securities laws, Morningstar said. The company said it overstated the returns of the Rock Canyon Top Flight Fund from March 12 to March 23. Morningstar said the regulator may be concerned with how long it took to correct the information.

Investing mistakes M-y mostly born of ego, emotion and ignorance M-y are costing investors big time. And investment advisers say they see the same errors made year in and year out. The first step in avoiding common blunders is knowing what they are. The worst mistakes include: Buying single stocks risks multiple errors ItM-Fs a lot easier to make mistakes when investing in individual shares of stock. Here are some common bonehead errors: Investing in individual stocks at all Unless you really know what youM-Fre doing and can stomach tying your future to the fate of a few individual companies, choose mutual funds instead.

The Securities and Exchange Commission moved yesterday to increase its oversight of hedge funds, the sometimes volatile investment tools of the wealthy that now operate almost without regulation. SEC Chairman William H. Donaldson, a Republican, joined two Democratic commissioners in voting to issue a proposal requiring hedge funds to register with the agency and disclose basic information about their management. Until recently, Donaldson had been in the Republican camp and opposed to increasing regulation.

The Securities and Exchange Commission told a top Maryland pension official that Nathan A. Chapman Jr. violated federal law when he permitted money managers he supervised to invest state pension funds in his own companies, newly released documents show. Carol Boykin, the pension system's chief investment officer, wrote in a March 19 memo that the SEC regards the purchases of Chapman stock as breaking a securities law, the Investment Advisers Act. "I was told by the SEC that these transactions were a violation of fiduciary duty according to section 206 (an anti-fraud provision)

If you want to be a barber in Maryland, you need to demonstrate that you can cut hair. But if you want to offer investment advice for a living, you don't need to show that you know the difference between stocks and bonds.That will change next year.Maryland and other states that license investment advisers in January will begin requiring would-be advisers to answer questions about the causes of inflation, annuities, the risks and benefits of bonds and stocks, and how certain investments or strategies will respond in a healthy or sluggish economy.