The News and Observer from Raleigh, North Carolina • E3

Q. Why write a book about Charles Schwab? A. Charles Schwab had a vision that set itself apart from the rest of the securities industry. Schwab considered selling aconspiracy against the investing public because what ends up being sold is what brokerage have on inventory and not what the investors need. So there would be no selling.

And because brokers are paid by salary and not commission, there would be no incentive to sell. And Schwab said there would be no advice. Charles Schwab was an analyst before he started his own company, and he knew how useless and corrupt advice was. Schwab was out there in the wind. Q.

And their commissions were much lower than right? A. Yes. When the company started in 1975, Merrill Lynch charged $600 per trade. Schwab would charge $50 to $60 per trade. Schwab could charge lower transaction fees because it have all those fancy analysts giving useless advice.

And at the beginning, it have any branches. Q. But why examine this firm now? A. Well, I began researching the book in the fall of 2001. And Schwab was clearly struggling.

It makes most of its money from trading commissions; and because trading was down, commissions were down. It was also a time when the corporate scandals started to kick in. And York Attorney Eliot Spitzer had just begun to go after the securities industry. So I thought it would be interesting to take a look at how a great company reacts. Q.

And how has this firm reacted to these events? A. In the mid-1990s, perhaps earlier, the company realized that trading had become a commodity item. And the company figured out that you make a go of it being a low-cost provider of a commodity item. So the firm began to do all those things Schwab said it would never do. Q.

What do you consider to be the most significant change? A. The biggest one is the wholesale shift of serving the investors of average means to serving the fat cats. Schwab opened the equity markets to a whole new generation of inves- tors. And the San Francisco, populist base was very much in support of serving average investors. Now, the company embarks on a program to make richer people richer.

Q. Where, specifically, have you seen this shift? A. They raised their fees on all accounts under $50,000. customersnow face a $25 fee per quarter if their account falls below a certain amount or if you do a certain number of trades. Q.

How do you explain this shiftin emphasis? A. Schwab participated in the creation of thousands of millionaires. But they watched those millionaires, as they got too big for Schwab to handle, move to competitors. Q. Why did they leave? A.

They left because of this wonderful paradox. Schwab said it would never provide advice. And that was great for people with $50,000. Then Schwab helped turn them into millionaires. say you have $2 million.

Now you need some advice. What if Ihave $25,000 in savings. What sort of advice should I expect? A. even bother going to Schwab or Merrill Lynch or Bear Stearns. Q.

So if I get a broker to pay attention to me, where should I turn? A Irecommend stock-picking clubs. And I would always recommend that people read The Wall Street Journal. Are people missing out on much if they get a advice? A No. I think their advice was useless. a lot of merit in picking an index mutual fund and just sticking with it.

You will sleep a lot better. HRIS ERRES 102030405060708090 102030405060708090 3E, SUNDAY, MARCH 23 2003 DESIGNER EDITION FILM Several of my employee benefits marketing pitches claim that I save money by purchasing these benefits because they are deducted before taxes from my monthly paycheck. These deductions include a 401(k), dental, disability and vision insurance. These items are deducted on a monthly basis before taxes are calculated, but at the end of the year I calculate my taxes on my total salary before any deductions are taken out. It seems to me that at the end of the year I still pay the tax.

This is costly when I owe taxes at the end of the year. Now that my employer has decided not to match the 401(k), considering dropping all of these Am I misunderstanding something about pretax benefits? A Either you understand how your taxes are calculated or the benefits are being touted as pre-tax when they are really just available through payroll deduction, which while convenient, does not pro- vide any tax savings. Your income taxes are calculated based on your taxable compensation. Any true pre-tax plan will reduce this taxable compensation, which reduces the amount of income taxes you pay. You save any money purchasing or investing in what you need, but if something you would buy or invest in anyway is offered pretax, you should use this to your advantage and participate in the plan.

If your benefits are pre-tax and you owe tax at the end of the year, you may need to adjust your withholdings. After reading the following explanations, contact your human resource representative to clarify the type of benefits being offered and if necessary, complete a new W-4. look at the 401(k) first. If this is an IRS-approved 401(k), it is a defined contribution retirement plan established and maintained by your employer allowing you to contribute pretax dollars to your own account through payroll deduction. The 401(k) plan is a tax-deferred account.

This means you pay federal and state income taxes on the amount you contribute, any amount contributed by your company or the earnings accumulated in your plan until you start withdrawing money from the plan, usually after age Many employers have stopped matching employee contributions, but this mean you should stop your own contributions. Your employer isproba- bly picking up the plan administrative costs and saving taxes and investing for your own retirement. The money you contribute will always be yours. When you leave your current employer for any reason, you can take all your contributions with you. The other benefits you mentioned will only be paid for with pre-tax dollars if they are offered through a cafeteria plan orflexible benefits plan.

These plans allow employees to select benefits that fit their specific needs. Although details of cafeteria plans vary, they have common characteristics. Cafeteria plans allot each employee a predetermined number of dollars with which to purchase benefits. Many plans also offer an optional flexible spending account. This account (also called a reimbursement account) is an arrangement by which the employee agrees to a voluntary reduction in salary.

The reduction can be used to pay for any plan benefit and other Internal Revenue Code approved expenses. You are funding the plan with pre-tax earnings, taxes are reduced and spend- able income is increased. If you are going to purchase any of the benefit options offered through the plan, it makes sense to fund the plan and avoid paying income taxes on this money. Determine the fixed costs, such as insurance premiums, of any benefits you want to purchase. At a minimum, you should fund the plan with this amount of money.

Once you decide how much to set aside in the plan, that decision is then irrevocable for the remainder of the plan year unless there is a change in family status (marriage, divorce, birth of a child, Any excess funding in a benefit category in a plan year is lost. The excess revertsto the company. This is an IRS rule; the employer may not reimburse the employee and the unused contributions may not be carried over to the next plan year. With planning, this be a problem. drop your benefits or stop investing in your 401(k) until you do some more research and fully understand the amount of income on which you are being taxed.

Even if you discover that the insurance premiums are being paid for with after-tax money, cancel right away. If you want this type of insurance, research whether buying this coverage through your employer at a group rate is less expensive than buying it on your own. Send questions to Holly Nicholson, CFP, P.O. Box 99466, Raleigh, NC 27624 or go to her Web site, www.askholly.com. Your Money MONEY MAKEOVER Citing heightened security concerns and the war with Iraq, the U.S.

Bureau of Engraving and Printing last week delayed unveiling the redesigned $20 bill until early May. The $20 is the most counterfeited note in the United States and second-most commonly used behind the $1. Tax status of benefits not always obvious SAVINGS ACCOUNT YIELDS Largest Triangle Institutions Here are the annual percentage yields that 22 federally insured Triangle institutions were offering March 21 on money-market accounts and certificates of deposit. Yields are based on lowest minimum deposit to open an account and may vary by branch location. 3 6 1 2 5 5 I i i A Bank of America0.500.900.951.061.452.70 Capital Bank0.800.851.051.201.652.50 Central Carolina Bank0.251.051.201.351.953.15 Coastal FCU1.751.251.752.002.253.75 Crescent State Bank0.751.201.502.00N.A.3.65 First Citizens First Union0.250.851.051.051.503.00 Four Oaks Bank Trust Co0.401.071.221.362.223.05 KS Bank, Inc0.251.001.511.76N.A.N.A.

Mechanics Farmers Bank1.001.001.191.311.712.78 Mutual Community Savings Bank2.281.131.261.331.863.00 NC Local Govt Empl CU2.25N.A.2.252.502.753.75 North State Bank0.751.351.451.752.803.75 RBC Centura Bank0.501.001.101.201.753.00 RTP Credit Union1.01N.A.1.461.87N.A.N.A. SouthBank0.501.251.351.60N.A.3.25 SouthTrust Bank0.501.051.151.251.803.10 State Empl CU2.25N.A.2.252.502.753.75 The Fidelity Bank0.501.051.151.25N.A.3.05 Wachovia Bank0.250.850.991.051.503.00 Wake Forest i a a 0 8 4 1 0 5 1 3 3 1 5 3 2 0 2 3 1 9 a a i a i a i 0 7 4 1 0 6 1 1 4 1 3 1 1 8 6 2 9 2 annual percentage yield offered last week by 100 large institutions in 10 largest markets. 3 MONEY MATTERS Holly Nicholson HE EWS BSERVER SUNDAY, MARCH 23, 2003 a cruel irony that, as the bull market ended and investors most needed the professional advice of stockbrokers, the cost of brokerage services increased. Even Charles Schwab, long considered a proponent of the average investor, has been raising its fees and shifting its focus towards wealthier clients. John Kador, a Duke University graduate and author of seven business books, addressed these changes in a recent interview with staff writer Chris Serres.

Kador, 52, will be at the Barnes Noble store in Cary on Thursday to discuss his latest book, One Company Beat Wall Street and Reinvented the Brokerage (Wiley, Schwab: Less for little guy Author Kador says Schwab was a visionary, but the company changed course. But if people turn on their televisions and see people all over the world chanting antiwar slogans, that lift the spirits of consumers and businesses. There is a danger that we could get into a quagmire of discontent, similar to what we saw in Vietnam, and that would dampen consumer confidence and impede the recovery. Q. So is it wise to be wading back into the stock market now? A.

The best thing to do is to avoid being overexposed to either stocks or bonds. There are too many unpredictable things that could happen that could send the market in violent moves in either direction. Q. Most of major brokerage firms remain fairly bullish on stocks. Some are still recommending that clients put about 60 percent to 70 percent of their money in stocks.

Is that a reasonable recommendation at time like this? A. What do Ithink about that advice? I think been catastrophic for the investor over the past few years and needs to be re-examined. Of the major asset classes and including here commodities, stocks, bonds and real estate stocks are second only in risk and volatility to commodities. Stocks are about twice as volatile as bonds. Q.

But if you want to save for retirement, stocks are still your best bet, right? According to research Ibbotson, stocks generate an 11 percent annual return over time, vs. just 7 percent for bonds. A. talk about those numbers, because I believe they are misleading. That data is based on a very defined period the past 50 years.

And, of course, if you go back 50 years, you go back to the beginning of the great post-World War II bull market. If you start your study in the early 1950s, you automatically get a big boost. Equities come out looking pretty good, relative to bonds. But what if, instead of taking a 50- year period, you took a 30-year would take you back to 1973-74, which was the beginning of a terrible bear market in stocks and also the beginning of a big inflationary period that sent the yields on bonds into the double digits. If you start from that period, what you find out is that stock returns and bond returns are basically a wash.

They both yield about 10 percent. So these studies depend on when you begin and when you end. Q. take someone who is 45 years old and is just starting to save for retirement. What, in your view, is the proper mix of stocks and bonds for that individual? A.

Well, a person who is 45 has about 20 more years in his or her investing life. As we know, anything can happen in a 20-year period. So you need a risk-controlled portfolio. So I suggest 30 percent in equities and when I say equities, I mean index funds because they track the market. And the other 70 percent I would have in a sophisticated bond portfolio that is allocated between different income classes that will generate a positive yield no matter what the stock market does.

Q. A 70 percent allocation to bonds might also seem pretty risky right now. There are plenty of economists who think the bond market may have already peaked. A. It may very well be that bond prices topped out in 2002.

But what would it take for bond prices to can think of two scenarios. One is that the economy will turn around and grow strongly again. That appear to be on the immediate horizon. The second is that inflation raises its head again, perhaps through another oil crisis. That, too, would cause bond prices to fall.

But not seeing much inflation right now. So currently, I see much short-term risk with bonds. Q. There is, however, a long-term risk if rates go up (bond prices move inversely to interest rates). A.

One good way to insulate yourself against risk of higher is to keep your bonds at a fairly short maturity range. You would invest in bonds with one, two, three and four-year increments. Every year, 25 percent of your portfolio turns over. called interest rates go up, and bond prices come down, then you be stuck with a portfolio of long-term bonds. Q.

The only problem with that strategy is that, by sticking to short-term bonds, sacrificing yield, no? A. Well, you have to take what the market will give you. If you chase higher yields, you will be exposing yourself to higher risk. Q. Are there other alternatives out there for people who want to avoid stocks but still want a 7 percent or 8 percent return? A.

Sure. You can invest in foreign bond funds, which are mostly invested in foreign government securities. Now you have to do some investigating to see which governments investing in, but these funds typically generate much higher returns. Q. A lot of people are nervous about switching out of stocks at a time when the stock market may have bottomed.

What do you say to those people? A. If your portfolio has gone down 50 percent, you want it to go down another 25 percent. You need to insulate yourself. The fact is, you can still keep a portion of your money in stocks and get a good kick from them if the market rebounds. But not necessary to be a huge speculator in stocks.

HRIS ERRES MONEY CHAT CONTINUED FROM PAGE 1E.