The Internet as an Investment Tool

EXECUTIVE SUMMARY

CPA/FINANCIAL PLANNERS NEED TO BE WEB SAVVY. The Internet makes it possible for CPA/financial planners and individual investors to be notified on-screen when news breaks about a particular stock. INVESTORS FOLLOW A STOCK BY WATCHING its price and trading volume and factors such as the P/E ratio and volatility rating compared against the overall market’s. The Web can help do this cheaply, accurately, at any time of day and without consulting a stockbroker. AN ELECTRONIC MODEL PORTFOLIO can “test drive” an investment’s behavior. A CPA/financial planner should look for charts offered by these services, including those that compare the stock to a benchmark over time and record the user’s unrealized capital gains. THE SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) protects up to $500,000 of securities (limited to $100,000 for cash) held in a customer’s brokerage account. There is no reason for a CPA, or a CPA’s client, to do business with a broker that does not offer SIPC protection. MANY INTERNET BANKS OFFER FREE Web-based calculators, such as those for mortgage interest rates. A Web calculator from a respected site can provide useful ballpark numbers for a mortgage or an easy way to benchmark a price. SECURITY IS A MUST FOR ANYONE connecting to the Internet, whether by dial-up modem or broadband connection. Get a good antivirus program—and use it. Encryption is important, too. Look for 128-bit encryption when transmitting confidential data over the Internet.

SARAH PHELAN, JD, a technical manager on the former AICPA personal financial planning team, is an employee of the American Institute of CPAs. Her views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.

emember that axiom about using good tools to do a good job? A tool whose time has come, the Internet—with its fast access to voluminous information—has revolutionized the retail securities marketplace and is rapidly changing the financial arenas in which CPAs and their clients interact. A CPA not yet using the Web to monitor and manage personal or client finances almost certainly will have to catch up with clients who do.

The Internet makes it possible for CPA/financial planners and money managers, as well as individual investors, to use e-based variants of time-honored data-gathering and financial-projection tools. On the Web, planners can follow a stock by watching its price and trading volume and studying its P/E ratio and volatility rating compared against the overall market’s. Best of all they can do it easily, cheaply, accurately, at any time of day—and without consulting a broker.

CPA/financial planners and individual investors can get streaming video of the major market tickers on their computer screens; arrange to have a pop-up box appear when news breaks about a particular stock; and be alerted by e-mail, beeper or cell phone when a stock reaches a set price or an index moves by a predetermined amount. This article looks into some of the many electronic tools CPAs can use to help clients right now.

ONLINE, INFO IS ALWAYS AT HAND

The Web offers easy access to information that traditionally has been available via print, radio and television. Although the medium is relatively new, the benchmarks against which stock performance is measured are still the major indexes. Sites such as www.cnnfn.com , www.dowjones.com and www.nbci.com now report these benchmarks, too. So do major wire service Web sites such as APOnline ( www.aponline.com ) and Reuters ( www.reuters.com ). Internet portals such as AOL and Yahoo give regular updates on the indexes and the markets, and, of course, The Wall Street Journal covers them on its Web site, www.wsj.com .

All this technology focuses primarily on pre-Internet indexes—the S&P 500, the NASDAQ, the DJIA and the Russell 2000. Other commonly available indexes or benchmark rates are the federal-funds rate (the rate at which banks lend each other money overnight), the EAFE (European, Australian and Far East) index, the Wilshire 5000, the commodities indexes and foreign exchange rates.

TEST DRIVE A PORTFOLIO

A number of Web sites allow CPA/financial planners and their clients to set up watch lists or model portfolios for free. Fidelity, Kiplingers, Morningstar, Schwab, SmartMoney, The Motley Fool and Yahoo let a potential investor choose one or a handful of investments, commit a hypothetical amount of money and then see how things progress over time (see “Cool Tools,” at the end of this article).

Using such a model portfolio, investors can test their judgment while risking only pride. For example, www.fool.com offers a model portfolio that’s easy to set up. It’s available to registered users only (they simply enter a user name, password, e-mail address and ZIP code). Then the user selects investments by specifying ticker symbols (easy to look up on-site) and an amount to “buy.” He or she may invest by dollar amount or number of shares for each investment. The site allows the user to name the portfolio, making it easy to follow more than one. There’s a space for notes, such as the portfolio start date or a target “sell” price for a particular stock. A user can tell whether the portfolio is up or down from inception as well as from day to day.

However, model portfolios don’t offer full functionality. The www.fool.com model portfolio, for example, does not recognize when a stock split has occurred, which makes for erroneous reporting. It would be wise to look at several sites before settling on one.

Some model portfolios offer more detail than others. A CPA/financial planner should look for charts that, for example, compare the stock to a benchmark over time and record the user’s unrealized capital gains (which the smartmoney.com site does). Often the sites offer links to more data, such as P/E ratios, dividend information and 52-week highs and lows.

Some let users link to the audio of a company’s latest conference call with analysts, giving a researcher auditory access to the same information that management offered to Wall Street experts. Analysts’ questions to a company’s management can be quite illuminating, too. Certain sites’ customizable watch lists (SmartMoney’s, again) give on-screen alerts and “instant” (actually 20-minute-delayed) securities price quotes.

Access is not always reliable, however. For example, in 1999 there were several notable crashes at E*Trade, Ameritrade and Schwab. Customers linked to one major broker lost the ability to buy or sell for part of a day because of computer troubles at the brokerage. Other significant glitches have occurred since then. In a sharp market downturn, especially if margin trading is involved, an inability to get through to one’s broker can be costly.

WHAT’S THE SERVICE?

“Full-service” brokers—which may offer online services—provide a continuum of interaction with clients: They generate investment ideas and provide stock quotes, research materials and the information necessary to compute the investor’s tax liability correctly. In many cases, they manage the customer’s account. Trading fees are higher than with a discount broker, and they charge a commission on each trade. Full-service firms also may charge annual “maintenance” fees based on a percentage of the customer’s account total. CPAs have traditionally built relationships with such brokers—Merrill Lynch and A.G. Edwards are just two examples—calling them up for tax data and telling clients who are shopping for a broker about them.

Discount brokers’ services generally are available online. They charge lower fees, offer fewer services and are suitable for investors who have sufficient expertise and research to make their own decisions. Because transactions on the Internet are not yet as reliable as those conducted by telephone, their services may be more prone to disruption, however.

A CPA/financial planner working with an individual investor in choosing a broker should consider some factors in the discount/online vs. full-service decision:

Available research tools. An investor can expect stock charts, screening tools and analyst research reports from an online broker, but what else is out there? Many good tools are available on the Internet, for free or at very reasonable cost (see “Cool Tools”).

Types of products. Some online brokers do not handle options, penny stocks or foreign stock trades. Some handle mutual funds; many don’t. It’s possible to invest in mutual funds online or move investments around. Brokers that offer only their own fund family aren’t right for investors who want access to a wide range of funds. Large- and mid-cap U.S. stocks should be available.

Costs. Typically, commissions are higher on small trades and proportionately lower on big ones. A CPA/ financial planner who works with an investor who often trades in 100-share lots should compare the cost for a specific trade of that size across several firms. Some online brokers charge more for human assistance. Ask about “hidden” expenses such as postage and handling, late payment fees, transaction fees and account minimums.

Payment methods and interest rates. As with traditional accounts, online transactions may be paid for by check, direct wire transfer and transfers between accounts (for example, a transfer from a money market account held at the same firm as the brokerage account). Margin interest rates vary widely from broker to broker.

Time. The speed of electronic trade confirmations and statements varies greatly among brokerages.

Types of accounts. Online cash, margin and IRA accounts are available; cash management accounts are not quite as common. A CPA doing research for a client should find out if the broker offers money market, checking and online-bill-paying accounts and what the fees are for these services. Is interest paid on the account? Is the account balance swept into the money market account at the end of each trading day? Discount brokers are expanding their banking services in an attempt to make the most from each customer. Online corporate and partnership accounts are relatively rare.

Telephone service. An investor using a full-service brokerage expects to be able to reach the broker by phone when the markets are open. At many, a trade can be executed through automated touch-tone dialing. Some discount brokers are Internet-only. Because a broker’s system or the investor’s computer may crash, some investors may prefer to deal with brokers who offer telephone service, too. So far, the 100-year-old technology is more reliable than the Internet.

SIPC protection. A broker that is a member of the Securities Investor Protection Corporation (SIPC) displays the SIPC logo on its print materials and its Web site. SIPC protects up to $500,000 of securities (limited to $100,000 for cash) held in a customer’s brokerage account. There is no reason for a CPA, or a CPA’s client, to do business with a broker that does not offer SIPC protection.

WEB RETIREMENT PLANS

More than half the discount brokers now offer online services to institutional clients, such as pension funds and trustees. A small but growing number of CPA firms have opened pension accounts through online brokers. Such brokers let clients process application paperwork online. First, it’s filled out electronically, then it’s printed, signed and mailed with a check to the broker. The plan administrator, generally a managing partner of the firm, can then trade online on the plan’s behalf.

Thanks to self-directed Internet brokerage accounts, employee participants in 401(k) plans can invest a portion of their retirement assets in an array of stocks and mutual funds. A few years ago this flexibility was rare, but companies now expect this option when they are comparison shopping for 401(k) plans to offer employees.

Retirement plans are available through both mutual fund companies, such as Putnam, and full-service brokers, such as Fidelity, for example.

Web-based information is available at www.401kcenter.com (for employers) and at Chalk401k.com . Search401k.com carries an online directory of more than 90 401(k) plan products from nearly 60 retirement plan providers. The Search 401k product guide gives CPA financial advisers access to more than 60 different data fields, including product descriptions, plan administration, investment vehicles, employee communication and record-keeping information.

SECURITY DO’S AND DON’TS

Anyone connecting to the Internet, whether by dial-up modem or broadband connection, needs a good antivirus program. CPAs should use it often and make sure that staff members do, too.

Encryption is an important safeguard for financial transactions. Levels of encryption are measured in bits. The higher the number of bits, the better the level of encryption. The highest level generally available in North America at this time is 128-bit encryption, so this is what to look for when transmitting confidential data over the Internet.

The level of encryption available on an “information appliance”—such as a personal computer, a pager, Palm Pilot or other PDA (personal digital assistant)—or cellular phone depends on its browser’s capacity. If a browser doesn’t have sufficient capacity to open an encrypted Web page, usually the screen will say so. Notification comes in the form of a prompt to upgrade the browser (that is, to download from the Web a higher version of Netscape or Internet Explorer).

Microsoft’s Internet Explorer 4.0 browser shows when encryption is in use by displaying a padlock icon in the bar at the bottom of the IE window. On Netscape’s browser, the padlock is in the lower left corner. When the padlock is open, encryption is not in use; when the icon shows a closed padlock, encryption is being used.

In addition to encryption, CPAs should, of course, use the following no-tech and low-tech steps to protect privacy over the Internet.

No-tech steps. As ever, passwords should be kept private. Avoid those that are easy to figure out (phone numbers; favorite teams; names of children, spouses or pets). Although some sites disconnect after a few minutes’ inactivity, a computer that’s logged into a financial site never should be left unattended.

Low-tech steps. To ensure that no one else can view recently transmitted information clear the cache of the browser after using secure financial sites. Be cautious about what is sent in e-mail. It’s unwise to send account numbers, passwords or other sensitive account information.

THE WEB IS A WORK IN PROGRESS

The Web continues to provide information about securities and markets that until a few years ago was available only to well-financed professionals, and it will go on affecting the transmission of services and materials in every industry and profession. It’s a tool both fabulous and flawed, and it’s here to stay.

It puts into the hands of CPAs and their clients many free, helpful tools for a number of common financial decisions and events, such as buying or leasing a car, refinancing a mortgage and finding a mutual fund. As the technology becomes more reliable, it will improve capabilities for browsers; encryption and firewalls; PIN numbers; asset transfers and order entry; transmission of trading statements, account balances, digital certificates and electronic signatures; services for money managers; the capacity to operate in options markets; support for 401(k) plans and mutual funds and enhancements to many other financial services.

However, the Web won’t ever be able to substitute for experience and judgment when trading stocks or other assets. Nor can it shield users from scams. It can’t evaluate—in a dependable way—important client questions such as “Can I afford to retire?” Nor can the Web shake hands, wish someone good morning, remember that a client’s spouse has been sick or an investment in a nephew’s start-up just tanked. Nor can the Web take the client out to lunch. That’s still the trusted adviser’s job.