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Investment clubs spread the wealth

JUST AS YOU WOULD SCRUTINIZE A SURGEON'S credentials before scheduling an operation, you should be choosy when finding professionals to tend to your club's financial health. Financial advisors range in reputation from highly trained professionals to fly-by-night con artists. So, how can you separate the helpers from the hucksters?

First, your club must decide whether it even needs someone to advise members on how to invest its money. You definitely want to invite financial planners and stockbrokers to speak before the group at regular club meetings and to provide a few pointers, but don't feel pressured into turning your portfolio over to a stockbroker.

Initially, when AT&T employees formed the Alliance Investment Group, club President Nate Watson was one of two people who had previous experience investing in the stock market. In order to make the other members feel more comfortable about picking stocks, the group chose to work with a full-service broker who could provide a little hand holding. A year later, the group was left feeling empty-handed. Dissatisfied with the lack of services they received, they opened an account with another full-service broker. The group has been with A.G. Edwards ever since.

"A.G. Edwards was better in terms of providing the services and resources we needed, like analysts' reports," says Watson. "But the main service our broker, Israel Maldonado, provides is that he will give us a complete analysis of our portfolio and make suggestions on what we should buy, hold or sell based on asset allocation. He will provide a very extensive report for us annually, and more frequently if we request it. He is always there to help us when we need it."

There's no getting around the fact that in order to buy and sell stock, your club must establish an account with a broker. However, you do have your pick: full-service, discount and deep discount. Keep in mind that while there are independent brokers--those who don't work for a firm--most are affiliated with a major house.

* Full-Service Brokers. Plain and simple: A stockbroker buys and sells securities (e.g., stocks and bonds) and provides financial advice. He or she is a commission-only advisor, meaning your broker will make investment recommendations, but won't charge you for the advice. Should you go ahead and purchase a security a broker recommends, he or she will receive a commission.

* Discount Brokers. You can save up to 60% on commissions with discount brokers, since they don't employ commissioned reps. Discount brokers such as New York's Charles Schwab & Co. essentially offer do-it-yourself investing: They don't tell you how to invest your club's money. However, they do provide some personal advice, news, investment materials and a few perks at a lower cost, including money-market accounts and mutual funds.

* Deep-Discount Brokers. These firms are the cheapest of the investment spectrum. You can save up to 80%, sometimes more. Deep discounters such as Brown & Co. and Ameritrade Inc. execute trades at rock-bottom prices. At the same time, these firms offer bare-bones services--no research, no advice.


In selecting a broker, the club president and other officers should seek recommendations from established clubs or experienced individual investors. Develop a list of five to 10 names. Club officers should call and visit these brokers, or invite them to attend the club's initial meetings.

Also, check credentials. Ask what professional degrees or certifications your broker has earned. Look at his or her work history. Make sure he or she is established and does not move from firm to firm. Brokers go through training and testing to qualify for various kinds of securities' licenses. To find out if your broker is a registered representative or has committed fraud or any other serious violations, contact the National Association of Securities Dealers Inc. (800-289-9999;


There are two basic types of accounts you can open with brokerage firms: cash and margin accounts. As newcomers, your club should have a cash account, which means that you will be required to pay for your security purchases within three business days of your order. Margin accounts are for sophisticated investors who are actually borrowing money from the brokerage to purchase securities. Discount brokers usually offer cheaper margin rates than full-service brokers.

Stocks are often ordered in even hundreds of shares (e.g., 200, 500, 1,000). When you order this way, it is called a round lot. An order that is not in even hundreds (e.g., 60, 128, 235) is called an odd lot. It usually costs more in commissions to buy and sell odd lots.

Once the account is open, your club's stockbroker transmits your bid (or price you are willing to pay), to the brokerage firm's trader who is located on the trading floor of the stock exchange. The trader will then try to match your bid to the best offer (the lowest price someone is willing to sell the same stock).


One of the easiest and most affordable ways to build an investment portfolio is through a program called the dividend reinvestment plan (DRIP). This low-cost way of buying stocks allows you to purchase just one share of a company's stock from a broker. (You can purchase a single share from a deep-discount broker to keep costs to a bare minimum.) After your initial purchase, any additional shares can be bought directly through that company.

Rather than pay out dividends, DRIPs automatically reinvest your stock dividends to purchase more company shares. Even better, many companies offer discounted shares through DRIPs, taking 3% to 10% off a stock's trading price. This enables you to accumulate a growing number of shares of a company's stock without paying high commissions. If the company does charge a fee, it's typically quite nominal.

More than 1,000 companies and closed-end mutual funds allow investors to buy single company shares through DRIPs. You can call or write to a company to request an enrollment form and prospectus for their DRIP plan. (Contact the investors' relations or shareholder services department.) Read the prospectus to determine whether there are any fees or charges, the minimum and maximum optional cash payments, and when they place the buy orders.

Make sure you take physical possession of the stock, registering it in the club's name, not in the brokerage firm or street name. Have the brokerage firm send the stock certificate directly to the club's treasurer via certified mail. Make sure the spelling of the club's name is correct and that a current address appears on the front of the stock certificate. In order to sell, you need to contact the DRIP plan administrator, mail in the certificates and have them sold on the specific sell day set by the plan.

Most DRIPs permit investors to send in an optional cash payment (OCP), which could be as low as $10. This enables you to purchase additional shares. For example, if a company's stock was trading around $50 and you sent in only $25, you'd receive a fraction of a share--in this case, 1/2 of a share. These fractional shares continue to build over time.

Keep in mind that when you send in additional payments, your account isn't usually credited immediately. Many companies invest DRIP payments once a month or every quarter. That's why it's important to time your purchases.

For example, if you place an order the first of the month and the company's investment date is the 25th of each month, your cash sits there for 24 days. The company is just holding onto it until the investment date. More important, the group's money will buy whatever number of shares it can afford at the current price, not the price at the time of the stock order.

Moreover, you will be getting separate paperwork for all of these different transfers. So, every month you will have to maintain different records on each and every DRIP stock holding (as opposed to the consolidated statement a broker provides). This can become very cumbersome.

There are several newsletters and even software programs for people interested in DRIPs. The best source to keep up with the latest DRIP information is the monthly publication DRIP Investor (219-931-6480), which is your guide to buying stocks without a broker. This newsletter updates each month which DRIPs are worth looking into.

DRIP Investor Publisher Chuck Carlson also provides free to new subscribers the Directory of Dividend Reinvestment Plans--the bible of the industry. This more than 140-page directory sums up everything you need to know about DRIPs, including tidbits such as minimum and maximum OCPs, fees and charges if any, and a special performance rating.


Over 1,500 companies have these plans, sometimes called optional cash purchases, which are often offered, as a feature of their DRIP program. Most companies have employee stock-purchase programs. Since the firms had the necessary procedures to sell in-house, many decided they might as well offer direct stock purchases as a benefit to individual shareholders.

Unlike DRIPs, these companies don't require you to buy one share through a broker in order to participate in their stock-purchase plans. However, some companies require that you reside in the state in which the company is headquartered.

Moreover, most DSPs require a minimum investment of least $250. Others, like Lucent Technologies, ask you to plunk down $1,000. Some companies, like IBM, will waive their minimum initial investment if you join their automatic debit plan. IBM's requires $50 a month for 10 months in lieu of a $500 minimum investment.

The desire to cut out the middleman has fueled the - proliferation of Websites devoted to both DSPs and DRIPs. Many of these sites charge fees to provide this service. They range from being transaction related, such as Netstock Direct (, to purely informational, like DRIP Central (

Bellevue, Washington-based Netstock Direct boasts that its site is the only one that does not charge investors a fee. The firm currently has 1,600 companies offering their DSPs on the site, but charges a minimum fee to only 250 of those companies, posted on the site. They include such well-known companies as General Electric and Home Depot. (Netstock Direct offerings can also be accessed at


The Women of the Millennium Investment Club in New York is experiencing growing pains as do most clubs when it comes to trying to get the most for their money.

The 11-member group consists of professional women ranging in age between their mid-20s and mid-50s, with backgrounds varying from homemakers to computer analysts to real-estate agents. The group was formed in June 1997, with members contributing an initial minimum investment of $200 each (monthly dues are now set at $50). As of January 2000, the club's portfolio was valued at $18,000, with 10 company holdings: Avery Dennison (office paper supplies), CVS, Compaq, Emerson Electrics, Lucent, MCI WorldCom, McDonald's, Wal-Mart, Cisco and Sun Microsystems.

Starting out, the group decided to invest through the National Association of Investors Corp.'s (NAIC) (877-275-6242; Stock Service program. "We chose that service because it was the easiest way out," says Arletha Allen Vickers, the club's former assistant treasurer for two years. "We thought that it would be cheaper using NAIC. We bought the Platinum plan, which consisted of a yearly fee ($200) and no purchase fees" (unless they purchased a stock not listed on NAIC's recommended sheet).

The group purchased its first five stocks all at once. With an investment amount of $5,468.78, they were able to buy 20 shares of Avery at $54.59 a share, 14 shams of CVS at $74.50 per share, 17 shares of Emerson at $65.38, 26 shares of Diebold at $42.69 (the club later sold the stock), and 18 shares of McDonald's at $61.81 per share.

Prior to participating in NAIC's Stock Service, members had the opportunity to hear from various brokers who attended preliminary meetings and spoke before the group. "Once we learned how much money it was going to cost in commissions and transfer fees, we decided it might not be worth it to us to go with a full-service broker," says Allen. "Also, some members feared the brokers would give us advice that was not in line with our investment goals. However, if we did it ourselves--chose all the stocks--we wouldn't have to worry about someone misleading us."

The Women of the Millennium stayed in NAIC's program for a little more than a year before moving to a discount broker, Charles Schwab, in March 1999. The main reason for the big switch--transactions weren't made in a timely manner. "MMS Securities did their transactions once a month, so, if something was happening in the market before that time and you wanted to trade right away, you blew it," explains Allen.

The group is now looking to further diversify its portfolio by adding mutual funds--a service that more and more discount brokers like Charles Schwab are offering.

From The Millionaires' Club: How to Start & Run Your Own Investment Club--and Make Your Money Grow! by Carolyn M. Brown. Copyright [C] 2000. Published by arrangement with John Wiley & Sons Inc., $19.95.
COPYRIGHT 2000 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:choosing an advisor for an investment club
Publication:Black Enterprise
Geographic Code:1USA
Date:Jun 1, 2000
Previous Article:star search.

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