How to determine whether two currently popular investment strategies—asset based fee approach or global investing—meet your investment goals and level of risk tolerance

The world of investing in the stock market is an ever-changing process. A savvy investor must do the homework to anticipate future trends. There are two areas gaining in popularity that will change how you invest—fee-based brokerage accounts and international investing.

The mechanics of investing used to be relatively simple. You call your broker, buy and sell on his or her recommendations, and then pay a commission on every trade. However, in the past several years, many full-service brokerage firms have introduced a customer account that enables investors to trade without paying commissions on individual transactions. Instead of commissions, a quarterly or annual fee based on the amount of assets in the account is paid. This asset-based fee approach is becoming popular with investors who conduct a moderate number of trades each year and want greater control over transaction costs.

With today’s rapidly changing market conditions, some investors want the ability to periodically adjust their asset allocation without worrying about commission costs. Asset-based fee accounts enable such investors to conduct multiple transactions and know exactly how much they will incur in investment expenses over a specified period. In addition, the account fee generally covers a number of other benefits.

Most asset-based fee services offer online access, allowing an account to be monitored on a day-to-day basis. Some provide online access to proprietary research not available to the general public, while others enable investors to conduct trades online without the assistance of a broker.

Asset-based fee accounts generally encompass trading in stocks, bonds, options, and mutual funds. Some offer the ability to purchase shares of a number of mutual funds at net asset value (NAV) with no front-end loads or back-end deferred sales charges. Most offer a relationship with a knowledgeable financial advisor who is always available to help execute trades, discuss investment strategies, and provide experienced counsel.

Some investors choose to work closely with an advisor, while others prefer to make independent financial and investment decisions. Generally, with an asset-based fee account, the investor determines the level of contact with the financial advisor.

Is asset-based fee trading for you? The answer depends on a variety of factors. If trading is your passion and you consider yourself an active daytrader, some of these accounts may discourage activity beyond a certain specified level. If you are a buy-and-hold investor who conducts few transactions, you may be better served by a traditional brokerage account where you pay commissions for each trade made.

However, if you are an investor who trades moderately and would like the opportunity to alter your portfolio to reflect changes in your needs, circumstances or market conditions, you might consider this alternative approach to paying for securities transactions. An asset-based fee account may enhance your investment strategy.

International Green Pastures
While investors have long acknowledged the need for portfolio diversification, they have encountered practical difficulties such as foreign currency exchange and monitoring overseas companies, which hinder taking advantage of global investing opportunities. However, the barriers to globalizing the investment process are slowly disintegrating, in part due to the following considerations:

• Diminishing foreign exchange concerns. The introduction of the European Economic and Monetary Union (EMU) in 1999 has reduced foreign exchange risk considerations in Europe, and the euro is likely to gain importance as more countries adopt it. Moreover, the widespread adoption of floating currencies in Asia and Latin America is promoting the development of better economic policies and making accurate cross-border comparisons easier.

• Continually improving corporate accounting standards. Corporate transparency, the ability to tell what is really going on by looking at the financial statements of a company, is a real issue even in developed markets. Companies focusing on the valuation of shares or seeking to raise equity capital are increasingly adopting by force the best disclosure practices available worldwide. Implementing more transparent disclosure practices is a prerequisite to becoming listed on US exchanges and is increasingly a must for companies with global ambitions.

• Standardizing industry classifications. The Morgan Stanley Capital International index (MSCI), which produces many of the international market benchmarks, and the Standard & Poor’s (S&P) index, the standard for measuring the US market, have adopted a joint industry classification system, making it easier to identify the best companies in a given sector regardless of where they are headquartered.

• Increased liquidity. In terms of liquidity, European markets have grown with the US market. With the rapid growth of Internet usage in Europe (and its implications for online trading), volume should increase quickly. The same is true for Japan.

One convenient way for you to invest internationally is through American Depositary Receipts (ADRs), negotiable certificates that represent ownership of a given number of shares in a foreign company. They are issued in the US by American banks and can be bought and sold like the stocks of American companies. The prices are quoted and dividends are paid in US dollars. Many ADRs are listed on US stock exchanges, with prices appearing in financial newspapers.

Now may be an excellent time to explore the possibilities of global investing. However, it is important to remember that investing in foreign markets entails political, currency, economic, and market risks greater than those normally associated with domestic markets. In addition, international investing should not be considered a complete investment program.

About the Author
Michael D. Kautz, CFP, is a financial advisor with Morgan Stanley in McLean, Va. He can be reached at 800-488-4380 or via email: michael.kautz@morganstanley.com.