nasd issues warning on systematic investment plans

For Release: Wednesday, December 15, 2004
Herb Perone
Sarah Bohn
Washington, D.C.— NASD today warned investors – especially those serving in the
armed forces – about the costs and risks of investment vehicles that require monthly payments
and carry high, up-front costs. NASD’s Investor Alert, Systematic Investment Plans –
Educate Yourself Before You Enlist, follows an NASD enforcement action against a
brokerage firm selling these plans to military personnel.
Sometimes referred to as “contractual plans” or “periodic payment plans,” systematic
investment plans allow investors to accumulate shares of a mutual fund indirectly by making
monthly payments – usually as little as $50 – over a long investment period of 10, 15 or 25
years. NASD’s Alert explains how these plans work, exposes misleading marketing claims
and examines alternative investment options.
“These plans offer little flexibility and limited investment choice,” explains NASD
Vice Chairman Mary Schapiro. “Members of the military and civilians alike should review the
charges and fees associated with these plans and carefully consider their investment objectives
before investing. They should also consider carefully whether other investment options would
better meet their objectives.”
These monthly payment plans are promoted as a way to dollar-cost average—a
strategy of investing the same fixed dollar amount in the same investment vehicle at regular
intervals over a long period of time. When investors dollar cost average, they buy more shares
of an investment when the share price is low and fewer shares when the share price is high,
which can result in paying a lower average price per share. However, the NASD found that
systematic investment plans come with high up-front costs and are expensive if the full term
of payment is not completed.
The Alert issued today looks at several alternative investments that allow investors to
take advantage of dollar-cost averaging. Mutual funds provide vehicles for implementing the
dollar-cost averaging strategy while offering more investment choices. If the goal is to save
for retirement, most employer savings and retirement plans allow workers to save through
payroll deduction.
Additional online resources include the NASD Investor Alert Understanding Mutual
Fund Share Classes; the Securities and Exchange Commission’s investor materials on Period
Payment Plans, Mutual Funds and Unit Investment Trusts, and the U.S. Thrift Savings Plan
Web site. Also available is the NASD’s Mutual Fund Expense Analyzer, which helps
investors compare the fees and expenses among competing funds.
Investors experiencing a problem with a systematic investment plan that cannot be
resolved by dealing with the brokerage firm can file a complaint online at NASD's Investor
Complaint Center.
Investors can obtain more information about, and the disciplinary record of, any
NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes
BrokerCheck available at no charge to the public. In 2003, members of the public used this
service to conduct more than 2.8 million searches for existing brokers or firms and requested
almost 180,000 reports in cases where disclosable information existed on a broker or firm.
Investors can link directly to BrokerCheck at Investors can also
access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated
to investor protection and market integrity through effective and efficient regulation and
complementary compliance and technology-based services. NASD touches virtually every
aspect of the securities business - from registering and educating all industry participants, to
examining securities firms, enforcing both NASD rules and the federal securities laws, and
administering the largest dispute resolution forum for investors and member firms. For more
information, please visit our Web Site at
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