What happened to mutual-fund fees and expenses in the wake of the financial crisis? Lipper has crunched the numbers, and it seems that the tumble in the stock market didn’t have much effect on expenses:

Surprisingly, the median management expense for most asset classes was largely unchanged from 2008 levels; most exhibited changes of +/- a few tenths of a basis point.

Fees, on the other hand, are a different kettle of fish entirely:

70% of equity funds realized increases in total expense ratios from their most-recent annual report to their most recent semiannual report. Of those funds with increases, the average increase was +8.2 bps, while for the funds with expense decreases the average decrease was only -2.4 bps.

There’s even a helpful chart:

The reason for the fee hike becomes clear at the end: it’s being implemented in a desperate attempt to keep income from plunging along with the stock market.

Despite the increase in management fee ratios for many asset classes, the revenue derived from those fees has plummeted. We estimate that total revenue over the period examined by this report is down more than 40%…

The total dollar amount of fees collected by open-end funds appears to have declined by approximately 31% over the period examined by this report. This value is in spite of increases in realized expense ratios for many funds.

The lesson here is simple: Stop trying to beat the market, and move to index funds or ETFs instead. (Index funds weren’t included in the Lipper survey.) Mutual funds are moving away from being a mass-market product, and becoming more of a niche product aimed at elderly investors who don’t know any better and who don’t worry much about total expense ratios. The smart money’s moving out of mutual funds, to the extent that it was ever invested in those funds in the first place, and the dumb money that’s left over is largely price-insensitive. Expect these fees to continue to rise for years to come.

Charles Schwab has an interesting new idea: ETFs which are commission-free for Schwab brokerage clients. Ron Rowland is enthusiastic:

Just as no-load no-transaction fee mutual funds changed the mutual fund landscape, commission-free ETFs will forever alter the way that ETFs are perceived. With this one change, nearly every argument in favor of mutual funds instead of ETFs goes away. Dollar cost averaging? No longer costly with commission-free ETFs. Small account size? Not a problem anymore.

This isn’t entirely true. There are two main costs involved when you buy or sell equities, including ETFs. One, yes, is the commission. But the other is the bid-offer spread. And if the new Schwab funds remain relatively small and illiquid, it’s still going to be a bad idea to buy them, just as it’s a bad idea to buy any ETF with less than a billion dollars or so in assets.

That said, Schwab is big enough that it should be able to get there pretty quickly. And at that point, if you’re a Schwab client, these things will look very attractive indeed.

Remember the grim days of March? You should. Millions of small investors across the country were staring aghast at their brokerage statements, with one thought going through their heads: “I should never have invested in the stock market”. They’d done so on the advice of people who had assured them that stocks always go up over the long term, and then they’d seen their holdings decimated. In hindsight, they decided, they had less of a risk appetite than they needed to have that kind of exposure to the stock market. But selling at the bottom and capitulating to the bear felt impossible.

The good news is that the current stock-market rally has given them a second chance. If you’ve been diligently putting money into stocks for years, there’s a good chance that the current value of your portfolio is not hugely lower than the total nominal amount saved. If you had an idea, back in March, of what your risk appetite really was, then now’s the time to rebalance your portfolio in line with the degree of risk aversion you discovered in yourself seven months ago. If and when stocks drop again, then you really will only have yourself to blame.

Of course, everybody’s individual situation is different, but in aggregate we’ve gone from devastation to mere pain. And when you’re involved in something painful, and you can get out of it, a quiet exit is often the best thing you can do. Of course, stocks could go up further from here. But that’s not the point. Unless you can afford to see your stocks fall, you shouldn’t be invested in them.

You don’t need to sell all your stocks, of course. Some exposure to equities makes perfect sense. But make sure you have a decent cash cushion first. And if you have any kind of debt at all — even if it’s just a mortgage — there’s a strong case to be made that you should pay that down by selling your stocks. Paying down a 6% mortgage is the functional equivalent of getting a guaranteed 6% return on your money, risk-free. (Ignoring the tax benefits of having a mortgage for the time being.) That seems a lot more attractive than buying stocks at these levels.

Michael Osinski has an interesting article on nymag.com about how he, a CMO-structurer-turned-oyster-farmer, is playing in the riskier end of the distressed-debt market.

I have no illusions about the risk of what I’m doing. Buying mortgage-backed bonds today is putting your finger to the wind in a storm, like you’re standing on a seawall facing a nor’easter. You know the second wave of defaults is coming. It’s forming out past Montauk, swelling in Gardiners Bay, about to smash into your seawall. Will it knock you down, rip your boat from its cleats, and scatter your oyster cages all along the rock pile?…

I buy my bonds through a former colleague named T…

You have to treat every bond like a time bomb, carefully assessing how much time you’ve got before it blows up in your face.

T. is selling me CMO bonds. I’ve bought seven of them in the last three months.

It’s a good, well-balanced piece, which shows how a sophisticated financial market professional is taking very careful and calculated risks with money he can afford to lose. He also knows, of course, that if he does end up losing that money, he has no one but himself to blame.

And then, at the end, it goes horribly, horribly wrong:

So how can you consider joining Michael Osinski and invest in toxic assets?

No!!!

The answer to that question is Do Not consider joining Michael Osinski. Do Not invest in toxic assets. And, whatever you do, Do Not start buying shares in things like BKT and HSM and TSI and FMY and HTR — ticker symbols all helpfully provided by nymag.com — especially if you think that in doing so you’re somehow replicating what Osinski is doing. You’re not.

Osinski is buying a very small number of very carefully-vetted bonds. This is the classic “PA” trade, where financial market professionals buy obscure instruments for their personal account in sizes which simply don’t scale up to the sort of money thrown around by institutional investors. Osinski’s bought seven bonds in three months, and I’m sure he went over each and every one in great detail with his friend T. That’s small-scale, highly-informed investing — the exact opposite of throwing your money at the Helios Total Return fund and hoping for the best.

Yes, the website does urge its readers to “be especially careful here”. But that doesn’t excuse spending 600 words on what you should do if, in a moment of recklessness, you decide that you want to ape the investing strategy of an oyster farmer who has just written a feature article for nymag.com, and who knows much more about what he’s doing than you ever will.

Mitra Kalita profiles Karen King, who has debts of $36,000 and a credit score of 576. King wants to get the former down and the latter up, but sometimes those two impulses work against each other:

With the aid of a financial counselor provided by a nonprofit, Ms. King is applying triage to her debts. “First, I want to take care of all the little things,” she says, “and then the student loans.”

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person’s credit report when it is settled for a partial payment.

This is what happens when people obsess about credit score at the expense of their broad financial health: it’s much the same thing that happens when people try to lose weight instead of simply trying to get healthier.

In an ideal world, people would simply find their credit score increasing as their financial well-being improved. But in the real world, there’s a whole cottage industry which has sprung up devoted to trying to maximize credit scores, as well as ancillary industries such as Ben Stein’s evil attempt to trick people into paying $30 a month for a service they neither need nor can afford.

What worries me is that the financial counselor provided by a nonprofit might well have been the person advising Ms King not to pay off her utility bill at a discount. Often these financial counselors are seconded from some arm of the financial-services industry, which has an institutional interest in people paying as much of their debts and penalties as possible. Meanwhile, of course, from an individual perspective, if you can pay off a debt at a discount, most of the time it makes perfect sense to do so.

Annoyingly, Kalita never tells us whether it’s generally true that paying off an overdue bill at a discount is likely to be bad for your credit. If it’s not true, of course, then King was extremely badly advised. But even if it is true, there’s a strong case that she should have taken the offer anyway.

What would you consider a reasonable cost of borrowing $20? On an annualized basis, my guess is you’d say something between 5% and 100%, or $1 and $20. Which means that you’re not Steve Tuttle:

Why not charge at least $100 if you overdraft at the ATM? That seems a reasonable fee to pay to get $20 that you don’t have from the bank.

I think that Tuttle is on to something here. Implement a law saying that every time anybody borrows money, even if it’s only for a day or two, they need to pay back five times what they borrowed. Alternatively, just get the Fed to raise the Fed funds rate to somewhere in the 10,000% range.

That would do wonders for the dollar — no more political fire on that front — and would at a stroke get rid of all that horrible debt which we want to convert to equity. Of course, stocks would plunge to unprecedented lows, but just imagine the buying opportunities!

Ryan Chittum and Dan Gross are being far too short-sighted here. Tuttle isn’t a moronic nonsense-peddler, he’s a veritable prophet! (Indeed, his views on debt are positively Islamic.) So next time you ridicule a CNBC talking head for spouting gibberish, just remember. There are some views which are so close to the bone they can only appear in Newsweek.

Yesterday’s news about the drop in consumer credit made sense to me: if people are saving more, that means they’re likely to be paying down their debts. But one thing jumped out at me in the official statistical release: it had figures going back to 2004 for credit-card interest rates, and the latest numbers are the highest of the lot.

The release doesn’t have intra-year data, though, so I looked back at the historical data. It turns out that credit card interest rates, for people assessed interest, hit a low of 11.96% in February 2003; they then rose slowly to a high of 15.24% in August 2007. After that, they went back down: they were 13.36% in November 2008. But in the three quarters since then they’ve risen sharply, and are now back up to 14.90%.

I suspect that what’s going on here is partly that limited-time teaser rates are expiring, and consumers aren’t getting new credit-card offers into which they can roll over their debts; it’s surely also a function of card companies raising rates unilaterally while they’re still allowed to.

So what’s happening to credit-card interest payments? When revolving credit hit its peak, in the third quarter of 2008, there was $975.2 billion outstanding, with average credit-card interest rates at 11.94%. Multiply the two, and you get $116.4 billion: that’s not a real number for interest payments, since many people pay off their credit cards in full, but at least it allows for a back-of-the-envelope apples-to-apples comparison. Today, outstandings have fallen to $899.4 billion, but rates have risen to 13.71%: multiply those two, and you get $123.3 billion — it’s gone up, rather than down.

I hope that the rising credit-card interest rates, along with the positive savings rate and the fact that credit card balances can’t be paid off with low-cost home equity lines any more, mean that the current decline in credit-card balances continues for a long time to come. What’s more, once the new rules come in later this year, credit-card companies won’t be able to continue to simply decide to raise their interest rates any more. But if you needed another reason to pay down those credit cards, this is a good one: your rates have gone up sharply, and they almost certainly won’t come down any time soon.

The Center for Responsible Lending has a new report on overdraft fees, which has some startling numbers on the degree to which these things have increased in recent years:

Overdraft fee income for banks and credit unions rose 35 percent between 2006 and 2008, going from $17.5 billion to $23.7 billion. Add in non-sufficient fund fees, and the totals rise to $25.3 billion and $34.3 billion, respectively. (The difference between an overdraft fee and an NSF fee is that an overdraft fee is charged when the payment is made; an NSF fee, or bounced-check fee, is charged when the payment is not made.)

The Center also notes that “as recently as 2004, 80 percent of all institutions denied debit card overdrafts” — it’s astonishing how quickly such charges went from the exception to the rule.

Overdraft fees now dwarf the actual overdrafts themselves:

For 2008, we estimate that checking account holders receive only $21.3 billion in credit for the $23.7 billion they pay in overdraft loan fees. Put another way, consumers were obligated to repay $45 billion for $21.3 billion in extremely short-term credit.

The Center has some good recommendations, including this one:

Require that overdraft fees be reasonable and proportional to the actual cost to the financial institution of covering the overdraft. On average, overdraft fees exceed the amount of credit extended, which is particularly troubling given the short time period until repayment—usually only a few days. Since banks are able to repay themselves out of the accountholder’s next deposit, these loans carry a low default risk relative to their high cost. Overdraft fees should be proportional to the actual cost to the institution of covering the overdraft, taking into account the cost of funds, default risk, and a reasonable profit margin. Indeed, a product designed to be proportional to the cost to the institution of covering the overdraft already exists—an overdraft line of credit at a reasonable interest rate.

In fact, the status quo is even worse than the Center here implies. Yes, it’s true that banks are able to repay themselves out of the accountholder’s next deposit. But they never do.

Where I come from (England), an overdraft is simply a negative balance on your checking account. You pay interest so long as the balance is negative, and if you put in enough money to bring the balance back into the black, you stop paying interest. Not here. In the US, there’s normally no such thing as a negative balance on your checking account: instead, when you go into overdraft, you not only pay the usurious overdraft fees, but you also start running up a debit balance on your overdraft account. If you then deposit money into your checking account, it’s entirely possible (and indeed common) to have a positive balance in your checking account and an overdraft, all at the same time. In order to get rid of the overdraft, you need to actively transfer money from your checking account to pay off your overdraft — which of course you’re never going to do unless and until you find out that you’re overdrawn in the first place. Which might not happen until you get your next month’s bank statement.

If I may, then, I’d like to make one addition to the Center’s recommendations: that all deposits into checking accounts be put first towards any overdraft, and only then towards a new positive balance. But that of course would be consumer-friendly, so it’s probably never going to happen.

Threatening to file for bankruptcy is a good way to get the attention of your lenders — it makes them that much more likely to agree to restructure your debts, just because bankruptcies are expensive, time-consuming, and unpredictable things. But how much money do you need to owe before your lenders will take you that seriously? In Kent Swig’s case, the number seems to be $28 million:

Developer Kent Swig is close to filing personal bankruptcy because he can’t afford to pay a recent $28 million judgment on his defaulted Sheffield57 condo conversion project in Midtown.

“We are exploring all options,” one of Swig’s advisers told The Post. “No one wants to do it but it’s certainly a play on the chessboard that we are considering at this time.”

I think most people are likely to be a little disgusted, when reading such a quote, that an extremely wealthy man like Kent Swig would cavalierly consider bankruptcy to be little more than “a play on the chessboard”. How come he gets to play chess with bankruptcy filings, when for the rest of us such a filing is ruinous in many ways? It’s just another way that the rich are different from you and me — and it reinforces my belief in some kind of wealth tax.

On Friday, Mike Arrington noted the overlooked player in the Mint-Intuit deal: Yodlee, the company which powers Mint’s backend and which competes directly with Intuit. I spoke to Yodlee’s Joe Polverari today, and he was very unimpressed with the Mint acquisition. He characterized Mint as essentially being a Yodlee service with a pretty user interface layered on top, and said that the natural place for people to go for online personal financial management was the bank. Mint, he said, had done a very good job of attracting “a niche of early adopters and tech-savvy people”, but they have now woken the sleeping giants (the banks), and indeed are already smaller than some of the big online-banking sites.

Polverari was, in sum, very skeptical that Mint was really worth $170 million, especially since its data isn’t particularly valuable to big banks, who already have access to substantially identical databases through their own personal financial management (PFM) systems. The value of Yodlee, he said, is “exponentially greater than whatever the valuation of Mint should be”.

Polverari also indicated that if and when Mint moves from Yodlee to Intuit’s own PFM system, that might degrade Mint’s users’ experience. After all, Mint chose Yodlee over Intuit in the first place, and there was no doubt in Polverari’s mind that the quality of the data it provides users was significantly better than Intuit’s.

I certainly agree with one of Polverari’s key points — which is that customers trust their bank with their financial information much more than they trust any third party. I trusted Mint more than Intuit, and now that Intuit is buying Mint, I’ll probably just stick with whatever service Citibank manages to put together. (Already, their online banking platform is pretty good, and I’m a fan of their iPhone app.) If Intuit is counting on continued strong growth in the Mint user base, it might be very disappointed.