Having read through the last month or so of posts here, it seems that I am not alone in my disdain for BuyandHold.com's new fee structure. I am liquidating my account today, and will request a check of the proceeds and cancellation of my account as soon as possible. My response is posted below for anyone interested in my opinion on these fees and their impact on my account.

Since there seem to be two views expressed here:
1. Why the fees/tactics/advertising/etc. are not worth keeping or fair, and
2.why we shouldn't complain over a company trying to make money),

I will tell you now that my response is along the lines of #1. For those that don't care for this opinion, I recommend you don't bother reading on. I am not interesting in starting or continuing this debate. I am posting my response to let others know how I dealt with B&H and of my disappointment with the change in their service.

I will be looking for new options as a beginning, small investor and have enjoyed to resources shared on this board. I am still chewing on this for now- maybe real DRIPs, maybe saving more money until I can afford a real index fund, or maybe saving enough to use my other discount broker and keep my transaction costs low.

-slaramee (Scott)

Here's my response...

******************

To whom it may concern:

I am very displeased with the change in policy at BuyandHold.com (B&H) regarding the monthly activity fee of $6.99. I opened my account with B&H because of your low fees and the ability to purchase fractional shares. As a beginning investor, the prior per-trade fee was superior to any other discount brokerage within my purchasing ability.

With this change in your fee structure I can no longer justify keeping my account open. Essentially, the $6.99 monthly fee translates to $84/year. In order to keep my transaction costs low (under 5% annually), this would require investing approximately $1,680 per year.

As a beginning investor, the appeal of B&H WAS that I could purchase stock in low dollar amounts within MY budget. This monthly fee will eat into any good returns unless you purchase stock of greater than ~$1,680, since it will result in rather high transaction costs. For instance, if I invest in $50 increments (greater than your well-advertised $20 minimum), my total cost for stocks in a year is $600. Using the $6.99/month fee ($84 a year), this results in a trasnaction rate of a whopping 14% ($84/$600)! In simple terms, this means for me to make money investing this small amount, I would need to see after-tax returns of greater than 14% to see ANY profit. As a frame of reference, this is a very high rate of return to expect without taxes. Adding taxes in would require an even greater return, thus making the likelihood of achieving ANY gains even more improbable.

I am presenting you this example to illustrate that the current fee structure does not make good economic sense to beginning investors that do not have a lot of money to invest. Investors at B&H who do not invest a fair amount of money are NOT getting a good deal that you advertise because their returns are being eroded by this monthly fee structure. My example of $1,680 per year is based on a minimum needed to maintain a 5% annual transaction cost- this is not even a very cost transaction according to many financial sources I have consulted. I find this fact ASTOUNDING, since beginning investors have been prime targets in your advertisements and marketing. You profess that B&H is the answer to getting into the market at low cost. Under your previous fee structure, I agreed. But I think that any marketing and/or advertising aimed at attracting new or beginning investors that touts the "economic sense" of this monthly fee structure is SERIOUSLY UNETHICAL, if not simply DISHONEST.

Your stance may be that the current economic climate makes this fee structure necessary for your own financial survival. This may indeed be the case, and I am aware of the tough economic times the past year has seen. However, I think you are making a serious error in judgement by passing along this new fee structure to your beginning investors. They are the reason why your business was founded and the reason for its initial growth and success. I believe you will find over time that numerous new or beginning investors will come to the same realization as I have: that there is no longer any real advantage to using BuyandHold.com versus a more typical discount broker. Several discount brokers offer no minimum balance for an account. Several also offer low transaction fees ($7-10), NO fees for account inactivity, and the option of dividend reinvestment without fee. Since I have just named most of the reasons why someone might use B&H versus a discount broker, that only remaining advantage I can see is the ability to purchase fractional shares. However, I may purchase as little as ONE share using a discount broker. With this all being said, I find NO reason to continue to hold an account with B&H. Even if I continue to purchase low dollar amounts of stocks, I would still give the advantage to the discount broker because I only get charged WHEN I make a trade, not every month regardless of my account activity.

As a final point, I am very discouraged by the lack of notice regarding this fee change. I DID NOT receive notification of this change, and I question the legality of springing this change on your customers without notification. Given the low dollar amount of my account, I will not pursue this issue further as I want our working relationship to be ended as quickly as possible, given my growing disdain for your new fee structure and business practices.

For the record, I WISH TO CLOSE MY ACCOUNT EFFECTIVE IMMEDIATELY. I am using the June $6.99 fee to liquidate my positions, and will cancel the account as soon as the trades are made. I wish to receive the proceeds by check or electronically to my bank account of record. Please contact me to confirm receipt of my correspondence, and provide WRITTEN confirmation of the closing of my account.

I am very disappointed in the direction taken by B&H regarding the new fee structures and I hope that you will realize the error of your judgement and remedy this. If not, I am sure that many other beginning and small investors like myself will take similar actions. Perhaps B&H does not see our small amounts of investing capital as significant individually. I believe that you will see the significance of the small investor's capital on your bottom line if others act the way that I have en masse. Maybe then you will realize the importance of keeping ALL of your customers happy and not just the customers with the largest investment accounts.

**********

Being a small investor,I am very unhappy with Buy and Holds $6.99 fee also.This fee will seriously erode my small gains.I feel pressured to invest every month whether I can afford to or not.Does'nt this defeat the purpose? I have chosen good stocks, but have not really made much money.The fees take alot of your gains.So whats the point? I much prefer the $2.99 initial fee and $1.99 for additional.Is'nt that what I signed up for??The switch in mid-stream is not what I bargained for.Is'nt this a "bait and switch"tactic? Any one else agree?

The switch in mid-stream is not what I bargained for.Is'nt this a "bait and switch"tactic? Any one else agree?


That was my opinion. Others have suggested it is an overwrought reaction. I still hold that it was Bait and Switch.

I will be surprised if there is not a class action suit about this.

OTOH, given the "going concern" issue, a class action suit may be moot.

Paul

Mary,

I too feel that this is akin to a bait and switch. While I understand that B&H must make a profit to survive, I don't feel any obligation to help them out by giving them more of my money for the service if I don't make a trade for a few months. I know a small account is not making them a lot of money- so do they. My thinking is that the customer is always right, whether the economics are infavor of B&H or not. If the market (meaning the majority of their customers) will support their move and folks stay on, then they have succeeded in their business decision and will do fine. But I won't be one of those customers because I do not agree with it.

This monthly rate will erode your gains. The amount of erosion depends upon the amount you are investing. For perspective, I posted a similar post with a table comparing a commission costs to the minimum level you need to invest to keep your transaction rate (i.e., your expense of investing) low. I have repoted this table below.

For some perspective consider this: if you invested $50/month with B&H's new plan, and assuming you trade no more than the two tranactions allowed with the new monthly fee, your transaction cost would be 14%. That means you need 14% returns just to break even, and that is not including any sales of stock (i.e., taxes). Quite a cold reality, IMO.

Transaction cost = $7 / month x 12 months = $84 / year
Investment capital = $50 / month x 12 months =$600 / year

Tranaction Rate (%) = Transaction cost / Investment Capital x 100
                    = $84 / $600 x 100
                    = 14%

I plan to do one of the following:

1. Look around for another synthetic DRIP (like B&H) that does not charge a monthly fee (is there still anyone else that offers this?). If I can't find one I like, I will...

2. Start real DRIP with individual companies, where you buy one share of stock and then reinvest every month with minimal commission. The old fashoined way- it still works, but you don't have as many choices.

3. Save my money until I can invest enough from my discount broker to maintain low transaction costs. A table of commssion costs versus what you need to meet minimum transaction rates is below.

Commission Cost       Minimum Investment Level to Maintain
                      Low Transaction Cost Rate*
                      1% Rate     2% Rate     5% Rate


$3.00                  $300        $150        $60
$5.00                  $500        $250        $100
$8.00                  $800        $400        $160
$10.00                 $1,000      $500        $200
$13.00                 $1,300      $650        $260
$15.00                 $1,500      $750        $300
$20.00                 $2,000      $1,000      $400
$40.00                 $4,000      $2,000      $800
$50.00                 $5,000      $2,500      $1,000


*Min. Invest. Level = Commission Cost / Transaction Rate

I hope this clarifies things for you. Sometimes seeing the numbers really chages your perspective- it has for me.

-Scott (slaramee)

"I still hold that it was Bait and Switch. "

It's no more "bait and switch' than when the Electric or Water company raise your rates. Dare I mention the local taxing authority, too?

Bait-and-switch is if B&H ADVERTISED a low rate to lure you into making contact with them. But they had no intention of opening an account at that rate. Then you are cajoled and bullied into opening the account with the higher fee.

It's Foolish to learn the difference.

BHP

Is'nt this a "bait and switch"tactic? Any one else agree?

Plenty of the readers here agree with you. B&H's fees no longer make sense for many people.

But it's not bait and switch. You are free to leave and not ever give them another dollar. You were signed up at the old fee structure and got to take advantage of it for some amount of time. You had enough notice to not get charged the new fee if you choose to move on.

I recommend 90 or 180 day CD's for those that can only add to their savings every so often. It makes a nice fee free stageing area for your funds until you gather enough to buy some stock. Plus you are doing that other Foolish thing of having cash available for emergencies. (If you decide to take the penalty for early withdrawal)

No matter what it costs us, we all need to bite the bullet and figure out how to pay ourselves first, because it's more expensive to not be invested when the market moves then to be invested and paying higher than some mental benchmark in fees - especially when you consider that we are still paying for things of dubious value like cable TV, internet access, SBUX, credit card interest, et al

...doc

salarmee,

Sorry to see you go. I've choosen to stay. I'm not thrilled about the fee changes, but I look at it this way, per account:

Its one less trip to McDonald's for the month

OR

Its one less six pack of beer for the month

OR

Its three less coffee and bagels from WaWa

OR

... I think you get the idea. Maybe I'll call it the BuyAndHold diet! ;)

I'd be interested in hearing where you end up moving your investing too. Thus far, I've yet to find an alternative that I found appealing. I think some who have headed to the doors will suffer from the "grass is always greener" problem. The grass always looks green until you get there!

Good Luck.

cleckjr

cleckjr asks:
I'd be interested in hearing where you end up moving your investing too.

I reply:
www.tiaa-creff.com

"I still hold that it was Bait and Switch. "


It's no more "bait and switch' than when the Electric or Water company raise your rates. Dare I mention the local taxing authority, too?
Bait-and-switch is if B&H ADVERTISED a low rate to lure you into making contact with them. But they had no intention of opening an account at that rate. Then you are cajoled and bullied into opening the account with the higher fee.
It's Foolish to learn the difference.


B&H did lure me into their system via a low rate. I think it is possible that they knew all along that their business model wouldn't work and knew that at about a year or so after they launched they would switch to this model (or something similar). If that was their intent, then the difference between a classic bait and switch (used by auto dealers and such) and this is insignificant, and the Foolish would recognize it as such.

Regardless of the possibility of B&H planning this tactic, the effect on me, the small investor, is identical. I was into the market at a price I could afford, Foolishly investing so that my fees were less than 2% of my investment, etc. Now, I can't afford to stay because I had no intention of being a Pseudo Drip nor Dollar Cost Averaging investor (regardless of their undeniable advantages). I intended to be a Buy and Holder of these securities, just as the company had structured its fees to accomodate. They changed their fees. I have to pay to leave. It bites!

As to having the option to leave (which someone else posted as a defense of B&H's change) somehow means this is not Bait and Switch, I also have the option of not buying the higher priced automobile when the auto dealer uses Bait and Switch.

Finally, Buy and Hold had a different option available to them. They could have honored their previous fee structure for all current investors and had new fee structures for new investors. Furthermore, they could have added some threasholds for future trading (such as, if you add more to these holdings, except as previously agreed in EZ invest, etc.) you will be moved to a new fee structure. That would have been a way to maintain good faith with their early adopters while improving their future financial situation.

Paul

cleckjr,

Unless I can find a similar alternative to B&H with no monthly fee, I will be moving my money into the money market at my discount brokerage until I have pooled enoiugh to buy stock at a low transaction cost (~2%). The $7 B&H fee may not seem like much, but when you are charged it monthly regardless of your trading activity, it can eat into your returns for those just staring out/with small investing increments.

Since I don't yet invest monthly (still working on the other 13 steps...), I need to keep the most I can for the stock purchases. And the idea of forking over commission regardless of activity is just not very appealing to me. Somehow paying $10 or so dollars when I trade seems to make more economic sense to me.

Thanks for your concern, and good luck on your B&H "diet"- that sure is one good way to look at it and it's better than eating donuts :-)

-Scott (slaramee)

FoolB,

In response to your post regarding the bait and switch tactics that you believe were employed to garner your business. As many on the board here have read, I used to work for the company. I promise you--from all that I know of the founders there, that it was never their intention to "bait and switch" any customers. After working there a short time, though (I was in product development) I began to believe that the business model was never going to make any money. The comments from some of the founders regarding what they saw the company developing into were ludicrous--if you look at some old press clippings you'll even see what I'm talking about. Peter's (Breen) dream was always to build the "biggest" brokerage firm on Wall St. (in terms of customers). From all I know of him, and I dealt with him directly hardly at all, he is a pretty decent man. Works hard and dreams big...but be realistic! And be a little more mature than "I want to be the biggest". I recall a comment that he made to the press about one of his goals being "to make Charles Schwab loose sleep at night". C'mon--Schwab had about 1 trillion in assets under management at the time--the comment was rediculous. One thing that I learned in business school is that "biggest" doesn't amount to a pile of horse *@$! if you aren't satisfying your customers, let alone turning a profit. This is not to say that with the company's model a profit was imposssible, but I always believed that it was HIGHLY unlikely. The guys running the show there on a day to day basis--who I understood to be salesman by trade--knew little, in my opinion, about the workings of Wall St., and certainly had had no experience running a company--let alone one as "big" as they wanted theirs to be. Put it this way--the Executive VP-albeit a bright and creative guy-was about 25. Let's be real. A 24 year old-unless he's some sort of prodigy-- doesn't have the experience to run a major organization. Granted--Geoff is a talented guy, but was more of a creative thinker than and industry exec. Anyway--I think the money behind the firm--Goldman, BONY, Pru. ect. never really counted on a profit or gave a damn if one ever materialized......when they first funded the place. IPO's wre hot--they figured they could plunk down 50MM, garner some interest, then IPO the company for a nice profit while still retaining a controlling interest in the company. Then the market went to hell and things changed. In short--to sum up my rambling--you probably aren't a victem of a bait and switch so much as a "bait and stumble". The original concept--from a true business standpoint (which I beleive is to turn a profit)--was not well thought through on a P/L basis. It was a "pump and IPO" deal that faltered because of market conditions and timing. It's probably a good thing that they didn't IPO though because I'd hate to see what the stock would be trading at these days. I'm still rooting for them but I have serious doubts about their long term future. Heck-I've even closed my accounts. Not because I think they will die but who wants to pay for the priveledge of maintaining a brokerage account? Not me, so I understand your point but feel it's just a bit off base.

TURK1031 wrote,
...Heck-I've even closed my accounts. Not because I think they will die but who wants to pay for the priveledge of maintaining a brokerage account? Not me...

BINGO.

Thanks for sharing with us your "insider's" view on B&H. Boy, I would have liked to have read this a few months ago. I blame myself for not seeing the impact of a down-side economy on the future of B&H- I should have seen this "writing on the wall" and saved myself the headache.

-Scott (slaramee)

Hey man, I wish I were 25 and thought of B&H. <gg>

Anyway, it seems that things are settling down over there to some degree, they just announced an endorsement deal with the Dolan's. (http://www.buyandhold.com/bh/en/about/news38.html) Maybe things are about to turn around - hey, the new trading windows are working great for me, and I'm still investing $20 into 9 stocks 4 times/month without a hitch. :)

Anyone got ideas to help me diversify, and I'm sick of tech stocks!? I'm heavy into the consumer goods (food and bevs in particular), energy, telecom, and foreign companies (I've got some hopes for a few countries), but probably could use a new sector or two to look at. I don't own any pharmaceuticals or chemical cos, defense or industrial equipment cos.; does anyone like those sectors?

I really like CAT and GE

Which both have a good presence in industrial equipment. I just wish the whole GE, HON issue with the EU could get resolved.

So nice to see others going through the same thing I am...I've closed my accts there too. Where to go now, though?
Ursula

Fantastic Letter! I agree wholeheartedly!
Ursula

Ursula,

I am considering doing some investing with traditional Dividend Reinvestment Plans (DRIPs) and/or Direct Stock Plans (DSPs). Basically, you buy a single share in your own name (certificate and all) and then reinvest with small amounts regulary or irregularly depending on the plan, with a low commission cost. I am just starting to learn more about this. Check out the DRIP Basics board on TMF. There is a pretty good FAQ and a number of good posts and folks on that board.

http://boards.fool.com/Messages.asp?mid=15172304&bid=100090

-Scott (slaramee)

"Finally, Buy and Hold had a different option available to them. They could have honored their previous fee structure for all current investors and had new fee structures for new investors. Furthermore, they could have added some threasholds for future trading (such as, if you add more to these holdings, except as previously agreed in EZ invest, etc.) you will be moved to a new fee structure. That would have been a way to maintain good faith with their early adopters while improving their future financial situation."

For me, the FEELING (as opposed to the actual intention of the company or the precise definition) of "bait and switch" comes from the "hold" part of "buy and hold." I opened accounts with a long term intention, but the company radically changed the fee structure in a short five months from the time I opened my son's custodial account. It would have been nice if Buy and Hold had grandfathered existing accounts with the old fees, as you pointed out. That probably was not feasible. But, at the very least, they should have waived transfer fees. Then my son could have kept his 8 shares of stock purchased from Christmas and birthday money instead of incurring a $40 loss through the sale of his stock. I had very high regard for this company before they totally disregarded their customers.

Mskree