Brokers report that a few anxious clients have actually pulled money out of the market--and out of banks--in anticipation of Y2K problems. Others are simply concerned about operational snafus and are holding off on making decisions. But such fears are irrational. Industrywide tests of remediation efforts have been largely successful. Bugs could still occur, but couldn't possibly compare with the risks

Brokers report that a few anxious clients have actually pulled money out of the market--and out of banks--in anticipation of Y2K problems. Others are simply concerned about operational snafus and are holding off on making decisions. But such fears are irrational. Industrywide tests of remediation efforts have been largely successful. Bugs could still occur, but couldn't possibly compare with the risks of holding cash. Investors could also pay an opportunity cost by being out of the market.

"The securities industry generally has been a leader in the United States in preparing for the year 2000," said John Koskinen, chairman of the President's Council on Year 2000 Conversion at a September press conference.

The SIA has conducted an industrywide testing program, which included 400 securities firms, nine securities markets and financial industry utilities that clear and settle trades. Over six weekends in March and April this year, firms entered and settled trades with their systems reconfigured to Dec. 29, 1999, Dec. 30, 1999, Dec. 31, 1999, and Jan. 3, 2000. Additionally, mutual funds were tested for Jan. 4, 2000, an extra settlement date, and options were tested for Jan. 22, 2000, for options expiration.

"We took the trade from conception through settlement, and we had to have the entire Street involved," says John Panchery, vice president and year 2000 project manager for the SIA. "We think we've managed all potential problems."

Testing included equities, options, corporate and municipal bonds, unit investment trusts, mutual funds, government securities, mortgage-backed securities and money markets. In the test, an "expected result" was defined as one expected step or observable event (such as an output report or message) in the processing of a trade. Of the 259,654 expected results, four had Y2K-related problems. "Two-hundredths of one percent were Y2K errors, and they were quickly fixed," Panchery says. Another 2 percent of trades were unsuccessful due to human error or non-Y2K-related system problems.

In May, the SIA coordinated a three-day test of lending-processing systems with 100 banks, broker/dealers, vendors, service bureaus and utilities. No Y2K-related errors occurred in the 10,495 expected results.

Market data systems also were tested in May with more than 200 participants, including the Securities Industry Automation Corp.; stock, options and futures exchanges; news providers; and market data vendors. More than 145 end users, including broker/dealers, government agencies and portfolio managers, took part in the test. In the 67,000 data items, there were no Y2K-related errors.

With system testing complete, the SIA's focus has shifted to contingency planning, covering "what if" scenarios for New Year's weekend. "We created internal firm event-management documents," Panchery says. "Firms can use them to get ready."

The SIA also has created a communications and coordination center that will be used as a central information source for firms.

"Customers can rest assured," Panchery claims. "We've proven we're ready."

Clients' Millennium Fears Clients' main fear is disappearing financial records, says Will Manzelli, chairman of the Y2K committee for A.G. Edwards in St. Louis.

"On January 3, they think it won't show they own X shares of stock. Some people--a smaller percentage--are concerned the market's going to drop precipitously."

Jan Holman, vice president of investment services with American Express Financial Advisors in Minneapolis, agrees. "The risk here is a self-fulfilling prophecy," she says. If investors panic about Y2K, they could create selling pressure on stocks. Holman, who has traveled the country speaking to investors about Y2K, says they also fret about emerging markets and junk bonds. "Their concerns usually involve a smaller portion of their portfolios."

Investors' worries about Y2K and their money have dissipated over time, several surveys show. "Gallup surveys six months ago showed all kinds of concerns. Yet they seem to be disappearing now," says Jim Devlin, director of the Year 2000 Enterprise Project Office for Citigroup.

A July survey by U.S. Bancorp Piper Jaffray found that 25 percent of investors are somewhat or very concerned about the safety or performance oftheir investments as a result of Y2K, a drop from 37 percent in January. "Since the industrywide testing, the general concern level [of investors] is not very high," says Terry Sandven, director of the Portfolio Strategy Group of U.S. Bancorp Piper Jaffray in Minneapolis.

Client Reassurance Three aspects of the industry's preparation should reassure clients, Devlin says. One, the SIA helped firms become aware of Y2K and formed committees to handle various aspects of it. Two, the industry focused on testing. And three, contingency plans are in the works.

"The SIA coordinated testing of multiple product lines and conducted two series of tests," Manzelli adds. "Because of the work, preparation and testing, the probability of problems are minimal."

Despite thorough testing, there will likely be some glitches in the millennium changeover. "We anticipate some small percentage of issues will arise," Panchery says. "When you're making changes to millions of lines of code, something has to be missed somewhere. We're taking every precaution to make sure we're ready."

To that end, keep in mind that post-2000 errors can be fixed. "We've dealt with glitches in the industry forever--making sure trades are calculated properly," Holman says. "It's a normal part of doing business."

Global Y2K preparedness is difficult to pin down. The data from foreign firms and markets is not as readily available or as reliable as U.S. data.

In late September, the U.S. Senate Special Committee on the Year 2000 Technology Problem released "Investigating the Year 2000 Problem: The 100-Day Report." The international preparedness section reported that several U.S. trade partners are "severely behind in addressing the Y2K problem." The committee concluded "many short-term, and in some cases long-term, disruptions to supply chains are likely to occur." Regions of particular concern include Eastern Europe, Africa and portions of Asia and South America. Countries that raise the most concern include China, Russia, Italy, and several countries that export oil to the United States.

The World Bank released a Y2K study in January 1999 on developing countries. Of 139 countries surveyed, only 54 had initiated Y2K policies. Twenty-one were taking action to fix their computer systems, while 33 noted awareness of the problem but were not taking action.

American Express Financial Advisors research analysts surveyed 700 countries worldwide in the second quarter 1998 and the first quarter of 1999. Jan Holman, vice president of investment services with the Minneapolis-based firm, says the results show that financial companies across the world are ahead of other industries and that larger companies are better prepared than smaller firms. "Western Europe and North America are best prepared," she says. "The Far East and Latin America are in the middle. Russia, Peru, Korea and Hungary are least prepared."

Finally, Merrill Lynch released a study in July on global readiness. Among the findings, by region:

Australia and New Zealand: Companies report they're up to speed with Y2K remediation.

Canada: Compliance costs have increased with a deadline that was pushed up from September to June. Of small businesses queried, 83 percent will be ready by Jan. 1.

Asia Pacific: Eighty percent of companies report confidence in their Y2K compliance. Areas of concern: government-owned utilities in China, Indonesia, Thailand and the Philippines. Most of the Asian bourses have completed internal Y2K remediation and are conducting external tests.

Japan: The government has increased enforcement efforts. About 40 percent of small companies are not spending on compliance, claiming lack of funds. Analysts are taking a wait-and-see attitude until more data is released.

Europe and the United Kingdom: Disclosure, compliance and contingency planning have increased.

Latin America: Analysts have the highest confidence in Argentina, Chile and Mexico, and lower levels in Brazil and Venezuela.

At a September press conference, securities industry leaders talked about global Y2K readiness and protection for U.S. investors.

For the past few years, central banks and market regulators from 175 countries have cooperated "to ensure that both markets and investment companies are up and operating," said John Koskinen, chair of the President's Council on Year 2000 Conversion.

Richard Grasso, NYSE chairman, noted that U.S. investors enjoy the advantage of investing globally "through a Y2K-compliant intermediary." And foreign firms doing business in the United States "fall under our regulatory net," said SEC Chairman Arthur Levitt Jr.

While the financial services industry may be breathing easier about the Y2K problem, the final cost might cause some hyperventilation.

For example, Alliance Capital and T. Rowe Price project they will spend more than 40 million dollars each on Y2K preparations. Franklin Resources, the Vanguard Group and Bear Stearns will spend at least 50 million dollars. Charles Schwab and Donaldson Lufkin & Jenrette will shell out closer to 90 million dollars. And both Bankers Trust and Morgan Stanley Dean Witter expect to pay in excess of 200 million dollars.

Then there's Fidelity Investments, which at its peak had more than 500 people tackling the Y2K problem. It expects to spend more than 300 million dollars by the time the dust settles. But that's peanuts compared with the 520 million dollars committed by Merrill Lynch, which at one point had 800 technicians working on Y2K readiness (see box).

Overall, the SIA estimates that financial firms have spent more than 5 billion dollars on Y2K assessment, fixing, testing and related efforts.

Given the considerable expense, Y2K efforts have put a dent in the profitability of financial companies, although the impact might be less severe than the numbers above indicate. That's because much of the Y2K spending has been diverted from other technology projects, says Jeff Morris, portfolio manager of the Invesco Financial Services Fund in Denver. "Nor will there be a lot of spending over and above what companies have disclosed so far," he says.

Morris thinks the real cost has been a drop in productivity among brokerages and investment companies, as technicians and managers divert attention from other issues. "What people do for Y2K produces a zero-percent return," he notes.

So will financial companies enjoy a profitability tailwind once Jan. 1 comes and goes? Pat Ouimet, assistant portfolio manager for the John Hancock Financial Industries Fund in Boston, doesn't think so. "My feeling is they'll put the extra cash into other areas, so [reduced Y2K expenditures] won't give as much of a boost as one would think."

However, Ouimet predicts investors will be feeling better about financial companies and Y2K by early next year, which could bolster the prices of brokerage and mutual fund stocks, and the market in general. Morris, by contrast, blames the financial group's recent weakness on rising interest rates, not the computer challenge.

Even if financial companies keep a lid on further Y2K spending and face no noticeable computer failures, that doesn't mean they're out of the woods just yet. According to Moody's "Y2K Preparedness of Securities Dealers" report, "There still remains the remote risk of a Y2K-induced liquidity or credit shock to certain markets or institutions." Some brokerages may reduce their own trading activities and raise cash as a precaution. "These actions are entirely prudent, but will likely depress revenues and earnings in the fourth quarter," Moody's predicts.

Merrill Lynch, 520 million dollars

Fidelity Investments, 300 million dollars

J.P. Morgan, 300 million dollars

Bankers Trust, 220 million dollars to 260 million dollars

Morgan Stanley Dean Witter, 200 million dollars to 225 million dollars

Goldman Sachs, 150 million dollars

Lehman Bros., 85 million dollars

Donaldson Lufkin & Jenrette, 90 million dollars to 100 million dollars

Charles Schwab, 86 million dollars to 91 million dollars

PaineWebber, 65 million dollars

Bear Stearns, 75 million dollars

Franklin Resources, 50 million dollars to 60 million dollars

Vanguard Group, 50 million dollars

T. Rowe Price, 44 million dollars

Alliance Capital, 40 million dollars to 45 million dollars

Source: Moody's Investors Service, company reports and public statements

What should clients do to prepare for Jan. 1, 2000?

"The things they should have done all along," says Jan Holman, vice president of investment services with American Express Financial Advisors in Minneapolis.

First, clients should organize their financial records. They should keep November and December account statements, and then track transactions that haven't yet been recorded on statements.

Second, they should put cash reserves of three to six months of living expenses in a money market or short-term bank account. "[For New Year's weekend, have as much cash as you would for any typical weekend," Holman says.

A "Year 2000 Investor Kit," prepared by the Investment Company Institute, the NASD, the SIA and the SEC, is available online at www.nasdr.com/ 3600_inv_kit.htm. It suggests the following:

* Ask your broker, mutual fund firm or investment adviser what they are doing to become Y2K-compliant.

* Query companies in which you're a stockholder about their Y2K readiness.

* Invest for the long haul. Don't try to time the market.

* Refrain from obtaining stock certificates from brokerage firms. Extensive electronic records are maintained and backed up.

* Keep copies of bank and investment account statements, and transaction confirmations. In January and February 2000, reconcile your personal records with account statements from financial firms to look for discrepancies.

Brochures and Kits * "Don't Panic Over the Y2K Bug, It May Be a Blessing In Disguise For Your Financial Health" by The National Association of Personal Financial Advisors. Offers tips for investors to avoid Y2K pitfalls with their finances. Available free at www.napfa.org/y2kfinprep.htm.

* "The Sky Is Falling! Or is it? Keeping a Cool Head About Y2K" from Forum for Investor Advice. Defines the Y2K problem, covers the financial industry's preparation efforts, recounts historic panic-induced stock market crashes and recommends consulting a financial adviser about concerns. Available free at www.investoradvice.org/ y2k.htm or in hard copy by calling 800/200-1819. The cost is 1 dollar 80 cents per brochure for a minimum bundle of 50.

* "Talking Y2K: How to Communicate With Clients" from the International Association for Financial Planning. Helps reps advise clients on Y2K preparation and communicate about firm readiness. Available free online at www.iafp.org. A version of this brochure tailored to clients, "Y2K Advice For Consumers: Be Informed, Be Proactive," is available free online at www.planningpaysoff.org.

* "Year 2000 Investor Kit" from Investment Company Institute, the NASD, the SIA and the SEC. Provides tips for clients' Y2K preparation and reviews the financial industry's testing to circumvent Y2K problems. Available online at www.nasdr.com/3600_inv_kit.htm or in hard copy by calling 888/227-1330 or e-mailing [email protected] The cost is 28 dollars 75 cents for 25 copies.

Books "Y2K and Your Money" by Harold Evensky (ISBN 0967014603, Sitting Duck Press, 9 dollars 95 cents). Covers the basics of the Y2K problem and helps clients make Y2K-related investment decisions. Available through major online booksellers or ordered through International Association for Financial Planning. Contact Linda Agee at 800/743-6938, ext. 1300.

Web Links * The Federal Deposit Insurance Corp., www.fdic.gov/about/y2k/index.html

* Investment Company Institute, www.ici.org

* National Association of Securities Dealers, www.nasd.com or www.nasdr.com

* Office of Thrift Supervision, www.ots.treas.gov/y2k.html

* President's Council on Year 2000 Conversion, www.y2k.gov

* Securities and Exchange Commission, www.sec.gov/news/home2000.htm

* Securities Industry Association, www.sia.com

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