In the beginning of the year, the number of Direct, "Broker–Free" Stock Purchase Plans had passed the 400 mark. New plans are being rolled out every week – both by issuers, in the form of registered plans, and by transfer agents, in the form of bank–sponsored plans.

Much as we love these programs – in fact, because we love these programs – we feel obliged to point out that there’s less to crow about here than first meets the eye.

Nearly half the 400 programs are being offered by the ADR agents of foreign companies, which, on the whole, feature unattractively high fees and a roster of names that are largely unfamiliar to the average American investor.

More than half the U.S. company plans are also bank–sponsored, rather than registered plans, which severely limits both the kind of marketing and the kind of investor education that can and must be done in our experience, if the plan is to earn its keep.

Although a few brave companies include their own cover letter and an annual report with the bank–sponsored brochure – and one even includes a "fact sheet" about the company and its past performance – most bank–sponsored offerings consist of a not very attractive generic brochure, outlining the same old terms and conditions… with no information at all about the company you’re being invited to invest in. Perhaps this is okay if you’re QUAKER OATS which just traded in its friendly old DRIP for a generic, bank–sponsored program – although we’re not convinced about even this one, given the major transformations they’ve been undergoing. But what if you’re MACERICH, EASTERN CO., GUIDANT, HARLAND, JUSTIN INDUSTRIES or NEWPORT? We didn’t know what they did before requesting brochures from their toll–free numbers and we didn’t find out afterwards, either. Hardly a cost–effective way, we’d think, to attract new direct investors, or to market anything.

Another downer, the 218 U.S. companies in the mid–February survey represent a mere 20% of the 1000+ that offer "traditional DRIPs"; a major disappointment given the ease with which they can open up their plans and the significant benefits that can flow to companies that do.

Although a few industry groups are well–represented – utilities, as one would expect, since they’ve been at it the longest and really understand the benefits – along with all the major oil companies, including a lot of the top non–U.S. names, which do indeed compete for investor attention – most industry groups are strikingly underrepresented.

We’re amazed, for example, that with all the competition for local, long distance, cellular and Internet connections that’s on the horizon, and with all the money being spent to get consumers to switch and not to switch, the telecommunications industry is represented by a mere five providers.

We’re equally amazed, given the potential for DSPPs to improve the caliber of one’s retail investor base, and thus to provide more corporate value for the mind–boggling amount of money companies have to spend on individual investors anyway, that only eight of the sixteen most widely–held companies have launched DSPPs to date.

The unkindest cut – which perhaps helps to explain the surprisingly slow acceptance of these programs by companies that are otherwise leaders, innovators, and smart buyers – is the fact that early this year, three full years after the SEC made it easy for companies to launch them, only two of the major back sponsors of such programs (NORWEST and, more recently, MELLON BANK) have taken a dose of their own prescription medicine. Despite the fact that all have DRIPs in place, and despite the fact that competition for retail customers is keen–to–brutal among the parent banks, so far there’s no First Chicago, Chase, or Bank of Boston DSPP on the list. (As the printers proofs came back we learned that Bank of New York just launched a DSPP.)

Most disappointing to us, as we’ve said here before, is the misguided marketing – and pricing – and customer advising – that some agents have sometimes served up. For example, 49 of the 218 DSPPs on our list are characterized by the Moneypaper, the leading sourcebook for direct investors, as having "high fees": 23 of First Chicago’s 43 DSPPs (a whopping 53%); 5 of American Stock Transfer’s 10 plans; 4 of Harris Trust’s 11 (36%) 5 of Boston EquiServe’s 22 (23%) and 4 of ChaseMellon’s 31 (13%).

By way of contrast, only two companies that run their own plans (P&G, which just lowered its fees, and whose long–term performance made it less important an issue beforehand, we’d think – and NORWEST) were labeled as having "high fees."

Especially alarming to fans of these plans – and to rooters for plan agents like ourselves – is the fact that many of them are losing their competitive edge vs. brokerage accounts. With most retail brokers now offering free reinvestment of dividends and free IRAs to good customers, and with online trading now as low as $7.95 a trade, transfer agents need to revisit, and to sharpen up many of their current offerings. They also need to remember that 90% of the "old fashioned–DRIPS" still have low or no fees. That "high fee" label stands out like a big UNWELCOME sign.

Frankly, it appears to us that many of the bank–sponsored plans have been sold to, and designed for issuers who are not the least bit interested in having individual investors if it will cost them even a little bit of time or money. Hardly a way to build a good business, one would think.

Our advice: Plan agents need to "go back go school" on these plans. It is hard to sell something you don’t truly believe in– or don’t truly understand, as some of the salesfolks seem not to do – or that customers don’t really want. And, while you can sell anything if the price is low enough – especially if you can convince the buyer that it’s "free" … or that it can even come with rebates if you get your investors to pay enough, as some agents have sometimes done, this "strategy" doesn’t really do right by investors, nor by their corporate customers. And ultimately, it sure won’t do right by the agents themselves.

Issuers need to go to school on these plans too. We’re absolutely convinced that every investment–worthy company can significantly improve its own retail investor base – and with it, the trading environment for all of its investors – even while maintaining (and sometimes even lowering) its total budget for investor services … and without gouging – or appearing to gouge the stockholders.

How? By carefully designing a DSPP that’s exactly right for the issuer’s own situation. It takes a bit of time, some brainpower, some retail investor relations savvy, and some marketing skills, but the effort will repay itself many times over.

Readers: If you’re interested in learning about our new DRP/DSPP mapping and benchmarking program, give us a call at 732–928–6133.

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