spyman wrote:I'm new to the forum and learning a lot and realizing how many mistakes I've made. In 2010 (age 50), I left a high-paying job for a low-paying dream job. I had enough $$ accumulated that I decided to hire an advisor at UBS to manage half of it. The rest was at Fidelity and self-managed. Total $3.2 mil and half of this is retirement. This year, I decided to move it all to Fidelity (except abt 350k in govt TSP and a health savings acct) and manage it myself with one exception. At UBS, I had (among other investments) about 450k in individual municipal bonds, all maturing bet 2013 and 2017. The Fidelity rep suggested that I consider opening a managed municipal bond account thru Fidelity with Breckenridge as the subadvisor. But the minimum account has to be $1 million. Fees are .35% (this is paid to Fidelity which in turn pays Breckenridge -- no other fees). I had extra cash so this seemed like a good idea at the time given Breckenridge's expertise and large inventory and the low fees. In hindsight and now that I've spent more time on this website, I realize that I should have figured out whether an addl $550k in individual munis made sense in light of my target allocation and existing fixed income holdings. What is really scaring me now is watching Breckenridge buy numerous fairly long-duration muni bonds apparently to balance out my existing short-term muni bonds that transferred over. But given how low interest rates are, I really question the upside of buying individual muni bonds right now that will mature not mature for several years. Since Jan 4, 2013, Breckenridge has bought 11 bonds of approx 50k each that mature in years 2018 through 2024. For example, I now have a general purpose bond with principal amt of $51,194 issued by Ohio St. Univ Gen Rcpts with a 5% coupon and maturity date of 6/1/20123. Current yield is 3.906. Yield to maturity is 1.990%. I bought it on 1/16/13 (issue date is 2/6/13 with first coupon date 8/1/13). It has call protection and is not subject to AMT. It is rated AA+
At UBS I was pegged moderate conservative with target allocation of 30% equities, 48% fixed, 23% multi, 10% credit. They concluded that I had enough saved to meet my goals and I was not interested in taking on more risk than necessary to gain a higher return. The Fidelity rep has recommended 40% equity, 60% bond. I am in the 28% tax tracket. Right now, on top of the $1 million in individual munis, I have $182k in 7 corporate bonds, and 520k in numerous bond funds almost all of very short duration. I will not need the money for over 20 yrs but I'm worried about the interest rate risk on these longer-duration individual muni bonds since it seems certain that interest rates will go up eventually. The yield to maturity is not so attractive that I would want to hold them until they mature. Thus, I'm questioning whether so much of my fixed income investments should be in individual muni bonds and whether I should keep these longer-duration muni bonds.
Thanks for your help!
Hello spyman and welcome to the forum.
Here is the bond you mentioned.http://emma.msrb.org/SecurityView/Secur ... 79F9E42C4D
you own $40k worth of face which was bought at a price of 127.985 for $51,194. Nothing seems particularly out of line for this trade. THey probably bought $100k of face and put $40k in your account and $60k in others.
WHy are they buying bonds like this? Cynically they need to justify their 0.35% fee. 5 year munis are yielding 0.81%http://www.bloomberg.com/markets/rates- ... -bonds/us/
if they buy those for you, then 0.35% out of 0.81% is going toward their fee or 43% of your income is going to pay their fee. They realize that would look bad and you might pull your money away from them. So they have decided to buy longer term munis instead so they can better justify their fee. Sorry but that's how it works. You would be better off @ vanguard in the intermediate muni admiral fund. That has an annual fee of just 0.12% or 0.23% less. On $1m that 0.23% amounts to $2,300 a year. That money belongs in your pocket, not fidelity/breckenridge.
Also the vanguard fund has a lower duration of only 5 years, or half of those ohio bonds.https://personal.vanguard.com/us/funds/ ... =INT#tab=2