Checking up on Mom: Individual bonds and other scary things

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Checking up on Mom: Individual bonds and other scary things

Postby phdbound2010 » Sun Jun 30, 2013 7:26 pm

Hi all,

I am trying to help my mom get a better hold on her finances, and, in reviewing her brokerage accounts, I have uncovered some things that concern me. I would like some help in figuring out what is going on. Please share some advice about what questions to ask the broker, and even some wisdom about helping a parent who is not so financially sophisticated.

As background, my mom is 63, single, and makes about $50,000/year. As best I can tell, she has a mortgage of unknown size on a $300,000 house, and has about $200,000 under management at Morgan Stanley with a woman she "really likes." By watching how my mom was taken by a previous adviser, I learned when I was young that financial advisers are not to be trusted.

With my mom's permission, I plan on speaking with the adviser about the overall strategy. I will try to get a handle on the expenses, but I know that might be difficult given the abundance of complicated instruments wrapped in complicated instruments (convoluted annuities, etc.).

The most recent transactions I can see are the purchase of two individual corporate bonds for a total price of under $10,000. They are bonds in Qwest and Pitney Bowes, with S&P credit ratings of BBB- and BBB respectively. The statement lists a "processing fee" of $13.00, but I have a hard time believing that this is the total that Morgan Stanley and the broker made off this transaction.

So, is there any good reason to invest in an individual bond or two rather than a bond fund? Is this a red flag, or am I overreacting? What questions do I need to ask when a broker says that there is no commission on this stuff?

I am fairly certain that my two siblings and I will be supporting my mom in her retirement given the way she has managed things. However, I'm trying to delay that time as I'm not currently in a position to help much (I'm 26 with 2 years left of professional school).

I plan to speak with the "adviser" tomorrow, and any advice about how to handle things would be greatly appreciated.
Last edited by phdbound2010 on Sun Jun 30, 2013 7:34 pm, edited 1 time in total.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby stevep001 » Sun Jun 30, 2013 7:32 pm

1. Most of the profit in the bond business is in the pricing, not in the commission.
2. Hard to be properly diversified with individual bonds in a $200k portfolio.
3. Bond historical data is tougher to get than stock historical data.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby phdbound2010 » Sun Jun 30, 2013 7:36 pm

stevep001 wrote:1. Most of the profit in the bond business is in the pricing, not in the commission.
2. Hard to be properly diversified with individual bonds in a $200k portfolio.
3. Bond historical data is tougher to get than stock historical data.


This is what I feared. Thanks for the reply.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby Grt2bOutdoors » Sun Jun 30, 2013 7:41 pm

Hard to get excited about either issuers. Is it Qwest or Qwest Communications? If the latter, that was taken over by Century Telephone, the merged company was renamed CenturyLink.
If it was PitneyBowes :oops: - this is a company that is on shaky ground, having just cut it's dividend, that is not what I'd call a stellar investment grade credit. At least she bought the bond, and not the equity, if that's any consolation.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby livesoft » Sun Jun 30, 2013 7:46 pm

I would guess the salesrep had another client who wanted to get rid of these bonds because they are dogs, so she got a double commission. Or maybe Morgan Stanley said, "Let's move these dogs today. Find somebody to buy them." All you have to do is read "Liar's Poker" by Michael Lewis for more info.

I would be surprised if the advisor would even talk to you without your mom present and would really only talk to Mom at that. Of course, you could try this ploy: Tell advisor you are thinking of putting all your investments with MorganStanley, too. Isn't that evil?

Basically, MorganStanley is not your friend and is very expensive for what you don't get.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby phdbound2010 » Sun Jun 30, 2013 8:05 pm

Thanks for the comments. It is Qwest Corp. And yes, the document indicates that Morgan Stanley acted as principal, so they certainly got more than $13 out of the deal.

My real question is what should I do at this point. If the broker has much of the money in some variable annuity, is there much benefit in switching to a fee only planner? Anyone found themselves in a similar situation and had success getting the house cleaned up for a parent?
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby JW Nearly Retired » Sun Jun 30, 2013 8:45 pm

phdbound2010 wrote: My real question is what should I do at this point. If the broker has much of the money in some variable annuity, is there much benefit in switching to a fee only planner? Anyone found themselves in a similar situation and had success getting the house cleaned up for a parent?

IMO, the real question is what can you do. Still working and adding to her $200k it would certainly benefit her to clean it up. If your Mom will get fully on board with cleaning it up then anything is doable. Her buy-in is the big hurdle. "Really liking" the advisor isn't a positive sign.

What does she have to say when she reads this thread?
good luck,
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby phdbound2010 » Sun Jun 30, 2013 9:26 pm

JW Nearly Retired wrote:
phdbound2010 wrote: My real question is what should I do at this point. If the broker has much of the money in some variable annuity, is there much benefit in switching to a fee only planner? Anyone found themselves in a similar situation and had success getting the house cleaned up for a parent?

IMO, the real question is what can you do. Still working and adding to her $200k it would certainly benefit her to clean it up. If your Mom will get fully on board with cleaning it up then anything is doable. Her buy-in is the big hurdle. "Really liking" the advisor isn't a positive sign.

What does she have to say when she reads this thread?
good luck,
JW


Thanks for the reply. You are right about the major issue; getting her fully on board is the challenge and must come before anything else As I'm sure many on these boards can relate, some of the people we love do things that harm themselves in the face of advice from their well-meaning and frustrated family. This has been an ongoing issue When I was 17 and tried to talk her away from the previous advisor, I wasn't so successful. I'm hoping that things will be different this time.

On the positive side, she's starting to get serious about budgeting and living within her salary. She has had a negative cash flow for about 10 years, drawing from home equity and a sizable divorce settlement to maintain a lifestyle that didn't fit her income. This is a big change, and I'm hoping that it reflects some willingness to take more responsibility for things.

As for how she would react to the thread...she wouldn't fully understand most of it, and would be furious that her children think they will be supporting her in the future (there's just no way around that, as far as we can see). Perhaps that tells me more than I want to admit about the situation....
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby Kevin M » Sun Jun 30, 2013 9:48 pm

Maybe tell her this story. My Dad was sold some individual bonds at Schwab. My brothers and I inherited them. One was a GM bond, and when GM went through their bankruptcy (or whatever it was), I think I got about 30 cents or less on the dollar when I sold the bond, so about $3,000 for a bond my Dad paid $10,000 for. This is one big danger with individual bonds. It only takes one going bad to really hurt your returns.

She might also ask the broker how much she could get (net of fees) if she sold the bonds today. The answer might help her understand that she's been fleeced.

Ditto re: the annuities; after the broker tells her how much it's going to cost her to get out of them, perhaps she'll understand that there are some very negative aspects to these investments. The broker will have a great pitch about the tax benefits of the annuities, but perhaps you can help her understand that the tax benefits are unlikely to overcome the extra costs. Also help her understand the danger of investing in something that's almost impossible for most of us to understand.

Like others have said, this is a very bad place for your Mom to have her investments, and I would do everything feasible to get her to move everything to somewhere like Vanguard and maybe a bank or credit union (for CDs), and just invest in low-cost index funds and non-brokered CDs.

Bond funds are better than individual bonds for most retail investors, but non-brokered CDs can be even better in terms of risk and expected return.

Getting out of the annuities may be problematical; you will need to check the terms. You may be able to get out without surrender penalties after a period of time, like 10 years, but there still may be taxes and tax penalties. This is a sad thing about annuities--once they hook you, it's hard to get unhooked. You will have to calculate the tradeoff between paying the penalties/taxes and the lower long-term costs of the alternatives (like index funds).

Kevin
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby phdbound2010 » Sun Jun 30, 2013 10:23 pm

Kevin M wrote:Maybe tell her this story. My Dad was sold some individual bonds at Schwab. My brothers and I inherited them. One was a GM bond, and when GM went through their bankruptcy (or whatever it was), I think I got about 30 cents or less on the dollar when I sold the bond, so about $3,000 for a bond my Dad paid $10,000 for. This is one big danger with individual bonds. It only takes one going bad to really hurt your returns.

She might also ask the broker how much she could get (net of fees) if she sold the bonds today. The answer might help her understand that she's been fleeced.

Ditto re: the annuities; after the broker tells her how much it's going to cost her to get out of them, perhaps she'll understand that there are some very negative aspects to these investments. The broker will have a great pitch about the tax benefits of the annuities, but perhaps you can help her understand that the tax benefits are unlikely to overcome the extra costs. Also help her understand the danger of investing in something that's almost impossible for most of us to understand.

Like others have said, this is a very bad place for your Mom to have her investments, and I would do everything feasible to get her to move everything to somewhere like Vanguard and maybe a bank or credit union (for CDs), and just invest in low-cost index funds and non-brokered CDs.

Bond funds are better than individual bonds for most retail investors, but non-brokered CDs can be even better in terms of risk and expected return.

Getting out of the annuities may be problematical; you will need to check the terms. You may be able to get out without surrender penalties after a period of time, like 10 years, but there still may be taxes and tax penalties. This is a sad thing about annuities--once they hook you, it's hard to get unhooked. You will have to calculate the tradeoff between paying the penalties/taxes and the lower long-term costs of the alternatives (like index funds).

Kevin


Thanks, Kevin. Good idea about asking the current value of the bonds and annuities. I will do that tomorrow and share these things with my mom.

It really is a shame that people who call themselves financial planners aren't held to some fiduciary standard. Oh well.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby denismurf » Mon Jul 01, 2013 1:14 am

Getting rid of the bonds now necessarily means selling them on the secondary market, where retail sellers really, really get the shaft. It could be that the shaft is so severe that your mom is better off just hanging on to the bonds until they mature.

Actually computing that comparison between selling now and holding on is beyond my pay grade, but I hope you get the idea.
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Re: Checking up on Mom: Individual bonds and other scary thi

Postby phdbound2010 » Mon Jul 01, 2013 10:55 pm

denismurf wrote:Getting rid of the bonds now necessarily means selling them on the secondary market, where retail sellers really, really get the shaft. It could be that the shaft is so severe that your mom is better off just hanging on to the bonds until they mature.

Actually computing that comparison between selling now and holding on is beyond my pay grade, but I hope you get the idea.


Thanks for the reply. You are probably right. Turns out they are some other kind of fixed income security (not actually a bond). In any event, they aren't what I would have bought, but it's not my money. Conversation with the broker was as expected. She lost me when she said that she took no commission on the variable annuity (I called her out...the conversation went downhill from there). Shared my impression with my mom, and it is up to her to decide what to do.

Thanks again to all of the responders!
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