How to help Dad escape bad ML broker

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alvinsch
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How to help Dad escape bad ML broker

Post by alvinsch » Fri Nov 09, 2007 2:34 pm

Family medical crisis has caused my Dad to ask me to help him with his finances. Much to my chagrin he has a Merrill Lynch account where the broker has put him in 20 year muni bonds (he's 84). He's in the 15% bracket so he'd make more in CD's not to mention that the muni interest increases the amount of his SS benefit subject to taxes. With only 5 bonds there's little diversification. Next year due to expected large nursing home bills starting in January for my Mom, he'll probably be in 0% bracket. These seem to be obscure, little traded bonds (Elysian Fields school dist TX?), that I'm sure will have a huge spread if he has ML sell them.

Is there any cost effective alternative to just having ML sell them? I assume he could pay ML $100 to close the account and transfer the bonds to say Vanguard but he'd still be faced with huge spreads in trying to sell them. Any reason to believe this would be better? How big a percentage hit do you think one would take on selling very thinly traded muni bonds?

I've also considered whether it is possible and would make sense to have him sell/transfer the bonds to me. I could pay him ML's likely inflated estimated value and then just hold them in my Vanguard brokerage account until they expire. At least I'm in the 25% bracket with no SS issues so they wouldn't be as idiotic as what the ML broker did to him. Is this possible and do you think it would make sense?

Any other ideas or thoughts?

Thanks
- Al

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ddb
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Re: How to help Dad escape bad ML broker

Post by ddb » Fri Nov 09, 2007 2:58 pm

alvinsch wrote:He's in the 15% bracket so he'd make more in CD's not to mention that the muni interest increases the amount of his SS benefit subject to taxes.
Well, whether the money is in CDs or muni bonds, their are still interest payments that would cause more of his SS benefit to be taxable.

Hard to answer your question without knowing more about his investment objectives, risk tolerance, and other investable assets. What is the purpose of this money?

What is the credit rating and YTM of each of the muni bonds that he holds?

- DDB

livesoft
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Post by livesoft » Fri Nov 09, 2007 3:29 pm

The muni bonds may be your dad's idea. My MIL was practically in the 0% tax bracket, but since she absolutely hated paying any kind of taxes, she only boughtt tax-exempt bonds. We could never convince her that she would have more after-tax money if she bought taxable bonds and just paid the taxes. She had her mind made up.

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alvinsch
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Re: How to help Dad escape bad ML broker

Post by alvinsch » Fri Nov 09, 2007 7:33 pm

ddb wrote:
alvinsch wrote:He's in the 15% bracket so he'd make more in CD's not to mention that the muni interest increases the amount of his SS benefit subject to taxes.
Well, whether the money is in CDs or muni bonds, their are still interest payments that would cause more of his SS benefit to be taxable.

Hard to answer your question without knowing more about his investment objectives, risk tolerance, and other investable assets. What is the purpose of this money?

What is the credit rating and YTM of each of the muni bonds that he holds?

- DDB
My point was that muni's don't make much sense in the 15% bracket especially if it increases ones taxable SS to boot. As I noted going forward he will probably be in the 0% bracket so muni's make no sense whatsoever compared to taxable bonds.

He's 84 with very little risk tolerance but I don't see what that has to do with how best to liquidate muni bonds.

Thanks anyway.
- Al

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alvinsch
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Post by alvinsch » Fri Nov 09, 2007 7:35 pm

livesoft wrote:The muni bonds may be your dad's idea. My MIL was practically in the 0% tax bracket, but since she absolutely hated paying any kind of taxes, she only boughtt tax-exempt bonds. We could never convince her that she would have more after-tax money if she bought taxable bonds and just paid the taxes. She had her mind made up.
He knows they don't make sense and is mad at himself for letting the broker talk him into buying another one this year. He wants to just sell them no matter the price and get away from this broker his friends call "Slick Willie".

I'm just trying to figure out the most cost effective way to help him out.

- Al

bolt
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Post by bolt » Fri Nov 09, 2007 8:50 pm

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Gekko
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Post by Gekko » Fri Nov 09, 2007 8:56 pm

don't walk away mad, just walk away.

gassert
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Post by gassert » Fri Nov 09, 2007 8:56 pm

Al

Not considering the wisdom of the original investment - I wouldnt think there is much difference in selling the munis at ML or VG. As you know the commission is nothing, but the spread (largely determined by the market) is another. I spent time as a ML broker. And I didnt make any money if someone sold bonds. So, my guess is that the only cost to you is the spread - and considering the 2 companies, I would bet you are better off liquidating at ML - not VG. Either that or hold until maturity. I dont think it matters either way

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alec
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Post by alec » Fri Nov 09, 2007 8:58 pm

Al,

You could look too see if there have been any trades reported in those bonds here or here. Likewise, you could try calling places like Schwab + Fidelity's bond desk to see what prices they'd quote you to sell. If they're better than ML, just transfer the bonds to them + sell.

- Alec

baldeagle
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Selling bonds

Post by baldeagle » Fri Nov 09, 2007 9:12 pm

Alvinsch,

I had a similar situation a few years back -- not with munis but with taxable treasuries and agency bonds. I had thought to transfer them to Vanguard from Ameritrade, but still the charge to sell would have been about $750.

Instead, I opened an account at ZionsDirect, transferred in the bonds, and sold both of them for $11 each, a total of $22. Saved over $700! The proceeds are still there, invested in other stuff.

I have had very positive experiences with ZD since.

BE

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alvinsch
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Post by alvinsch » Fri Nov 09, 2007 9:53 pm

alec wrote:Al,

You could look too see if there have been any trades reported in those bonds here or here. Likewise, you could try calling places like Schwab + Fidelity's bond desk to see what prices they'd quote you to sell. If they're better than ML, just transfer the bonds to them + sell.

- Alec
Thanks for the links. I'd previously tried investingbonds with no luck but your cxa.marketwatch link shows the Elysian bond has traded only 3 times this year. Last trade was Sept 5 so these are looking mightly thin.

Any ideas on what the spread might be on something this thinly traded: maturity 02/15/24, 4.375% coupon, callable in 2017? If it's going to be a 2-4% spread then seems like I'd be doing him a big favor trying to transfer it to my account and I can just sit on it waiting for it to mature since it will be an insignificant part of our portfolio. Anybody try to do a broker to broker asset transfer to different peoples accounts?

If he just sells it in his account does it make sense to try to find a bond with similar characteristics and try to put in a sell limit order? Otherwise what's to stop the broker from selling it to one of his clients who he owes a favor, at a really bad price for my Dad?

Sounds like the easiest thing to do is just sell at ML, take the hit and move on. Hate to see my Dad get screwed again on the way out the door but then the chances of him living well over 100 when they expire isn't very likely so ML is going to get their cut at some point anyway.

Hasn't anyone looked into a broker to broker asset transfer/sell to a differently named account. Guess I'll call Vanguard rep to see if this is possible.

Anyway, thanks for everyone's replies.
- Al

gassert
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Post by gassert » Fri Nov 09, 2007 10:07 pm

al

if you are thinking financial - you are btter off holding and inheriting.

if you are thinking about cleaning up his portfolio - just bite the bullet and sell and start fresh.

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alvinsch
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Post by alvinsch » Fri Nov 09, 2007 10:32 pm

gassert wrote:al

if you are thinking financial - you are btter off holding and inheriting.

if you are thinking about cleaning up his portfolio - just bite the bullet and sell and start fresh.
My best estimate is that with the nursing home care my Mom now requires, my Dad's assets, outside of the house, would depleted if she was still there in 5 years, so I don't expect or need any inheritance though I know it would be important to him if he could leave something to my other siblings.

So in a few years it's likely those bonds will have to be sold anyway. In the mean time he'd be earning subpar bond returns (holding muni bonds when you have no tax liability doesn't make much sense).

So my only real choices are for him to sell them and take the spread hit or to somehow sell/transfer them to me where I'll pay him top dollar and then put them in my VBS account and forget about them for 20 years. However, as no one appears to have any experience or knowledge about doing the later, the choice seems to be to just sell them (but I'll check with Vanguard first).

Thanks again for the reply.
- Al

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gatorman
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Post by gatorman » Sat Nov 10, 2007 1:33 pm

Al- If your folk's assets will be consumed in 5 years by nursing home expenses, maybe you and your dad should make an appointment to talk to an elder law attorney to see if there is a way to move assets around and qualify your mom for Medicaid now. It is often possible to preserve the assets simply by redeploying them. For example, in some states income property is not treated as an asset for medicaid qualifying purposes, so if a couple had $200k in munis, they couldn't qualify, but if they had a $200k rental property, they could and would not have to spend down to meet the eligibility standard. It is worth looking into it, your dad may need that money later on.
Gatorman

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alvinsch
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Post by alvinsch » Sat Nov 10, 2007 3:25 pm

gatorman wrote:Al- If your folk's assets will be consumed in 5 years by nursing home expenses, maybe you and your dad should make an appointment to talk to an elder law attorney to see if there is a way to move assets around and qualify your mom for Medicaid now. It is often possible to preserve the assets simply by redeploying them. For example, in some states income property is not treated as an asset for medicaid qualifying purposes, so if a couple had $200k in munis, they couldn't qualify, but if they had a $200k rental property, they could and would not have to spend down to meet the eligibility standard. It is worth looking into it, your dad may need that money later on.
Gatorman
Thanks for your reply and good advice. Yes, we recently did go to an attorney to discuss this but came to a tentative conclusion that there wasn't enough there to necessarily do anything too elaborate though he did suggest retitling the house. We plan on meeting again in January and see how my Mom is doing at that point. My Dad's CPA was also there so I asked him to look into whether it might make sense to annuitize some of his assets. Really makes it hard to discuss when the key issue is how long your Mom is likely to survive.

He did a good job of trying to plan ahead as he bought long term care insurance years ago but it's only $80/day which doesn't go very far any more. Good lesson on the pro's and con's of LTCI.

- Al

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Post by gatorman » Sat Nov 10, 2007 4:12 pm

Al - Just one other thought, instead of an annuity, take a look at a self-cancelling installment note. If your mom was to transfer the munis to you and you gave her back a note that cancelled itself on her death, you might be able to preserve more of the money. Its tricky to structure correctly, but a tax attorney and elder law attorney should be able to do it for you.
Best of luck,
Gatorman

smartin
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If you decide to buy the bonds from your father....

Post by smartin » Sat Nov 10, 2007 8:41 pm

My experience has been that you cannot transfer assets between brokerages unless the accounts are owned/titled exactly the same way. But I believe you could open up a Vanguard brokerage account for your father, transfer the bonds from Merrill Lynch to VBS, and then go through Vanguard's process for changing account ownership to yourself (which involves a form and signature guarantees).

- Sally

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Post by alec » Sat Nov 10, 2007 9:01 pm

Al,

There are FINRA Rules about excessive markups/markdowns. Generally, any markup/markdown greater than 5% is considered fraud. Though, this looks like it covers everything except muni bonds. You might want to check out the MSRB, or perhaps call regarding reasonable markups/markdowns. Though, FINRA [f/k/a NASD] is charged with enforcing the MSRB rules.

Though, if you father filled out his tax bracket on his new account form at Merrill, and indicated a low tax bracket, you could always threaten Merrill that the municipal bonds were unsuitable, and thus there was a violation of NASD Rule 2310: Recommendations to Customers (Suitability). And say something like, "if you don't give us a good price on these bonds, I'm going to file a complaint with FINRA."

Note that ML already got fined and had to pay restitution in 2004 for overcharging customers in muni bond transactions. Shocked aren't you?

Nothing makes a regulator happier than dinging a firm for more instances of the same violations for which they were previously dinged and probably said, "Oh we're soooo sorry, we'll fix it so that doesn't happen in the future." Hello, much larger fine/sanctions.

- Alec
Last edited by alec on Sat Nov 10, 2007 9:36 pm, edited 1 time in total.

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alvinsch
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Re: If you decide to buy the bonds from your father....

Post by alvinsch » Sat Nov 10, 2007 9:31 pm

smartin wrote:My experience has been that you cannot transfer assets between brokerages unless the accounts are owned/titled exactly the same way. But I believe you could open up a Vanguard brokerage account for your father, transfer the bonds from Merrill Lynch to VBS, and then go through Vanguard's process for changing account ownership to yourself (which involves a form and signature guarantees).

- Sally
Yes, I'll ask about that possibility when I call Vanguard.

Thanks for the input.
- Al

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Post by alvinsch » Sat Nov 10, 2007 9:54 pm

alec wrote:Al,

There are FINRA Rules about excessive markups/markdowns. Generally, any markup/markdown greater than 5% is considered fraud. Though, this looks like it covers everything except muni bonds. You might want to check out the MSRB, or perhaps call regarding reasonable markups/markdowns. Though, FINRA [f/k/a NASD] is charged with enforcing the MSRB rules.

Though, if you father filled out his tax bracket on his new account form at Merrill, and indicated a low tax bracket, you could always threaten Merrill that the municipal bonds were unsuitable, and thus there was a violation of NASD Rule 2310: Recommendations to Customers (Suitability). And say something like, "if you don't give us a good price on these bonds, I'm going to file a complaint with FINRA."

Note that ML already got fined and had to pay restitution in 2004 for overcharging customers in muni bond transactions. Shocked aren't you?

- Alec
Thanks for the input. We're not the threatening type so I'm just trying to figure out how to get out with the least cost. If the spread was 5%, I would definitely try to transfer them to my name but if the spread was 1% or less, I'd just recommend he sell them at ML. Unfortunately if I go onto VBS and search for muni bonds with a similar maturity, call provision, AAA rating and coupon rate, I get dealer prices from $96.6 to $100. So can one just put in a limit order, like for stocks, say for just under $100 and hope they sell?

- Al

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