Dear Mr. Berko: I’m 57 and have $129,000 in cash in my IRA. My broker suggested that I invest in five different $25,000 pieces of A-rated corporate bonds with 20-year maturities that would yield 4.0 percent. He said he won’t add a commission on the price I pay for these bonds. This $129,000 is a little less than half my IRA value and the other half is invested in an index annuity. The five different bonds will cost me a total of $124,325. This looks safe because each of the bonds is rated A and the income is guaranteed. I’ve enclosed this list for your comments.
— SK, Buffalo, N.Y.
Dear SK: Don’t you dare! At age 57, you have to be dumber than a two-tailed wombat investing $124,325 in five $25,000 face value bonds with a 20 year maturity, yielding about 4.0 percent. Bonds, even well-rated bonds, are a lousy investment for most civilians including you. But they’re wonderful investments to sell because the huge hidden commission gives him a nice payday.
Your brokster is right. He won’t add a commission to the price you pay for those bonds because the commission is included in the “price you pay.” This mountebank ought to be pilloried, painted yellow, and flogged for this greedy and unsuitable recommendation. I also recommend that his tongue be spliced by an incompetent surgeon! If you buy those issues, you’ll pay a substantial and hidden fee; sometimes as high as 4 percent of the bonds’ face value. Those bonds are part of your broker’s trading inventory so the price to you is “marked-up” three to four points. And since the commission is “hidden” or added to his firm’s cost of the bond, you could be paying as much as $5,000 and never know it. That is unless you have the ability to call another broker and compare prices. And if you do, you’ll be mad as heck, as well as “gabberflasted.” I checked those five bonds with a Merrill trader I’ve known for years, and suffice it to say, a Merrill customer can buy the same bonds for about $121,000, including commissions. And that should be an important difference to you. It also suggests that your broker is a crook and the brokerage that employs him endorses his selling tactics.
If you buy those five different corporate bonds with a 4 percent yield, you should get checks every six months for $2,500. Those 40 interest payments of $2,500 over 20 years are carved in stone and never change. And when those bonds come due in 20 years, you’ll have received $100,000 in interest income plus the $125,000 face value of those bonds. And while those years pass slowly, you may note that the prices of prosciutto, peaches, pasta, Pringles, pizza, plums and pickles have doubled in price. And when you’re 77, you may also realize that your 20-year $124,325 investment has suffered from the inflation disease and will only buy you about $70,000 worth of parmesan, pita, pears, pumpkins and Pierogies. Not good, that.
