Stockbrokers Informative - Your Stockbroker Is Not Your Friend
My wife and I almost got ripped off to the tune of fifty grand by a stockbroker, a so-called financial expert who professed to have our best interests at heart.
We're a typically conservative senior couple who had squirreled away a lot of money twenty years ago in United States series EE savings bonds (I know, we're virtually stone age when it comes to investments). We had reached the point of needing to retire the bonds over their final ten years to minimize income taxes (our savings bonds have a thirty-year maturity). And we had to decide where to invest the money from the bonds.
Neither of us is sophisticated financially, so we sought expert advice. Since we don't have the expertise needed to sort the good players from the scammers, we focused our efforts on the country's most successful brokerage firms in the Our ultimate selection was one of the country's most well known and well respected investment firms.
The vice president we talked to boasted an arm-long string of initials after his name, connoting his certification by every financial accrediting agency imaginable. Impressive, yes. As were the surroundings we met in a fancy office in a fancy building in a fancy office park. Just the kind of environment to impress investors.
But the investment advice we received was far from fancy. This conniver did not tell us the truth about our savings bonds. He tried to convince my wife and I to cash in all of our bonds and invest the proceeds in risky variable annuities and front-loaded mutual funds. Why those particular investments? You guessed it: because that's where the sales commissions are highest.
He based his recommendations on two facts. First, in the marketplace for bonds, as interest rates rise, bond prices fall. And since interest rates were rising, every day we waited meant that we would receive a lower price for the savings bonds than the day before. Cash in now, he urgently advised.
But there is no open market for United States series EE savings bonds. They are redeemable only by the United States Treasury, and those bond prices never fluctuate because the interest rate is fixed by the government and not determined by the market.
Our financial wizard then informed us that cashing in the savings bonds immediately wouldn't incur the normal tax rate because we had held them twenty years, and therefore the bonds were subject to the lower capital gains tax, not the normal (and higher) income tax.
That claim, like his first, was not true. No matter how long one holds United States series EE savings bonds, their appreciation is taxed as normal income, not at the lower capital gains rate. There is no capital gains tax when it comes to United States series EE savings bonds.
Had we been foolish enough to heed his advice it would have cost us fifty grand in extra income taxes and bloated sales commissions.
KEEP YOUR EYES WIDE OPEN WHEN DEALING WITH STOCKBROKERS
Needless to say, we scurried away from this rogue as fast as our legs would carry us. And from this experience devised the following set of investment rules:
Your stockbroker is not your friend. No matter how a nice a person you think he or she is. Get that out of your head. When it comes to money your best and only friend is you.
Don't be fooled by appearances. Investment offices are designed to trap the unwary, to persuade them to drop their guard in the presence of great wealth and financial success. So too are brokers who look as if they stepped out of a movie set. But fancy appearances do not necessarily equate to sound investment decisions.
Before you meet with your broker check his registration and record of conduct violations with the National Association of Securities Dealers toll-free hotline, 1-800-289-9999. And call the office of Georgia's Secretary of State, Division of Securities at 404-656-3920. If there's even a whiff of rot, look for somebody new.
Never make an investment decision in the presence of a stockbroker or any other financial wizard trying to sell you anything. Take home the investment proposal and examine it in the cold light of day, far away from any smooth-talking stockbroker who knows the right words to persuade you to part with your hard-earned dollars.
When it comes to investment decisions, remember that the harder the sell, the riskier the investment. So when your stockbroker puts the pressure on You must pay now or risk losing this opportunity that's yet another signal to find a new stockbroker. Keep that in mind and you reduce your chances of getting stung.
© Copyright Ron Smith, 2006