I have an investing question? Can you help?

[kuozzman]

I was wondering if someone could weigh in on a recent problem I had. It has to do with buying/selling Municipal Bonds.

Background info about the situation: When my Mom's Mom passed away, my Mom took over responsibility of all of her parents investments (her Dad has Alzheimer's). My Mom and her 2 sisters know absolutely nothing about investing in anything and literally do anything their advisor says(he advised their Mother for over a decade). Well I don't do a lot of investing myself, but I'll soon graduate w/an Econ degree and I stay informed (not via MSM) about the world econ/investing news, etc. Anyway, I think my Mom's getting ripped off and wanted to see what others think.

Main thing I'm skeptical of: Her advisor said he was going to put a lot of the money into tax-free muni bonds, which would have a low risk, which my Mom said was fine(it was previously invested in about a dozen stocks-this was in 2002). Well he bought a bunch of bonds other than that because he said he couldn't get the tax-free(in DE and Puerto Rico) ones at that point. (he said this months later after I noticed it and told my Mom to ask him about it)The ones he got were all callabe in 2012 or later and apparently he never even planned on holding them for more than a couple months. So after 1-2 months, he had sold all of them and gotten the tax-free ones he originally mentioned. Well in all, before he got the right ones, he made over a Million $s in transactions for a loss of over $40,000. When my Mom asked him about it, he said something stupid(I think) like it would have cost that much in taxes for something or other else anyway, I forget exactly what, but it was BS.

Questions:
1. Are there times when you would have to wait to buy DE or PR Bonds?
2. Did he rip off my Mom?
3. Do many people buy Puerto Rican bonds?
4. Are there times when it would be smart to buy bonds that aren't callable for 10 yrs? 20 yrs? when you know you will redeem them long before that?

Any feedback is appreciated. Thanks....

[NYC]

1. There are times when specific municipal bonds are not available

for purchase.

Can you call Lebenthal? 1-800-425-6116
They are usually reliable.

[satori]

2. Call a broker

Call a stock broker like Paine Webber or Dean Witter. I have a Trust fund that is invested by Morgan Stanley Dean Witter and Paine Webber and a majority of it is in a tax free mutual funds. And it has done quite well over the last 10 years almost doubled with me receiving income as well. I think Paine Webber is good at picking stocks as well.

[newyawker99]

15. Hi satori!!

Welcome to DU!! :toast:

[Kahutec]

3. Bonds

Time to clean house on your Mom's financial adviser! A loss is never good when you are talking Mom's money! You could by municipal bonds from your city. I would have a professional take a look at the transactions and follow up! Your Mom and family would greatly benefit. I watched a friend's $800,000 estate get bilked while the kids just watched. Take a more interactive role!

[kuozzman]

4. I definitely agree. However my Mom and her sisters

either belive him over me or believe me and don't think it will happen again. Anytime a transaction is made now, she runs it by me, which is good, but I'm no expert and the fact is, they can't trust him. I don't think there will be any more unnecessary losses since she checks with me, but I can't get over the fact that they are willing to stay with him after he lost $40,000+ for no reason and I definitely don't think he deserves them as customers. I just wanted to confirm that the $40,000+ loss was unnecessary and easily avoidable. I'm going to talk to them when I visit for Christmas.

[Blue Wally]

7. Sometimes

It is worthwhile to trade out of a bond into a more advantageous bond even though you have a loss. What you do have to watch out for is excessive trades in the account. That would mean the broker is "churning" the account to create more commission money for himself. Commissions in bond trades are "hidden" in that the commission is in the bond "spread" and not explicitely stated as in a stock transaction. On a bond account, no more than 10% of the account should turn over in a year (as a general rule of thumb). Sometimes a callable bond has more advantageous terms than a non-callable.

[kuozzman]

10. Will you read my post #8? I was just asking about spreads....

The website I listed in #8 has the spreads of the bonds he bought "red flagged". I assumed he was "churning", but I'm not familiar with how his commission relates to the spread or what these "red-flags" mean. I would really like to hear what you think. There is a link to a specific bond in #8. Thanks.

[Blue Wally]

14. Spread

The brokerage profit on the bond is the difference btween the "bid" and "offer" prices. The broker gets a portion of that as his commission. I don't think the bond was a very good investment for the portfolio. He should have bought a shorter term bond in the low interest rate environment and allowed the bond to go up. evidence of "churning" in an account would be if the account were worth, say, $2 mill and there were, say, $600K of trades in the bond account in a year.

[elsiesummers]

5. See if you can find a fee only, no comission, Certified Financial Planner.

On place to start might be by taking a look at Andrew Tobias' website, www.andrewtobias.com and clicking the "ask less" link.

Andrew Tobias is the democratic party's treasurer and he often refers questions to Less Antman at the ask less link - who is a fee only CFA.

While I don't necessarily agree with all of Antman's advice, (he is more bullish on the stock market for the long term than I am) I think he seems really knowledgable on a variety of topics - selling for tax loss - insurance issues - and if you could get information on (a) whether he could become your mom's advisor or (b) whether he could help refer you to other advisors - it might be a jumping off point.

You will have to jump around the link menu that pops up before the discussion board before you'll find a place where you can contact him.

I also found another interesting website of a financial planner who writes for CBS marketwatch that I'll see if I can find - seemed very above board on the face of it - I'll see if I can find it.

Edit: The other link www.fundadvice.com

I have no personal experience with either of these planners - except that Less Antman has answered a couple of my questions on his discussion board (he's not very timely about the board although there is a lot of good info already there - so I wouldn't simply post a question there and hope he'll get back to you in a reasonable period).

Good luck. Be careful of brokers as opposed to financial planners - they have an incentive to sell high commission items - even at the most respectable companies.

A fee only planner has no incentive to sell one investment over another because there is no commission.

This is just my opinion and I'm not an expert.

[kuozzman]

9. Thanks, I'll look into those.

[Yupster]

13. Certified Financial Planner

is a degree earned by getting books through the mail, reading them and then taking tests at a testing center. I wouldn't get too hung up on a CFP designation.

[cavanaghjam]

6. Did he rip off your mom?

I don't know, but he was apparently not promptly telling her what he was doing or what he had done. That is unacceptable and indicates either malfeasance or incompetence, neither of which is a desirable quality in someone managing money.

As for callable bonds, it is usually best to buy bonds that are not callable for a while as it gives one room to maneuver. Generally one buys bonds when interest rates are high and seen to have peaked, a tricky bit of clairvoyance needed, it's true; and vice versa. Anyone who has bought, or recommended others to buy, bonds in the last two, nearly three, years needs to be questioned. Better the money in a measly money fund when interest rates have nowhere to go but up. Though the return is low, and taxable, one is not hit with the price loss that results. As interest rates go up, bond prices fall, though the two do not move in lockstep. There's generally a six to twelve week lag in bond prices.

[kuozzman]

8. That's what I said.

but it had already been done. But they did just sell about half of the PR bonds for a small profit in october, which was surprising to me. They put that in an annuity. I really just think they need to get a different advisor. I simply don't think there an excuse for losing all of that money and his excuse confirms that.

What do you know about illegal spreads in the Municipal Bond markets?
I'm not very familiar with how it works, but when I was looking into this whole ordeal, I came across this website: www.municipalbonds.com
and saw that the PR bonds that he bought were "red-flagged" for having a potentially unfair/illegal spread. An example was 105.977 / 109.729, but he says he bought it at $104.227, which seems wierd. If you want to see it, it's here: http://www.municipalbonds.com/archive/PR/20030701.html
Bond: PUERTO RICO MUN FIN AGY SER A 5.000% 08/01/2027
If you start at the bottom and go up, it's the first red flag.
They were all red flagged like that one. I'm not sure what it means. It just seems odd that after the shady transactions for a loss, the ones he ended up getting are "red-flagged".

[cavanaghjam]

11. I honestly don't know;

my specialty was small cap equities and I haven't been in the game for many years, though I still have general theory down pretty pat. The job just, like many of my hats, got boring. I would guess that a large spread in bid/ask is indicative of a low-volume market. A high volume market would demand more efficient pricing.

Y'all might be better off managing yr own monies by placing equal amounts in no load mutuals. Some in muni or corporate bond funds, some in blue chip funds, some in low cap funds and some in foreign market funds. Be aware - all investment advice should be treated skeptically. Including mine.

[Yupster]

12. A few things

All investment firms have a compliance department to look into things like this. You might want to call them and ask in a non-threatening way, could you please look at these transactions and see if it looks okay to you? The firms are not trying to rip their customers off. If a broker of theirs is doing something fishy, they want to know about it and make the customer whole.

In the situation you described, it would not be normal to buy 10 year bonds as a holding place until the broker found suitable munis. It is possible there were no suitable munis from Delaware for a while though. However, the normal thing to do would be to put the money in a money market mutual fund with no commissions in or out as a holding place for the days, weeks or even months.

Normally, older investors would buy bonds to hold for their safety and income. There are other people who buy long term bonds with no intention of holding them a long period just gambling interest rates will go down and they can sell them for a profit. Those are bond traders rather than bond investors. It would be unusual for an elderly woman to want anything to do with that.

My honest guess knowing just what you told me is the broker bought the wrong kind of bonds by mistake. He should have fessed up immediately (believe me it's best rather than losing sleep), called his compliace office and they would have made the client whole.

One other thing. A broker cannot buy anything for you unless they tell you about it first and get your agreement. The exception to this is if you've signed an agreement giving the broker "discretion". That is pretty rare. If you have a discretionary agreement, cancel it. It's too easy for a broker to get to the end of the month, need a little more commission and say "what can I do in this account." At least get a call and an okay first.

And another thing. Brokers love meeting the family of their clients, especially the younger ones. That increases the chances that they will keep the assets through the generations. If you ask to see him, he should be thrilled to talk to you. You'll need to have your mother give him an okay to tell you her info, but the broker will be happy to do it. If not, I'd be concerned.

Best of luck to you.