Dear Mr. Berko: My significant other and I are in our early 50s, and in March 2008, we rolled over our 401(k) accounts — which were stuck in some stupid, pitiful mutual funds offered by our company — to a Roth IRA with a broker we didn't like because we were in a hurry. This broker recommended a portfolio of utility, drug and oil stocks that you approved of, and — as you also recommended — we reinvested every dividend. Even though the commissions were 10 times higher than Charles Schwab's, you also told us to keep the broker because you heard he was honest and "a good egg."
Our accounts (enclosed), as you can see, have done very well and are worth $231,000 each, and our co-workers are envious of this performance. We still keep a small amount in the company plan in order to get the matching contribution, which is 8 percent. Unfortunately, we can't keep this broker anymore, because he decided to take an early retirement last October. Because we have about $12,000 each to invest in our Roth IRAs, we met with our new broker last month, and this nice, sweet, kind man recommended that we invest half of our Roth IRAs in an equity-indexed annuity (enclosed). He said that it's guaranteed, that the guaranteed yield is 2 percent and that when it matures, it will pay each of us at least $310,000. We have been reading your column for 11 years and have greatly appreciated your advice. — CC, Durham, N.C.
Dear CC: Equity-indexed annuities are as easy to sell as beating bunnies with a stick. In my opinion, EIAs are the great American rip-off and equal in evil to the perfidious mortgage transactions effected by JPMorgan Chase, Bank of America and Goldman Sachs. More than $25 billion of this stuff was sold last year to simpleton investors who were figuratively charmed off their turnip trucks by sweet-talking salesmen. EIAs are unregistered investments, which is why they have sales charges of 10 to 12 percent, annual expenses of up to 5 percent, surrender costs of 25 percent and impossible-to-understand or -calculate maturity values. Kiplinger, Morningstar, Wiesenberger and Standard & Poor's have cautioned investors about EIAs, which are responsible for the majority of investor complaints to the Securities and Exchange Commission in any given year. This crap is lethal to your wealth; however, this particular annuity may be one of the better ones because it guarantees you will get a minimum of 87.5 percent of your premiums back, plus 2 percent interest, at maturity.
But the travesty here is that this nice, sweet, kind brokster would have you sell half your exceptionally classy portfolio of highly regarded electric, water and gas utilities, international oil stocks, and major drug issues to purchase swine in a poke. It's frightening that there are so many financial advisers who would steal pennies off a dead mother's eyes with no more conscience than a fox in a poultry farm. And it's sad that there are so many trusting people who lack investment knowledge and are fodder for the sales pitches of these predatory, articulate incompetents who hide under the imprimatur of being licensed financial advisers.
It's time to move your Roth IRA from that brokerage to Charles Schwab or Fidelity or Vanguard. Each is as good as the other, and it doesn't make a tinker's dam's worth of difference which firm you choose. It's as simple as Simon to make that transfer. Schwab, Fidelity or Vanguard will send you some papers to sign, and quick as a jiff (actually about a week), your accounts will be electronically moved to your new brokerage.
Meanwhile, you don't have a telephone stock in your portfolio. So use your credit balances to buy 300 shares of AT&T (T-$35.56). T yields 5.2 percent and has a long record of dividend growth. The Street believes that T will trade in the mid-$40s in the coming few years, and I think that's very reasonable. The commission costs will be $8.95 for 300 shares, versus $120 at the brokerage that currently has your Roth IRAs. Then find a money manager whom you can trust to help you for the best of your life.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.