Dear Mr. Berko: My 67-year-old husband will retire this summer with $430,000 in his company 401(k). He was advised by a young man, whose dinner seminar we attended, to invest $330,000 of this amount in an AXA variable annuity and $100,000 in the Franklin U.S. Government Securities Fund. We must get $20,000 a year, or about 5 percent, on this money to meet our needs. He said that AXA can pay us 6 percent a year, that the Franklin fund will pay us 5 percent and that there's room to increase this income later if we need to. He said these are very safe and very conservative investments. All of this sounds fine, but our daughter asked us to write you before we roll over my husband's 401(k) to an individual retirement account with this young man. Would you please tell us what you think of this approach?
GE, Destin, Fla.
Dear GE: Please be very careful of young brokers and seminars. Free dinner seminars, where they promise not to solicit your business but do, are typical honey pots for retirees.
The next day, you get a phone call asking for an appointment. Seminars are a Golconda for moist-behind-the-ears brokers and a source of new clients for brokers who aren't good enough to earn business by referral. I'm glad your daughter cautioned you before the damage was done.
One of the major drawbacks with young, well-intentioned, eager brokers is that they're primarily trained to understand the technical knowledge of the market, such as portfolio diversification, short-term capital gains versus long-term, tax-free versus taxable income, yields on certificates of deposit, annuities, preferred stocks, IRAs (Roth or traditional), etc.
This is what they learn at “broker school,” but this information is also published in myriad “how to invest” books and available in thousands of stock market essays and research reports. So after three months of Broker School, these eager, ardent Young Turks pass a test certifying their knowledge, and then they're qualified to advise retirees to invest their life savings. (They also pass a worthless, absurd exam testing their knowledge of state and federal securities law.)
However, practical knowledge — knowing when a stock should be sold, when to ignore certain rules, when to change diversification, when to decrease volatility, etc. — is the good judgment that comes only with experience. And experience, which derives from bad judgment, cannot be taught in a classroom. And this Young Turk is doing just what he was taught to do in Broker School, which advises, “Sell high-commission products.”