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? 

G.E., Destin, Fla.



Dear G.E.: 

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 on how 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.”

AXA used to be a fine variable annuity. It wouldn’t pay you 6 percent unless you were to invade principal, and that’s a fact. Besides, that broker’s payday would be 5 percent of $330,000, or $16,500, so ... forgetaboutit! The Franklin U.S. Government Securities Fund used to be a good mutual fund but wouldn’t pay you 5 percent unless you were to invade principal, and that’s a fact, too. Besides, the commission would be 4.25 percent of $100,000, or $4,250, so ... forgetaboutit! Tell that pup to get his experience with someone else’s dollar.

There are lots of darn good stocks that have raised their dividends practically every year and pay more than 5 percent (AT&T, Kinder Morgan, Philip Morris, Southern Co., BCE, Royal Dutch Shell and Total SA, to name a few). If I were a retiree, I’d rather own those in a long-term income/growth portfolio. An experienced professional or money manager can recommend other quality issues with higher yields to improve your income and put some modest annual bump in your investment income. And if that broker has the wisdom and the skills gained from lots of experience, he may also recommend various closed-end funds and exchange-traded funds to enhance your income and appreciation. In fact, an increasing number of experienced professionals are now using only CEF and ETF strategies to produce attractive and dependable returns for conservative retirement accounts.

If you employ a professional money manager, he/she will probably charge you a 1 to 1.5 percent annual fee to compose and watch over your portfolio. And an experienced money manager whom you trust can make a big difference in your retirement comfort.