My 80 year old father-in-law just purchased a number of CD's on the advice of his Smith Barney broker. Below are a couple of examples:

LEHMAN BROTHERS BANK, FSB - DE
*CERTIFICATE OF DEPOSIT
DTD 08/29/07 INT : SEMI-ANN
5.1500% DUE 08/30/2010
PRINCIPAL AMT $5197.70
YIELD TO MATURITY 2.00
FULL PRICE IS 103.95400000
Gross Amount $ 5,197.70
Accrued Bond Int. 57.14
Amount $ 5,254.84
Settlement Date 05/20/2009
Trade Date: 05/20/2009 CUSIP#: 52521E-KF-6 Solicited Order
Market: Over-The-Counter Security#: 5354515 Cash Acct. HOLD SECURITIES
Ref #: 357733

BANCO BILBAO VIZCAYA ARGENTARI
*CERTIFICATE OF DEPOSIT
DTD 07/30/08 INT : SEMI-ANN
4.2500% DUE 07/30/2010
PRINCIPAL AMT $3079.47
YIELD TO MATURITY 2.00
FULL PRICE IS 102.64900000
Gross Amount $ 3,079.47
Accrued Bond Int. 38.08
Amount $ 3,117.55
Settlement Date 05/19/2009
Trade Date: 05/19/2009 CUSIP#: 059457-NL-1 Solicited Order
Market: Over-The-Counter Security#: 5435691 Cash Acct. HOLD SECURITIES
Ref #: 1449439

Would anybody care to offer thoughts on safety, appropriateness, and what the broker commission might have been.

Thanks in advance,

Joe

Joe,

If he didn't get hammered by fees YTM looks about right. Buying international debt right now may not be a bad idea. Argentina is neither politically unstable or straight as an arrow but it has been rising against the dollar.

jack

The math looks close to right for a 2% yield on the Lehman Bros CD, I think I got a little higher than 2%, but I did the math in my head.

But I see 2.6, 2.7 yields on bank rate for terms that are 3 months shorter.

It seems the broker is selling your FIL a previously issued CD. So I wonder if he's doing more of a favor for the seller than the buyer?

Take it with a grain of salt, because I just don't trust large full service brokers

Being in a similar situation with my mother-in-law,who continues to use her late husband's full service broker for no reason other than it is what she is used to and theoretically is within driving distance, I empathize.

Chances are it would be possible to find new issue brokered CDs with similar maturities with no additional commission (other than what is built into the offering yield), at least that is true for places like Vanguard and Fidelity. You can't always match dates if you want to ladder every month or so, but if he got 1 year or 18 month CDs, then left money in a money market for a few months if needed for expenses, the lower return in the money market for a few months would probably not cost more than an added commission.

Assuming the CDs are FDIC insured, I wouldn't worry about risk. If you are truly looking at something international and not insured, I wouldn't go there for something with a marginally better return (and these CDs don't look like even a marginally better return).

I think the real question is whether you and your wife want to get into the generational conflict where your FIL's generation tends to feel a need for full service brokers, because that was what was available most of their lives and they think it paid off (not having a basis for comparison).

Of course he can do better for fixed-income assets taking money out of his full-service brokerage account. (A combination of something like Pentagon Federal Credit Union for regular CDs and Vanguard/Fidelity for brokered-CDs and free auction bids on Treasuries/TIPS would do the trick, staying with the "safest" options.) But my experience with my MIL is that even for a bank she can't drive to herself (she needs to get friends to drive more than very locally—we live far away), she is uncomfortable with anything that is at a distance.

Usually the commission on a $10000 brokered CD is about $50. Of course it is in the yield--the CD matures at face value. So the commission on a CD is like the spread on a bond.

Actually your full-service broker might have a secondary market CD. You cannot take a bokered CD back to the bank to cash out early, but the broker will buy it back from you and then resell it. In that manner a few months back I got 3% annually for a 6-month CD. The availability of this of course is spotty--depends on somebody needing their money early, and they took the haircut for the service.

I agree--don't buy a CD that isn't FDIC insured. For that reason I'd be suspicious of the Argentine one.

Best wishes, Chris

Thank you all for your thoughts.

My thoughts were these CD's seem to be in their inventory, making it difficult to see the real commission on them.

They also were pushing ALZ, a 6% preferred, but I can never find the usual information on it. When I tried to buy from Fidelity, the bid/ask spread was crazy so I felt Smith Barney had this in house also.

When I first saw the Argentina CD, I flashed to the Stanford Ponzi scheme, but am probably only paranoid for my FIL. I just hate to see old folk taken advantage of.

Thanks again for the feedback.

Joe