Tuesday, April 14, 1998

Full-Service Foolery
By Robert L. Bailey ([email protected])

Approximately one year ago, Ma and me started to have rather significant tax-paid money left at the end of the month for a change, instead of the other way round. I've always tried to max out my 403(b), but up to now have had only a small savings otherwise; typically CDs at the bank. Upon my asking him about investing, the guy who prepares my tax forms suggested someone he knows at a full-service brokerage (no names but the initials are MLPFS). I made an appointment and signed on. Here's where my "full-service" lesson began.

Being concerned about next year's taxes and some significant additional income from consulting, I indicated that I'd like to put a certain sum into something secure with the intention of sending it to Uncle Sugar next tax season. This conversation took place along about April 20th or so. My full-service guy directed me towards zero-coupon bonds. No problem. Good choice. However, he buys one that matures on May 15 the following year. Upon asking him if that's not a little past tax time, he informs me that he can handle that little detail. There's a market for these things. What he didn't tell me is that there's also "markdown" and transaction fees. If I sell it prior to tax time I'll get less net interest than my cash brokerage account would have given me! Fortunately, I didn't have to use it this year and had other funds to cover taxes.

After purchasing the bond, I had some funds to invest in stocks. My full-service guy picked three. I put about equal amounts of money into each. Then I discovered The Fool and other neat stuff on the WWW. So, I got interested in all sorts of stuff, including the Foolish Four. Started tracking performance, I did. Found out about discount brokers and all that. Being a statistician, I decided to run a little test on my broker's picks. The test was to determine if his picks were doing as well as a randomly chosen set of three from the ten Dogs of the Dow. The test was for a full six months, and in a random set of three chosen independently seven times, the full-service picks beat the random set one time out of seven if commissions were not factored in. With his commissions on his picks and the discount broker commissions on the randoms, the full-service picks were left in the dust!

The next big service I got involved with was a SEP/IRA account. The full-service guy set one up for me and advised that my contribution ought to be in the super-duper-market-beating growth fund (SDMBX). So, that's where it went. Fast forward to one year later. Now seeing the light, I wish to transfer to a no-fee IRA account at a discount brokerage. During a year when the S&P 500 went ballistic again, SDMBX produced an astounding 8%. After taking out the account administration fee, early withdrawal fee, and transfer fee, I got 3.5% on the deal.

Some lessons are expensive. Some lessons are stressful. Those that are both are usually well-remembered. I'll never forget my one year of "full service" and the lessons it taught me. I now run my own money, make my own choices, use a discount broker, have a free IRA, and am a proud Fool. Cash King forever!

Persevere!

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