Transfers between funds of a mutual fund family

[BP.]

I hope that some of you who deal with investments in your business can answer a question for me that has bugged me for years now.

Client has money invested with an investment firm. They are at least regionally known, as I see their ads on TV. Let's give them the fictitious name of "Jefferson Investments." Her money is invested in about 8 different mutual funds in the same fund family. We'll call it "Coin Funds." The different mutual funds are ones such as Energy Fund, Technology Fund, Health Fund, etc.

Client has someone from "Jefferson Investments" managing this money. The client doesn't initiate any trading. Every year she has at least a 3 page 1099-B with about 50-65 sales transactions, which are simply exchanges from one fund in the "Coin Funds" family to another fund. The transactions occur all throughout the year.

I've never seen any other situation like this one. I asked her years ago, but client doesn't know why these trades are happening. She doesn't even seem to care, this is just me wanting to know. She likes the manager, and trusts him. I wouldn't want to disrespect another professional, especially when this isn't my area of expertise.

But I can't help wondering every year just what's happening here? What possible good reasons are there for the constant exchanges among and between the funds? Thanks!

[ChEAr$]

It's apparent what's happening

I think.

Each sale/exchange generates a commission. All in the guise of buttressing client's
image that the account manager is trying to do the best for him.

It bugs me too, and with a more national outfit like Merrill Lynch. How can client really
know this constant trading actually makes more money than holding onto existing
investments?

[AZ-Tax]

Sounds like your client gave authorization

BP, its pretty simple, if your client did not initiate the trades, then either she gave written permission to manage her mutual funds with the authority to trade at their (investment firms) discretion, she has subscribe to some auto re balancing program or its possible the investment firm is conducting un authorized trades. Regardless frequent trading in mutual funds is not usually wise. If it’s within the same family of funds then there should not be any trading fees but could be Investment advisory fees.

It does not surprise me that your client is blind sided by liking the investment rep and loosing site of her investment. I had a client like that a couple yrs ago when I told her that their family friend (the investment rep) lost her a bunch of money. She refused to accepted that and we all know numbers don’t lie, she never came back to do her taxes with me again.

BP, my suggestion is don’t get between the investment rep and your client. Just charge her for all those trades.

[BP.]

Thank you, Harlan, for your reply. Confirms my thinking, but I always wondered if there were a less-nefarious reason behind this multiplicity of trades. This is a dear, sweet, retired woman, who also happens to live just a few doors away from me. I question whether I should do more to bring this situation into closer focus for her, or just let it ride.
Barbara

[BP.]

BP, my suggestion is don’t get between the investment rep and your client. Just charge her for all those trades.

Thank you, AZ-Tax. I am extremely loath to get in the middle of this, but as I posted, she's a neighbor, and I feel an extra duty to my neighbors. We gotta look out for one another, after all. Normally I would simply rack up charges for the Schedule D, but I try to give close neighbors a bit of a break. I'm inclined to continue to keep my lips zipped on this, but at least I know now.

[AZ-Tax]

You have a different situation with your client

My former client was not a neighbor and I rarely knew her. I see your concern but this sounds like a delicate situation. This is where having your securities license could help you convince her to discuss her investments with you.

[Jesse]

We have a Financial advisor in our area that seems to carry on with this same "trading policy" year after year. I cringe when I see this company's heading on the 1099B, and the gains that were seen once upon a time in the past didn't appear to me to be worth the trading of funds.

I feel even to charge for all the Schedule D entries and keep my mouth shut seems just as unethical as the person responsible for all this trading. I don't slam anyone but I do suggest to the client they should ask why all the constant trading? But they don't, I think they feel they will appear stupid to ask such a question to the advisor.

What I don't understand is if extra money is to be gained by the adviser's, where or how do they hide their commissions or fees so that the taxpayer doesn't seem or is so unaware?

[solomon]

It is called "churning the account." Regarding all of the Sch D entries, there should be two at the most - one long and one short - if any.

Use Form 8453 and check the D-1 box and attach a copy of and summary of the trades.

[BP.]

It is called "churning the account." Regarding all of the Sch D entries, there should be two at the most - one long and one short - if any.

Use Form 8453 and check the D-1 box and attach a copy of and summary of the trades.

Always appreciate your wisdom, Solomon. I wondered if this constituted churning, but wasn't sure. There's no summary total of L/S gains on the 1099-B, just individual transactions, as well as several wash sales in there, and separate documentation of the cost basis of the trades.

What I don't understand is if extra money is to be gained by the adviser's, where or how do they hide their commissions or fees so that the taxpayer doesn't seem or is so unaware?

Agree, Jesse, about the fee/commission situation. I've seen no documentation about fees. Maybe they are taken into account when the firm prepares the cost basis statement?

[JohnH]

I have one of these situations that still infuriates me - the financial advisor should be in jail. When the client came to me several years ago, I questioned the dozens of trades on her statements every year. Even in the good times, the trades would often produce losses. She trusted the advisor because her husband had always used him. I could see from the account activity alone that the adivisor was a snake. I'd show her how he was moving her around in proprietary funds and buying "B" shares in funds, but she still stuck with him even thbouh he was clearly churning her account. He continued doing it even when I convinced her to send him a letter telling him not to make any trades without consulting her first.

Eventually he got in trouble with some other clients and she joined in the lawusit, but as often happens the lawyers made most of the money and she got a few thousand in the settlement. We're still nursing a capital loss carryforward of well over $100K, which will probably outlive her.

[Burke]

I have dealt with several financial advisors who have numerous stock trades within the same family of mutual funds. At least one of these managers, when I questioned him about the number of trades, referred to "their computer analysis" which told them when to sell, etc. So I don't know how much intuitive reasoning any of them do -- if you plug in the client's own risk assessment, types of investments, etc I suppose this could generate a strategy of buys/sells. This is the same investment advisor who continually produced losses in his clients' account even in the boom years. One of them finally got it, and moved his money out. I had to be careful of criticising the advisor, and could not figure out why the client could not see it. He was not dumb. When I remarked then, "oh, you lost money last year," he said yes, but I trust what XXX is doing, so I left it alone. Mgrs get advisory fees quarterly based on values in the acct. I suppose many of their incomes are down now. Also when they decide to change their affiliation with one family of funds to another, everthing is liquidated, generating sales for tax purposes to the client, but it is just moved into another "family." The third thing is if you do enough of these advisors' clients' taxes, you can see most all of them are in the same things, whatever is "hot" at the moment, regardless of risk, age, wealth, etc.

[sea-tax]

I hope that some of you who deal with investments in your business can answer a question for me that has bugged me for years now.

Client has money invested with an investment firm. They are at least regionally known, as I see their ads on TV. Let's give them the fictitious name of "Jefferson Investments." Her money is invested in about 8 different mutual funds in the same fund family. We'll call it "Coin Funds." The different mutual funds are ones such as Energy Fund, Technology Fund, Health Fund, etc.

Client has someone from "Jefferson Investments" managing this money. The client doesn't initiate any trading. Every year she has at least a 3 page 1099-B with about 50-65 sales transactions, which are simply exchanges from one fund in the "Coin Funds" family to another fund. The transactions occur all throughout the year.

I've never seen any other situation like this one. I asked her years ago, but client doesn't know why these trades are happening. She doesn't even seem to care, this is just me wanting to know. She likes the manager, and trusts him. I wouldn't want to disrespect another professional, especially when this isn't my area of expertise.

But I can't help wondering every year just what's happening here? What possible good reasons are there for the constant exchanges among and between the funds? Thanks!

I am not sure what the advisor is trying to accomplish, as mutual funds are not generally sold and bought on a frequent basis . However with regards to the commissions or fees...
If the client is having the broker buy and sell or exchange in the same mutual fund family there is usually only one sales charge paid by the customer when they first bought the original fund. As long as one stays inside the same fund family no additional sales charges will be paid on the original investment no matter how many times you exchange or trade.
Now if the advisor is buying and selling between different fund companies this might be a churning situation. Your client should inquire and make sure that they are satisfied. Generally speaking mutual funds are a long term investment 2-5 years.

[Burke]

Agree, Jesse, about the fee/commission situation. I've seen no documentation about fees. Maybe they are taken into account when the firm prepares the cost basis statement?

Assuming they are mutual funds, they should be somewhere on the client's statements sent out by the advisors, maybe on the quarterly reports they send out or attached to them. You can always contact the investment advisor and get these for Sche A. Sometimes they are substantial. Large brokerage houses, like Wachovia Securities, Raymond James, etc. print them on their "enhanced 1099" statements sent to the client. If I don't have them, I either call or email the broker to send me the figures. If they are deducted from IRA accounts, you might not see them, but they are not deductible either. I always get them anyway, to see if it would benefit the client to pay them directly out of taxed monies and take the deduction. If they are individual stocks, the commissions are reflected in the buy/sell price of the stock and you do not have to do anything. However, even the big brokerages have management accounts these days with quarterly fees.

[Gretel]

Barbara, I agree with you, we have to watch out for each other. We also have to step back if our friend, neighbor etc. doesn't want to hear anything about it. That's one of the hardest things to do.

I would point out the client what is happening and would suggest to get a second opinion from another investment adviser.

[BP.]

So very appreciative of all the responses. Interestingly, bottom line is, no one's come up with a plausible reason why it is truly in the client's best interest to run their account this way. You are so right, Gretel. If the person's not trying to hear what I'm saying, it is usually best to step back. The info on possibly no fees if in the same fund family (and they are) is at least encouraging.