I Must Be the Dumbest Financial Person on the Planet

[JohnH]

This aggravation I'm dealing with today has to indicate how little I understand about high finance. Working on one of those returns I extended because the client has so many pages form their financial adviser. I simply cannot understand why a financial adviser takes about $250K and in the span of two years invests it in such a way that the client gets a 38-page statement and a second 14-page statement from the same company. The 39-page statement contains 3 1099-Divs, 3 1099-Int's, and a 1099-B which reports cycling money from one set of funds into another with a slightly different name. Plus there are two other independent 1099-Divs, not to mention the obligatory K-1 from a Limited Partnership, with a measley $5K invested and 7 line items ($17, $160, -$60, $2, $350, $14, and $17). It costs the client more in fees to enter all this stuff on the return than they are earning. And should I mention the tiny amount invested in a trust that invests in collectibles, a SPDR Gold trust, and all the mutual funds are the most expensive "A" shares? (I'm sure the choice of "A" shares has absolutely nothing to do with the fact that the sales charge comes off the top.)

I don't want to throw around the "churning" accusation too quickly, but that's where my mind goes when I see this sort of thing. So what is it I'm missing? The financial adviser claims he's diversifying, but the client could get the same diversification by putting the equity portions of their investment into the Total Stock Market Index, paying a fraction of the management overhead this guy is raking off.

I can only conclude that this whole process is designed to keep the client confused & off balance, while making it too cumbersome for an outsider to try and explain. It's all smoke and mirrors as far as I'm concerned. As I said at the beginning, this rant must just be because I'm not sophisticated enough to understand all this high finance. Put me down as one of the dumb ones.

[Burke]

I see this too, mostly with institutional investment firms, i.e, the big boys, and large banks' investment arms. I have an elderly (90 yrs old) client who turned his money over to one of them and he has 3 different accounts, one of which has a different beneficiary, so I understand the reason for that one. However, the other two are invested in myriad mutual funds (theirs, of course) divided between 2 accts. The reason? "Different investment goals," according to them. Really? He's 90! The only investment goal he should have is preservation of capital for possible long-term care needs. He has no family. I suppose it is a mixed blessing; he certainly should not be managing his own money at this point.

[WhiteOleander]

I actually laughed out loud reading these posts. We have had the exact same conversations in our office. And if we try to tactfully tell the client about what might be going on.....Well, they act like you said they have a ugly dog or something!!!!!

[ATSMAN]

I have a few clients who have these type of discretionary investment accounts with name brand brokerage houses and I too see the same high level of transactions that hardly make any profit for the investor but a lot of trade fees for the broker. On top of that they are paying an asset management fee anywhere between 1 and 2 percent.

My father in law had such an account, until I weaned him out of that and had him trade via Scottrade.

[JohnH]

Looks like I'm in good company, or else we're all a bunch of dunces.

[BOB W]

Yup, I've lost clients for bringing up this "churning" problem. One was showing only profit sales and leaving the losses unsold. They thought the broker was doing great for them, 'look at the profits he is getting for me".The total value in the portfolio was going down by 5,000 a month. Boyfriend was helping girlfriend handle investments with a broker he found or knew and became defensive in what I exposed. Never saw the client or boyfriend again.

Now I just say, "keep an eye on the total value of your portfolio with a monthly review of your statements". They say " is there something wrong?" I say, not that I know of but you should keep track of your investment value just to make sure all is going in the right direction, up. Some come back to me and say thanks I got rid of the broker. I still have the clients that I told it to.

[FEDUKE404]

Happens all the time

I had a client in the past with such an account. Stock transactions within one year were well within the 7-digit range, whereas the net gain from such was less than $5k. Heck, a good savings account would generate more income! Of course, the "response" was there were no transactions costs (for all those trades), but the 2% asset based fee for the privilege of such "free" trades was a bit steep. That line entry alone would have justified the filing of a Schedule A.

Another client was well into his 80's and had a reasonable (but far from huge) investment account. The first year I did his taxes I was looking at various K-1s (PTPs no less) and what looked like a fair amount of churning. My fees had to be high just to deal with the paperwork. Once he realized what was going on (along with some help from his daughter who is also a client) he came to his senses and moved his assets elsewhere. (And rumor has it he -- WWII veteran -- gave a serious tongue-lashing to his prior investment "advisor" !!)

Yeah, PT Barnum was indeed correct!!

FE

[Kram BergGold]

PTPs and Tax Prep

As a reuslt of this post I am going to put a note in my annual Newsletter telling client's to mention to their financial advisors that investing less than 10,000 in a PTP most likely makes no sense due to the costs associated with tax prep.

[ChEAr$]

What I do every year for a Merrill Lynch client is to calculate her return.

compute an average of beginning and ending balance is the account, and that is the approximate amount invested throughout the year.

Add up the interest, dividends and net capital gains (doesn't matter whether long or short term),and subtract the investment fees. Then and divide that total by the average investment to get ROI (return on investment.

It's easy, down and dirty and simple.

At that point I also usually allude to what my own ROI was last year investing solely in mutual funds.

Now there must be somewhere on this big old world wide web something we can print about churning for clients to read. Need to look for it.

[appelman]

I can go you all one better.

As a reuslt of this post I am going to put a note in my annual Newsletter telling client's to mention to their financial advisors that investing less than 10,000 in a PTP most likely makes no sense due to the costs associated with tax prep.

I have always considered Wells Fargo Advisors to generate the 1099's from hell. I once had occasion to request a wage and income transcript for someone who had an account with them. It was too big to be delivered on line -- I had to retrieve it from the secure repository. What WF had done was issue a separate 1099-B for each of hundreds of microtransactions. No one could possibly have gone through all that in detail. My feeling was that it constituted a denial-of-service attack on the IRS,

[taxmandan]

Yep, these brokers are unbelievable in their chicanery. Be aware that state law may require you to report possible churning of elderly folks to the state consumer protection bureau. Our state requires tax professionals and others who have knowledge of possible financial abuse to report it. I did that once and the investigator contacted me and said it helped them save that person thousands of $$ in inappropriate fees.

[ChEAr$]

Churning

A concise explanation for clients: cut and paste from Wikipedia:

http://en.wikipedia.org/wiki/Churning_%28finance%29

Here is the law, a la SEC with handy way to report it:

http://www.sec.gov/answers/churning.htm

The simplest indication of whether there is churning I think would be calculating a ratio. Here is such a formula courtesy of www.Seclaw.com:


"To determine whether the trading is excessive in light of the goals of the account, the most often used analysis is the calculation of a "turnover ratio". A turnover ratio is the total amount of purchases made in the account, divided by the average monthly equity in the account. That ratio is then annualized (by dividing the result by the number of months involved to get a per month ratio, and then multiplying that result by 12). An annualized turnover ratio of 6, which means that the equity in the account was invested 6 times in a year, can be indicative of excessive trading in the typical customer account. However, in a day trader's account or in a heavily margined account, a ratio of 6 is meaningless. "

Our seniors deserve better from trusted financial advisers.

[BOB W]

I like the last line about "Reverse Churning". I never considered that issue.

[JohnH]

As a reuslt of this post I am going to put a note in my annual Newsletter telling client's to mention to their financial advisors that investing less than 10,000 in a PTP most likely makes no sense due to the costs associated with tax prep.

But how are you going to explain to your clients that you got the idea from the dumbest financial guy on the planet?

[buzzardbreath]

Common Denominator

I've got 6-8 clients like the ones described. They all have one thing in common.

At some point in the past they have given their stockbroker a "green light" to invest their money as the broker sees fit. One elderly woman had a 1099-B with 700 transactions, ALL of them trading mutual funds, and a healthy portfolio fee for this "personal service".

If she thinks her broker made all of these transactions "just for her" they musta dribbled her down the hospital floor when she was a bouncing baby. All of these transactions were mandated by the folks upstairs at the brokerage firm and filtered down pro-ratum to each sucker [investor] and purporting to do all this for the sake of the investor.

I compress statements on the Sch D/8948, e-file, then mail in the statements on a transmittal. And I charge an arm and a leg, advising them of their folly and move on.

"The rich man writes the book of law, the poor man must defend
But the highest laws are written on the hearts of honest men" - George M Green