I Must Be the Dumbest Financial Person on the Planet

[ATSMAN]

This could be a legal trap!

I stay away from discussing/reviewing with my client their investment portfolio etc., and just concern myself with the tax issues, 1099-B, 1099-Div, 1099-Int, K1 etc.

The reason is that if I get into an indepth discussion with a client about the portfolio and it leads them to doing some consolidation or selling based on my views and that causes undesirable effects I could be exposed to a lawsuit because a court may find that I engaged in investment advice and I am not a RIA or a stock broker and do not possess any securities licenses.

Believe me I have been asked countless times to review their brokerage statements and give my opinion.

[DonPriebe]

Kill a tree for diversity

At one point I had a number of accounts with one of the big investment houses (regular taxable, Roth IRA, spouse IRA, etc.) A rep called me on the phone and invited me in to discuss my overall strategy and possible consolidations. Since I was 500 miles from his office, I declined his fine invitation. He then offered to do the analysis and send me his recommendations by mail. It would probably take a week or two. Sure - why not!

The next morning I received his recommendations by overnight mail. He had "analyzed" ONE of my accounts (a small Roth IRA) and split it up into over 100 mutual funds, none of which had over $1,000 allocated to it. That afternoon I received a large cardboard box with the printed prospectuses (prospecti?) for all the funds. He seemed upset that I did not go with his plan after all his hard work for me.

[In fairness, a different rep from the same company called me sometime later and we both had a good laugh about this. My new rep calls about every six months and gives me advice when I ask for it.]

[taxxcpa]

Even the fee-only advisors can take a pretty steep cut from the client's portfolio. If you compare dividends, interest, and capital gains/losses (realized or unrealized) to the fee you will usually find that the advisor's fees exceed the results he achieved for the client. Also, it is highly likely that the results are negative.
I had one client whose $1 million + is down to less than my own somewhat-less-than-Warren Buffet's portfolio.

[appelman]

From Wikipedia:

Frequent trading in fee-based accounts is not an example of churning, since no commissions are generated in those transactions. However, the practice of putting clients who trade infrequently into a fee-based brokerage account is known as "reverse churning", since clients are charged fees in accounts with few if any transactions.[1]

[1] http://nysbar.com/blogs/SecuritiesLi...t_w_baird.html

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

[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

[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?

[BOB W]

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

[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.

[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.

[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,

[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.

[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.

[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

[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.

[JohnH]

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