year in the financial services industry, there seems to be additional
scrutiny and new regulations that ultimately lead to filling out more
Although consumer protection and disclosure is an admirable goal, at the
end of the day bad apples in any field will find a way to bypass
Even though Bernie Madoff, the poster child for financial criminals, is
sitting behind bars, Ponzi schemes and other improper financial
transactions continue to occur on a much too frequent basis.
The vast majority of financial advisors do their very best to juggle the
overload of rules and regulations, while at the same time doing
everything they can each and every day to maximize client returns. Part
of the responsibility of a financial advisor is to regularly review a
client’s investment portfolio.
For years, financial advisors have been warned against “churning” their
clients’ accounts. Recently, a client who meets with me on a frequent
basis received a letter warning him that his dormant mutual fund account
would soon be turned over to the state due to a lack of activity.
For some reason, a documented meeting with your financial advisor is not
considered activity. To my way of thinking, this situation is the total
opposite of churning. My client owns a mutual fund that has done
nothing but make him a lot of money over the last few years. In our
reviews, we both concluded that the best action was no action. But, in
this case, inactivity led to a red flag.
I subsequently contacted both the mutual fund firm and the state of
Michigan. The fund company sent me a letter that stated “Michigan
requires mutual fund companies to have evidence of contact with their
shareholders at least every three years. The statute requires that
contact must be initiated by the shareholder rather than by the mutual
fund company. If the shareholder-initiated contact cannot be
demonstrated over this time period, we may be required to transfer your
mutual fund assets to the state as abandoned or unclaimed property.”
I was taken aback that automatic programs such as dividend reinvestment are not considered activity.
When I called Lansing for clarification, I was pleasantly surprised by
the kindness and professionalism. I can confidently say the state is not
out trying to gather wealth. Rather, the intent is to protect consumers
and their families. As the state explained, the dormancy period had
been recently reduced from five to three years.
What’s more, the dormancy rule not only applies to mutual funds, but
brokerage and bank accounts as well. Michigan simply wants to be certain
that, in the event of death, the financial institution continues to
hold the investment and that it ultimately gets to its rightful owners
or their heirs.
Unfortunately, I can envision a scenario where the state steps in with
good intentions and closes out a client’s account or cashes in an entire
IRA, thereby triggering a large, untimely tax.
I want my readers to be aware that this can happen. Read your mail
carefully, and if you receive a warning letter, immediately contact your
financial advisor and take action to prevent an unwanted sale. In my
humble opinion, this is one well-intentioned rule that needs some
tweaking and input from financial advisors.
If you are past the age of 70, you need to be familiar with the phrase
“required minimum distributions.” What it means is that people over the
age of 70 1/2 must withdraw a specified percentage of money out of their
qualified investments, which, of course, refers to IRA, 401(k) and
Qualified dollars are those monies that have been growing tax-deferred
since the day of their deposit. Over a period of time, that could add up
to a significant pile of cash. But when you reach 70 1/2, the free ride
is over and Uncle Sam mandates that you must begin pulling the money
out and start paying income tax on it.
Naturally, the rules are overly complex. But the penalty for
non-compliance is as easy to understand as it is hard to take: A hefty
50 percent! Because of this severe penalty, my firm and other financial
firms throughout the nation go to great lengths to make certain our
clients are in compliance.
Overall, the tax code seems like it’s becoming more complex each and
every year. In addition to the required minimum distributions, the
Affordable Care Act will soon be adding more complexity to the tax code.
It’s not just the tax code that’s becoming increasingly complex. The
entire world of investing seems to be getting more complicated with each
Meanwhile, regardless of age, investors are receiving multiple mailings
and disclosures on virtually every investment in their portfolio.
Clearly, we’ve gone from a society seeking information to a society with
an overload of information. I think it’s safe to say that trying to
keep on top of all the necessary tax and investment data is a real
So, let’s talk about simplification. First off, I think it’s an
admirable goal, and as year-end approaches along with all its attendant
statements, now is an opportune time to start simplifying your life for
By simplifying, I don’t mean to reduce or eliminate your investment
diversification. For example, if you have ten IRA’s with ten different
investment firms, you’re receiving ten reports and paying ten
administrative fees. If you’re over 70 1/2, that’s an awful lot of
calculating that needs to be done in order to make certain you’re in
compliance with Uncle Sam.
A reasonable goal in 2014, then, would be to simplify. In all
likelihood, you could consolidate those ten IRA’s into one or two. Your
custodial fees would very likely be reduced, maybe even eliminated.
With the proper custodian, you can continue to diversify among several
asset classes and, more important, dramatically reduce the volume of
reports and tax forms in the years ahead.
My experience is that, once clients get deeper and deeper into their
retirement years, they like simplified reports and minimal paperwork. A
number of our clients actually have their mandatory distributions set up
to be automatic each and every year.
That’s another smart way of keeping their investment world as simple as
possible without sacrificing the integrity of their investment
objectives. And that’s an objective for which we all should strive.
Will you be able to simplify and consolidate your financial world in
2014? I certainly hope so. But if you’re really serious about it, the
time to start planning is now.
The turmoil over the rollout of the new health care law and the higher
premiums many are paying has dominated the domestic news lately. But
there’s another change about to occur that could also impact your
pocketbook, and I don’t believe it’s getting enough coverage.
Ben Bernanke, our nation’s Federal Reserve Chairman, will soon step
aside and be replaced by Janet Yellen, the first-ever woman to hold the
Congress created the Federal Reserve in 1913. But in 1977, Congress
amended the Federal Reserve Act and established what is known as the
dual mandate, which tasks the Fed to maintain price stability and full
Most experts agree that Chairperson Yellen will continue the policies
of her predecessor, which means we can expect continued low interest
rates throughout the economy.
As a financial advisor, I’m certainly concerned about our ballooning
national debt. But I’m equally concerned about another frightening
economic trend. Income inequality.
Over the past few years, I can’t tell you how many times my retired
clients have expressed a concern that their adult children and
grandchildren will never be as financially comfortable as they are.
Unfortunately, I see very little that would incline me to disagree with that likelihood.
During her confirmation hearing, Yellen stated, “It’s not a new
problem, it’s a problem that really goes back to the 1980s, in which we
have seen a huge rise in income inequality.”
She believes there are many causes for the inequality, including
technology, globalization, and the decline of unions. Clearly, there is a
problem, just as there is with health care. And, as with health care
issues, fixing the income inequality problem will take a great deal of
Every suggested fix seems to have a legitimate counter argument. For
example, increasing the minimum wage has been proposed. Some experts
contend, however, doing that could actually increase unemployment.
Another popular suggestion for leveling the playing field would be to
raise taxes on the top wage earners. The counter argument is that
increased taxes would substantially reduce spending by the wealthy. Less
spending would result in an economic slowdown and still more
In short, Chairperson Yellen is going to have a challenging job.
She’ll have to deal with politicians who hold conflicting political and
economic views. Her suggested solutions include a “multitude of things,
including education, maybe early childhood education, job training and
She noted that the Federal Reserve cannot change all these problems but
her goal is to “try to bring about a strong economic recovery that
creates jobs and gives people more opportunities to rise up the ladder”.
Think of the Federal Reserve Chairperson as the one steering the boat.
The problem is, she doesn’t set the course. That’s in the hands of
politicians who have proven to be poor stewards of our dollars.
There’s no question in my mind that Janet Yellen has inherited a
difficult situation. There will be many challenges. Let's hope she can
close the income gap by helping people up the economic ladder rather
than by making everyone poor by pushing us down the ladder.
To get up that ladder, we’ll need an economy much stronger than we’ve
seen in many years. If politicians would allow economics to trump
politics, I’m confident the economy would take off like a rocket.