Monday, December 16, 2013

Don’t unwittingly let your investments become dormant

Every year in the financial services industry, there seems to be additional scrutiny and new regulations that ultimately lead to filling out more forms.

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 regulations.

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.

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