Don’t unwittingly let your investments become dormant
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.