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.

Making life simpler in a complex financial world

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 403(b) accounts.

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 passing year.

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 challenge.

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 2014.

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.

Will Janet Yellen be good to your children?

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 office.

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 employment.

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 effort.

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 unemployment.

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 other things.”

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.