It’s a wonderful time of year, I’ve seen the sun more than once this week. Flowers are beginning to bloom and taxes are due…. well, maybe that’s not that great for some. As tax day approaches we’ve been getting calls regarding how the investments we use are taxed. During those calls, we’ve heard some interesting stories of how other advisors are taxing their clients financially and emotionally.
Well intentioned, but inexperienced advisors can wreak havoc on their clients this time of year. In an effort to help clients, some advisors create massive messes that have to be cleaned up by accountants and paid for by clients. A little like a young child who tries to help a parent in the kitchen. Good in theory, but not without keeping a close eye on them.
Recently, a client told us of an advisor who had invested her funds in eleven mutual funds. The client wanted a distribution every month, so the advisor would sell multiple mutual funds to generate the cash, again every month. Every sale created excessive paperwork for her accountant that resulted in an unnecessary five-hour tax prep bill!!! She will not be awarded advisor of the month. But that’s not the worst story we’ve heard.
Another client came to us after an advisor recommended she sell all her US Bank stock to buy an annuity (that’s one strike, we hate annuities). Seemed like a good idea to the client, after all diversification is great, right? Unfortunately, the sale of the US Bank stock generated a $50,000 surprise tax bill!!! That’s strike two and three!
I shouldn’t just tell on others, we occasionally do things that create stress for our clients too. Many clients will recognize the K-1 as something accountants don’t care for, but we believe the generous distributions generated are in the best interest of our clients.
Speaking for all investment people, we advisors occasionally get tunnel vision and focus on making as much money as we can for our clients while not paying as much attention to the tax side. The two cannot be separated though. After all, what good is a 10% return if you have to give it all back in taxes? We must continue to communicate with our clients’ accountants and try to minimize tax bills or at least prepare our clients for larger tax, or accountant’s bill, if we think one’s coming. After fourteen years we’re getting better at this, but we’re not perfect yet.
Not tax related, but investment focused, we are purchasing a conservative Barclays Bank bond-like note paying 2.4% per year while we wait for the inevitable pullback in the stock market. As soon as that happens, we’d like to buy the stock National Grid NGG, a British utility company paying (and growing) a 5% dividend in the income portfolio. For the growth portfolio, we’re looking to buy QuintilesIMS Q, a pharmaceutical related company that outsources clinical trials and manages pharmaceutical sales data. Morningstar says fair value on this company is $88/ share and it’s currently 10% below that.
Thanks for taking the time to read. Please call us with tax or any other questions you’d like to discuss.
-Tim Porter, CFP®