Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
Feb 11


by Dick Schlote

As a volunteer tax preparer for the AARP, I often review tax statements from many different brokers and investment companies. The Income Tax preparation process always seems to identify examples of the value of working with a trusted investment advisor.  Here are some examples from my experiences as a volunteer tax preparer for AARP from 2013 and 2014.

Cleo, a widowed tax client, called me last fall to tell me that her broker had retired and a new guy was taking over her accounts.  Cleo said that her deceased husband had been with that broker for many years and liked them.  She really didn’t know how her accounts were invested but her account did “quite well.”  (In 2013 nearly everyone in the equity markets did “quite well”, a relative term)  As I do her taxes this year it will become evident what her new broker has done with her account, especially if the sale of securities create a taxable event, probably to her surprise.  One of our Rockbridge practices is that we have at least two investment advisors who are familiar with each client, and their accounts, and are available if the primary contact is not.

This is similar to the broker moving from one firm to another and taking the account with them.  Most investors don’t realize how this will impact their accounts.  The broker typically sells the invested securities and replaces them with new, at the expense of the client in the form of sales charges, new redemption periods, or unexpected taxable income.  Most brokers’ income is derived from commissions on buy and sell transactions, so their objective is to buy or sell.  A fee only investment advisor like Rockbridge Investments has nothing to gain from the purchase or sale of securities, so would review the value and implications of changing securities with the client before acting.

One tax client in 2013 had sold all of his stocks and brought the Form 1099 showing the transactions which amounted to over $120,000.  His broker either didn’t advise him, didn’t know, or was more interested in the commissions on the sale, but his taxable capital gain on the sale of these stocks, held by him over many years, was over $25,000.  He was incensed that his income tax was so high, both state and federal.  He kept insisting that the money was his, that he should be able to keep it.  It was his, though the IRS wanted their share.  This is the kind of thing one would talk over with their investment advisor before selling everything.

My daughter called me recently to ask about a friend whose accountant told her to take her 401k plan with a former employer and roll it over into an IRA with an associate of his.  Accountants are in a great position to know about their client’s investments, but they are not investment advisors.  I told her that I didn’t know the employer, or the 401k investment options, or the competency, stability, or reputation of the “associate” and that her friend should know all of those things, and more, before making any distribution of her 401k monies.

Every year we get tax clients with distributions from several mutual funds or custodians, Franklin Funds, Fidelity, American Funds, T Rowe Price, Prudential, Met Life, Schwab, Vanguard, to name a few.  When I ask them how their investments performed last year, they typically say “pretty good”, or “not too good”, not really able to have a good idea of their results.  With investments scattered all over the place, one really never knows how they performed compared to relevant market benchmarks.  Our advice is to consolidate wherever possible.   The investor in the family may know what he or she has, but your spouse will never be able to figure it out when the time comes.

Last year one tax client brought his forms in for preparation, including his previous year’s return.  I noted an IRA distribution in 2011 from one custodian but none in 2012.  There was, however, a statement showing a considerable balance in that account.  It was the only IRA owned by this individual, age 74 and making required minimum distributions.  The penalty for not making the minimum distribution when required is half of what the distribution should have been.  We called his local broker who told us the broker on that account had left the firm.  Their response was “Sorry, the client should have told us to make the distribution.”  This would never happen at Rockbridge Investments where we review all client accounts and contact them during the year for distribution discussions.

Communication between the client and the advisor, and between advisors is important for the proper management of the clients’ investments.  Rockbridge has in place a unique system for recording and sharing internally important client information needed to manage the investments.

The Rockbridge Investment Management team is familiar with income tax implications of client transactions, and often discusses such with clients on their request.  However, tax preparation for clients is not practiced as a part of our fee-only investment advisor service.

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