April 6, 2015


Why Do I Need An Advisor?

I’ll tell you a few reasons why, and how, an advisor might save you more than you will ever pay in account management fees.  Income tax time exposes some of the costly mistakes of investors, especially those who decide that they can manage their own investments.

I have heard this for years:  “I can do the same thing you guys do with my money, and save money on the annual fees.”  I agree that one may be able to decide what to invest in, what amount of risk to take, invest in the same products, and rebalance his/her accounts regularly.  Then I add, “but you won’t!”, and there are other less obvious reasons to take advantage of an investment advisor.

Here are a couple simple real life examples, understood by just about everyone who has investments or IRA/pension accounts:

Vince brought his documents to have his taxes prepared, generally a simple return with some pension, dividends, interest, and Social Security.  As I entered his data from 1099 forms, I noticed a large one-time distribution of over $30,000 from his IRA, not unusual in itself, but I noticed no federal or state withholding.  Upon completion of the return I asked Vince about it and he said he took it all out for improvements to his house.

I then told him to his surprise that it was all taxable income, and that his federal tax liability is $6,400 and his state tax liability is $600.  In previous years he would get a small refund.  In Vince’s case not only was his taxable income increased by $30,000, but this additional income was enough to make about $13,000 of his Social Security taxable income.  Vince manages his own accounts, had an IRA and lots of telephone stock from years of payroll deductions with the phone company.

Now he has to come up with an extra $7,000 to pay his taxes, or file for installment payments of roughly $90 monthly for six years.  Plus, he has to deal with NY State IRS about payments.  He and I agreed to hold the return until the next week so he would have some time to think about how to handle the situation.  The next week he came back and told me he would pay the whole thing by April 15 of this year. I asked where the money was coming from, and he said he had sold all of his stock holdings, worth much more than the $7,000 he currently owes IRS.

Now he has created a few more problems for himself:  He has created a very large capital gain for himself for 2015.  This extra income will, no doubt, make his Social Security taxable again this year, and he will have a large amount of cash on hand that should be invested.

What should he have done?  He should have talked with his financial advisor/consultant about his need for cash to make his home improvements.  By taking the money out over 2 or 3 years, or getting a home equity loan, or selling some (not all) of his stocks, he would have been in a lower tax bracket, possibly paying no NY State taxes, and kept his equity investments in place.  It is the kind of financial discussion one should have with an investment advisor before making a rash decision.

At Rockbridge , we feel that this kind of support and assistance is what the investor client should expect.

Sharon, age 72, came to the tax preparation session fully expecting that she would not need to file a return this year because her income was too low.  I looked at her documents and agreed that she need not file a return.  As we talked I inquired about any pension, because she had no document from a custodian or company.  She said that she didn’t need any extra money last year, and that she remembers some letter in the fall but ignored it.  I suspect the letter was from a custodian telling her that a required minimum distribution (RMD) from her IRA was due because she was over 70 ½.  The custodian is required to notify the client, but is not required to make a distribution because the client may have already satisfied the minimum distribution from another IRA account.

Since Sharon had thrown the letter away, I suggested that she contact the custodian to see what she should have taken in 2014.  The penalty for not taking the minimum distribution is 50% of the distribution.  This penalty is applied regardless of the tax liability or lack of it on the tax return.

At Rockbridge we talk with every client who has an RMD and make sure they understand the amount, the payment method, and the withholding options.

One might ask why I didn’t do more to help these people.  In my role as a voluntary tax preparer for AARP I am precluded from acting as a consultant or advisor to those for whom I prepare taxes, and may not hold myself out as an investment advisor, nor solicit business for my firm.  In these cases I talk with the client about the situations and suggest the actions that I think they could take in their best interests.  It is their tax return that I prepare and file for them.

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