Monday, March 08, 2010

Divorced in 09? Here are Some Helpful Tax Hints

Many times we are very confused how to file our taxes for the year in which we were divorced. It can be complicated and here are a few tips that may help you.

I received a question from a woman who had divorced in 2009, and she was concerned about having to file taxes with her ex-spouse for her 2009 tax return. Fortunately, the law provides a solution: it simply says that exes cannot file together.

There is one important date to always bear in mind and that is Dec. 31. If you are married as of that date you may file as 'married filing jointly,' 'married filing separately,' and under some circumstances as head of household, for that tax year.

If you were divorced as of Dec. 31 then you can file as single or head of household for that tax year.

Head of household requires that you have a qualifying individual living with you for at least 183 days of that tax year. It is important to note that head of household status is not conferred upon you by the divorce decree or judicial order but by the requirements as outlined in the Internal Revenue Code.

You may have a dependency exemption for any children and those can be allocated in the divorce decree. Often the divorce decree will call for each parent to claim the deduction on alternating years. If you are not the custodial parent then you will be required to file form 8322 which is titled Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. (Thank goodness for form numbers.)

You may claim a child provided they are under 19, or 24 if a full time student, for at least five months of the year and they do not provide more than half their own support. If the child is permanently and totally disabled there is no age limit.

The child must be younger than the taxpayer and spouse in the event of a 'married filing jointly' return. Keep that in mind should you decide to marry someone much younger than yourself!

Money that you receive as child support is not a taxable event. The recipient does not declare it and the payer cannot claim it as a deduction. Alimony on the other hand is taxable to the recipient and is a tax deduction for the payer. The amount of alimony received goes on line 11 of form 1040 and the amount of alimony paid goes on line 31. Alimony is a component of adjusted gross income, a number that is used to determine many entitlements.

Beware of what I call 'hidden alimony.' One example may be the premiums the ex-spouse paid on court ordered life insurance for your benefit. Also certain expenses paid for housing that were not in his name, such as property taxes on a house that was not in his name or was in both names with rights of survivorship.

One question that I am often asked is, "To what extent can I deduct legal fees and other costs incurred with my divorce?" The answer is that legal fees for the divorce itself are not deductible however legal fees post divorce may be if they are paid for services rendered in an attempt to recoup taxable income. In other words if you had to go to court because your ex did not pay alimony for three months, those legal fees may be deducted on schedule A, miscellaneous itemized deductions subject to the 2% floor of AGI. If you retain a financial planner to do projections for you on a possible settlement, then that money may be a deduction as well, again subject to the 2% floor on AGI. For those who wonder what that means here is a clear example. Your adjusted gross income is $100,000 and therefore the first $2,000 of deductible miscellaneous expenses is for your own account. If you paid a financial planner $2,000 and a lawyer qualifying expenses of $2,000 then only $2,000 would be deductible although each expense has to be claimed.

The non custodial parent may claim a child tax credit in the years that they are entitled to claim the dependency exemption provided all other conditions are met.

If you changed your name after the divorce, you should notify the Social Security Administration and file a form SS-5. This will prevent possible delays since the name on the tax return will not match the Social Security number of the flier. It will definitely create a delay in e-filing a return.

If you are not used to filing your own taxes you may wish to use a professional and plan to spend some additional time going over all the facts.

© 2010

Thursday, January 21, 2010

Financial Designations are Not Really as Simple As ABC!

There are way too many designations that financial advisers use and none of them are statutory.

A few months ago during a discussion of financial credentials it was pointed out that the public is somewhat confused by what all the acronyms mean. That was music to my ears because I cannot think of one other industry that has created so many initials to place after someone’s name on their business card. For other professions, it was simply Marcus Welby, MD, and everyone understood that he was a doctor. If Perry Mason had a business card it would have simply said Attorney at Law or perhaps Perry Mason J.D.

I was challenged to put together a list that might be educational but does not reflect strongly my own opinion that there are way too many organizations selling initials.

In the world of investment advice and financial planning there are certain registrations that are, by law, required to be held. No designations are required.

The first is Registered Investment Advisor, which means that the person has registered with their state or with the SEC as an investment adviser. The body with which they register is determined by the amount of assets that they are managing. Currently if you have less than $25 million you register with the states. If you have more you register with the Securities and Exchanges Commission. Registered Investment Advisors are governed by the Investment Advisers Act of 1940 and it provides for the disclosure and the fiduciary relationship that everyone is all abuzz about. The person or firm provides investment advice for a fee. A Registered Investment Advisor cannot use the abbreviations RIA on their cards or letterhead.

Along a similar path comes the Registered Representative or Stockbroker. They are authorized to sell securities for a commission and must have either a limited Series 6, which allows for the sale of mutual funds, or the more encompassing Series 7, which allows for the sale of funds and general securities. They are granted and regulated through FINRA. Registered Representatives are not allowed to refer to themselves as financial planners.

Those registrations are at the top of the food chain and allow for the provision of advice for a fee, management of securities for a fee or the sale of securities for a commission.

The next set of initials that the public seems to be enamored with is the CPA or Certified Public Account. This is a licensed profession regulated by each state. While many people think a CPA is an expert in taxation, the truth is that the CPA license is required in order to attest to the accuracy of financial statements. No small or insignificant task considering the ENRONs, World Coms and Madoffs that we have seen this past decade.

Many CPAs also have added the initials PFS after their CPA designation. Personal Financial Specialist means they have completed additional studies dealing with personal finance as opposed to corporate issues. However, the addition of those three letters does not afford them any legal right to call themselves financial planners.

Next we have the CFP® designation which is the Certified Financial Planner™ mark owned and franchised by the Certified Financial Planner Board of Standards. They do require that current applicants have completed an educational track of five approved courses, have a college degree, pass a comprehensive examination and submit to both a background check and adhere to a code of ethics. However, the holder of a CFP does not have any legal right to call themselves a financial planner.

In fact depending who they work for a CFP may use the designation but may not be allowed to refer to themselves as a financial planner. That one statement speaks volumes about the sad state of the financial industry.

Along the lines of the CFP mark is the Chartered Financial Consultant® designation, which is awarded by the American College in Bryn Mawr, PA. The college is nearly 100 years old and has curriculum for numerous designations. The requirements of the ChFC are completion of an educational track and passing of a comprehensive examination. Holders of the ChFC must also undertake continuing education requirements biennially.

Read more about the CFP mark and ChFC here.

The CFA Institute issues a designation called the Chartered Financial Analyst or CFA. The requirements to obtain that involve passing three difficult exams, each exam given annually. The holders receive an excellent knowledge of the investment arena and many of the products used. While the CFA is a wonderful designation I truly question its usefulness to the consumer who is seeking financial planning advice and not portfolio management. The CFA curriculum devotes very little time to personal finance.

You will find that there are numerous other designations out there all created to fill a niche. The vast majority are ones that require little study and are often granted over a weekend. I question their value and in fact I have had one or two of them in the past and allowed them to lapse. It seems that as a subject becomes “hot” a designation is created and the real beneficiaries are the creating organizations.

I have provided the registrations required to deal in securities, either for a fee or commission as well as the three most common designations that people associate with financial planning. None of them are required by law to provide financial planning advice.

The public needs to be wary of the designation craze and seek the individuals that are legally empowered to provide either advice or sale.

Thursday, October 22, 2009

Find a Cause and Get Involved!

Too many people accept the status quo and say thank you and then complain as opposed to getting off their keesters and doing something about it. Being a baby boomer I know that movements of the 60s and 70s did bring change.

Last weekend I attended the second memorial service for a person that I was proud to know and be friends with. There were so many local dignitaries in attendance that I commented to an aide from a Congressman’s office that this is as close to royalty as I’ll get.

What made this person so loved and respected? It wasn’t wealth; she was comfortable but cautious with her spending. It wasn’t what we would call fame; she had published a number of cookbooks but that wasn’t why people paid their respects.

She was a person who simply cared about her community, whether it be her street, city or her country. She was an involved person! Some might even call her an activist or community organizer. She wanted the world to be a better place and she did her share.

I look back at the last 40 years or so and realize that America now is much different than it was then. Or is it? We were involved in an unpopular war then and now, well we have been in Iraq and Afghanistan for 8 years which is longer than we were involved in Viet Nam. What we don’t have today is the sense of outrage that was more pronounced in the sixties and seventies. There have been major improvements in Civil Rights and yet it seems that we will always have a group that is discriminated against. Poverty is perhaps less pronounced but affecting more people. Spending on social programs and defense programs were large then and they are enormous now.

There is a distinct lack of public outrage now as compared to then. Perhaps the internet has provided a forum for people to voice displeasure but I haven’t heard the news anchors discussing web traffic too much.

My friend demonstrated commitment to concerns four decades ago though becoming a leader in the community for the causes she believed in. She would volunteer realizing that no job too insignificant for something that was needed; something that should be changed. She supported politicians who were Democrats but admired those who supported the other party for that meant that people cared. She organized fund raisers and open houses where political leaders could come and meet with constituents.

She was from New York City who moved to the suburbs in the 50’s. She became a supporter of Open Spaces in an urban setting. When she said that green was among her favorite colors it signaled the green of grass, not money; blue referred to the skies. She wanted a nice environment for all.

She would work tirelessly for causes she supported and that seems something that today’s people are shying away from. It truly is sad because while I was listening to the accolades being presented I could only think of a voice saying “Don’t ask why but ask why not?” and knew that social progress is seldom achieved when the status quo is revered.

Sunday, October 04, 2009

Bifurcated Designations or Grandfathering at Its Worst

The public is often confused by the alphabet soup of financial designations and in an attempt by the CFP Board of Standards to show differentiation they have instead highlighted what may be major shortcoming.

People like to look at credentials and think that everyone who has them has satisfied the same requirements. All too often that is not the case, and now in the financial field we are seeing the effects of grandfathering at work.

Grandfathering is the term used when the rules of the game change mid-stream and those who have met certain requirements are exempted from the new requirements.

What has brought this to mind is the recent newsletter issued by the CFP Board of Standards, in which they attempt to explain the differences in the CFP® mark and the ChFC® designation. It is in the message from the CEO.Both are used by professionals in the financial planning, investment and insurance world as well as in the legal and academic arenas.

Kevin Keller, CEO of the CFPBOS refers to the fact that the CFPBOS requires the passing of a comprehensive examination as a litmus test to demonstrate professional competency. The test does not have a traditional passing grade requirement. Instead, if I understand it correctly, certain questions within each category must be answered correctly in order to demonstrate mastering the material. Historically 5 out of every 8 candidates who take the test for the first time have passed it.

He then refers to Michael Shaw, who is an attorney and the Managing Director of their Professional Review and Legal Departments and earned his ChFC from the American College and is still listed as a ChFC in good standing despite the fact that he has not provided financial services since 1990. It appeared that Mr. Keller was dismayed that the American College continued to show Mr. Shaw as a member in good standing considering that he no longer is involved in providing financial services. However, Mr. Shaw still refers to his ChFC designation and in fact in a press release issued by the CFP Board they referred to Mr. Shaw as having both the CLU and ChFC designations.

In 1989 the American College, the academic organization that awards a number of financial designations changed the requirements of continuing education for the ChFC designation. People who had enrolled in a program prior to 1989 would not be covered by the new rules which are 30 hours of continuing education each two-year period.

The American College confirmed that Mr. Shaw is grandfathered. Each organization's CE requirements are somewhat similar.

The CFP Board did not always require a comprehensive exam. In fact it was introduced in 1991, and yet all those who were awarded the CFP® designation prior to the exam requirement are not referred to in any different matter. These people did not demonstrate the professional competency that those who took the test did. There are no asterisks next to their name although perhaps there should be since they did not take and pass the exam.

The issue here is not to decide who is right or wrong or to discuss the merits of any designation or organization but rather to point out to the public that on face value you do not really know what requirements a person authorized to use the designations has met. In the first two instances older advisers may have had to achieve less in order to use the same titles. Conversely, the newer planners who may have the least experience are the ones who have met all the current requirements.

I wouldn’t mind arbitrating a meeting between the CFPBOS and American College in order to clarify the underlying issue. My decree would be those that are grandfathered from CE requirements must meet the new standard and those that did not pass the CFP comprehensive exam have one year in which to do so. That way the public will know that the holders of each respective designation have met the same requirements and have the same ongoing obligations.

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Tuesday, August 18, 2009

Divorce - Civil Style

There are basically three paths to divorce in America: litigation, mediation and collaborative.

Litigated divorces are where each party hires an attorney with the objective to get the best deal for themselves. These are cases we usually hear about when our friends complain how the attorneys fought over every detail and the case ran on forever, costing nothing but money and aggravation. "The case was so bad our kids take turns hating us" has been uttered as well.Perhaps my all time favorite example of a bad divorce is in the movie War of the Roses. I remember watching the movie with my then-wife, thinking that this could never happen in real life. Wrong! It can and does if you allow it.

Mediation may be considered as the opposite extreme. Usually the husband and wife seek resolution through the use of a neutral third party called a mediator. That person can be an attorney, mental health professional or someone simply trained in mediation. Each state has its own statutes as to who can practice. Please note that if the mediator is an attorney that they are not acting as an attorney in this instance and will disclose that fact to you. The mediator will guide you through a series of issues and allow you to come to your own agreement. These issues will include child support, spousal maintenance, parenting plans and division of assets. Then a memorandum of separation will be prepared and each party should have it reviewed by their own attorney, who is acting in that capacity.This path works well when both spouses are emotionally healthy and there have not been instances of emotional or physical abuse. Quite honestly, when domestic violence has been part of the relationship most mediators will suggest that you consider litigation.

The next and perhaps newest path is Collaborative with a capital"C". Collaborative divorce combines the best practices of mediation with each party having an attorney representing them during negotiations. The goal is to achieve a workable solution for both today and tomorrow. The big bright line that makes Collaborative divorce different is that each party signs agreements that state, should the negotiations fail, it is understood that the attorneys can no longer represent them nor be called in to testify in litigation. In addition, all documents produced and discussions had during the process are confidential and cannot be used during litigation. Often in the Collaborative process, besides having attorneys, each party may have a mental health professional on their side to act as a coach and keep them focused on what is important to them and possibly avoid the petty squabbling that can prolong litigated divorces. If there are minor children then a child specialist may be involved to offer opinions on what is the best route for the children and express some concerns.There may also be a neutral financial expert who will meet with both parties, gather all the financial information and help draw up scenarios for support and distribution of assets. The financial person will meet with the clients and also the attorneys and other team members. By agreement, once the divorce is settled, the financial person cannot represent either spouse again.Each spouse also agrees to provide full and complete information, and failure to comply can result in disqualification and the process will end. Court orders are not sought in Collaborative divorce.You can see that each side is investing time, money and emotion into this process. They're making the informed decision, knowing that if the proceedings break down they'll have to start over with new attorneys -- without being able to use any information that was disclosed. This is the crux of the issue.

Often in a litigated case the attorneys will say that they will work collaboratively with opposing counsel. They often do this in order to lessen tensions, but unless there are the disqualification clauses this type of collaboration is not collaborative!

Friday, April 24, 2009

No Apologies Here

"Because the fee-only approach (which not all CFPs embrace), and NAPFA's pr and outreach efforts in recent years, has a slightly self-righteous air to it."

"NAPFA planners place themselves above it all, on a higher plain of ethics and practice. I took it on faith that NAPFA planners were safe. But at the end of the day, it's just a membership organization, not a regulatory body. There are crooks and alleged crooks everywhere, in journalism, in NAPFA, all over the place."

These are direct statements from someone who felt betrayed by their financial advisor . The particular advisor has the CFP mark, was a Registered Investment Advisor and was a fairly well placed member of NAPFA's hierarchy having spent a few years on various Boards.

The person does not mean the remarks as anti- NAPFA however from the second sentence they believed all the hype. While I don't agree with all the hype that comes from NAPFA I can say that given the choice I would rather aim high than aim low. In the ideal world I think it’s best to aim true.

It is incredibly hard to read about brethren who fail to serve their clients well and causes some remorse. However I am not responsible for their actions and everyone who knows me is aware that although I embrace a fiduciary standard it is just a legal term and does not mean that I am a saint.

I made that point a year ago and if you want to hear that podcast click here. I work hard for all of my clients, don't let my interests get ahead of theirs and pretty much pay my own way to due diligence meetings. I know advisors who let their airfare, hotel and entertainment be comped and for me that doesn’t work.

I follow a process in planning and do my homework (due diligence) on investments that I choose.

In spite of my own knowledge that I am Mr. Dudley Do Right in disguise I would never ask for nor accept the ability to move client's money to an account that was not already linked up to the investment account. In fact when I was using Fidelity as a custodian they came up with an option to have the ability to move money to a third party without pre-arranging a link. I would never even ask a client for the authority because I would hate the responsibility if the custodian blew a transfer.

While I am sorry that someone felt betrayed by their advisor my main concern is my clients and their advisor (me). Do I think that the industry can be improved? Sure I do and my blogs reflect it.

President Obama has made reform of the financial services industry one of many priorities and I hope that he comes through on his promise and doesn't blow the shot from the foul line.

Dear President Obama:
In order to make the financial services industry better as it applies to the field of financial planning and investment advice I think that you should ( fill in the comment box and have some fun)

Monday, April 13, 2009

Beware of IRS’ 2009 “Dirty Dozen” Tax Scams

The Internal Revenue Service today issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds. It is always my pleasure to pass these tidbits on.

“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”

Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.

The IRS urges taxpayers to avoid these common schemes:


Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to Further instructions are available at To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at

Hiding Income Offshore

The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.

Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.

Filing False or Misleading Forms

The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.

Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Return Preparer Fraud

Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on

False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited.

Disguised Corporate Ownership

Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

Tuesday, February 24, 2009

Timely Actions are Important in a Divorce

An interesting tidbit came across my desk yesterday and it highlights a very important fact and one that is often overlooked. When you get divorced and have to separate assets you should do it in a timely manner. Don’t treat things in a cavalier fashion and don’t let your attorney do it either.

Of course I am not using real names here except when I mention Attorney Dratch.

John and Mary got divorced and in the settlement Mary was awarded 50% of John’s 401(k). A 401(k) plan is covered under ERISA and as a result it is necessary to have a Qualified Domestic Relations Order (QDRO) drafted, signed by the Judge and then honored by the Administrators of the 401(k) plan. The QDRO cannot be signed nor presented prior to the divorce but it certainly could be prepared and ready to be presented to the Judge when the divorce is being granted.

Subsequent to the divorce John lost his job and rolled his 401(k) into an IRA. He must have told his employer that he was not married because when you are married a 401(k) distribution requires the approval of your spouse.

There is no longer a 401(k) to split and the protections afforded an IRA are less than that afforded an ERISA plan. However John does want to comply with the Court Order and transfer half of his IRA to his ex spouse. Why is it difficult? The Separation Agreement makes no mention of an IRA. An IRA can be transferred to an ex-spouse with no tax consequences provided it is part of a divorce settlement. There are no papers that indicate that John is supposed to transfer the IRA and the custodian cannot just take his word.

As a result of the QDRO not being prepared in a timely manner Mary has not gotten access to her funds. In addition the availability of the funds is more advantageous when they are coming from an ERISA plan than when they are coming from an IRA.

What can be done?

If 60 days have not elapsed since John transferred the money from the 401(k) to the IRA he may be in a situation to transfer some of it back. If he is allowed to then the QDRO can be prepared and executed and Mary can access the funds.

They can go back to Court and have the settlement modified to reflect the division of the IRA instead of the 401(k).

If Mary wants the cash then John can cash it out and give Mary the money. However this will be a taxable event and be subject to a 10% early withdrawal penalty. Depending on the incomes this could be a 49% hit, including State tax.

All of this could have been avoided had the QDRO been ready at the time of divorce or shortly thereafter. In addition Mary’s Attorney could have written a letter to the Administrator of the 401(k) plan advising them of the divorce and that a QDRO is being prepared. With that letter on file it is more likely that John would not have been able to move the money to an IRA.

After my own divorce there were a number of post divorce issues that needed to be taken care of. We needed a QDRO to move some of my 401(k) to my ex and a QDRO to move money from hers to me.

I recall telling her lawyer, Barbara Dratch that I would take care of it. Curtly she said no that she would and I asked why. “Because it is my job to protect the interests of my client” was her response.

A light went off in my head and those words are so true. In a divorce it is your attorney’s responsibility to protect you and that includes timely preparation of all paperwork. Attorney Dratch also sent a letter to the administrator. While I wasn’t thrilled at the time I now appreciate how important those actions were.

Thursday, January 08, 2009

IRS Presents: Top Ten Tax Time Tips

As an Enrolled Agent I received this notice today from the IRS. If I were making my own list I would simply have number 1 as ... Let Morris Armstrong do your taxes, he is after all an Enrolled Agent!

1. Gather your records…now! It’s never too early to start getting together any documents or forms you’ll need when filing your taxes: receipts, canceled checks, and other documents that support an item of income or a deduction you’re taking on your return. Also, be on the lookout for W-2s and 1099s, coming soon from your employer.

2. Find your forms. Whether you file a 1040 or 1040-EZ, you can download all IRS forms and publications on our Web site,

3. Do a little research. Check out Publication 17 on It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return. Review Pub 17 to ensure you’re taking all credits and deductions for which you’re eligible.

4. Think ahead to how you’ll file. Will you prepare your return yourself or go to a preparer? Do you qualify to file at no cost using Free File on Are you eligible for free help at an IRS office or volunteer site? Will you purchase tax preparation software or file online? There are many things to consider. So, give yourself time to weigh them all and find the option that best suits your needs.

5. Take your time. Rushing to get your return filed increases the chance you will make a mistake and not catch it.

6. Double-check your return. Mistakes will slow down the processing of your return. In particular, make sure all the Social Security Numbers and math calculations are correct as these are the most common errors made by taxpayers.

7. Consider e-file. When you file electronically, the computer will handle the math calculations for you, and you will get your refund in about half the time it takes when you file a paper return.

8. Think about Direct Deposit. If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a check by mail.

9. Visit often. The official IRS Web site is a great place to find everything you’ll need to file your tax return: forms, tips, FAQs and updates on tax law changes.

10. Relax. There’s no need to panic. If you run into a problem, remember the IRS is here to help. Try or call our customer service number at 800-829-1040.

Saturday, January 03, 2009

Nine for '09

Nine for ‘09

Here are nine little thoughts that may help us get through the coming year. Some may be easier to accomplish than others but they are all aspirational. The last two may be the most important and easiest to accomplish.

• Resolve to review spending and cut by 9% where possible.

• Resolve to increase savings by 9% where possible.

• If you need to have a PhD to understand an investment concept avoid the investment.

• If you have been meaning to get a Will or update an existing one and haven’t in five years then do it now.

• While we all try to economize let’s not forget those who have less.

• Waste not, want not. A cliché? Maybe but we realized last year how expensive commodities can become.

• Make sure that you and your family know where all the assets are. Keep an account list or updated financial plan in a safe accessible place.

• Respect and love your family

• Count your blessings. I know that I do every single day.
Best wishes for a happy and healthy 2009!

Sunday, November 30, 2008

The Blackest of Black Fridays

Historically the Friday following Thanksgiving marks the beginning of the Christmas shopping season and has often been called Black Friday because that is when many retailers begin to turn profitable.

Black Friday will never have the same meaning to me because this year people showed their lack of humanity in the possible worst way, they trampled a Walmart worker to death and on the whole showed absolute disregard for the event.

People were not lining up for food; they were lining up to buy discounted TVs.
People were not without money; after all they were there to shop and save a hundred dollars or so on a TV.

We are not in a depression and the world is not falling apart. Times are hard for virtually everyone but that does not allow us to become savage.

Imagine that you are on line and eagerly awaiting the store to open. There is a slight delay so you begin pounding and pushing on the glass doors. The collective force of 40 or 50 savage people up front causes the doors to buckle. They are glass, transparent. You see the employee on the other side. Do you rush forward or halt? Do you rush around away from the fallen person or over him? The people at that Valley Stream Walmart decided that the best course was to rush and step on the fallen figure. How do you ignore the screams? Not see the person beneath your feet?

According to reports in various papers people tried to push rescue EMT personnel aside and when told that the store was closing due to the tragedy refused to leave. For them saving a hundred bucks was more than the value of a human life.

Where is the outrage? People are blaming Walmart for being unprepared and yet were any other people trampled at other stores? Any other stores?

I hope that those shoppers in Valley Stream take time to think long and hard about their actions and reactions and have as happy a holiday as the family of the murdered worker.

Thursday, May 08, 2008

A Potpourri of Scams

I received an email today from a GI in Iraq. He asked for my assistance in moving five million dollars out of that country. I was born in 1950 and not yesterday. Beware of any emails asking for help in moving money out of a country. The most famous one is the Nigerian scam but there are variations. Sadly, people still fall prey to these scams and lose a lot of their hard earned savings.

Another scam coming from Iraq involves the currency. The old Iraqi Dinar had a value of over 2 bucks per Dinar. The new one is like 12 dinars for a penny and it is not convertible. That means in simple language do not fall for a story that says with your help I can buy $1000 of Dinars and ship them to you and they will be worth millions. It doesn’t work and if you have any relatives over there caution them about this. I actually was contacted by a fellow member of NAPFA who had a client that was asked to participate in this. We saved his money for him!

A client sent me an email they had received from the Internal Revenue Service with information about a refund. It looked real except that the IRS does not contact people via email out of the blue. If you ever get an email from the IRS send it to You will make some FBI agent happy, and that’s a good thing.

Recently yours truly received a letter from the Consumers’ Research Council of America advising me that I had been selected for inclusion in their 2008 Edition of “Guide to America’s Top Financial Planners.” Quite an honor and to celebrate and recognize this achievement I was offered the opportunity to purchase various displays for my office so that visitors would be aware of my accomplishment. A mere $169 - $229 is all that one would cost.

Modesty prevents me from stating that I am a top planner, and there is some obnoxious and wordy planner in Florida who thinks I need a remedial course in planning because I disagreed with the position that the Financial Planning Association espoused with regard to the recent stimulus payments. That leaves me probably somewhere above the middle and below the zenith.

That guide contained the name of nearly every CFP in the world, hardly relevant. It is like when I tell people that I was top ranked in tennis; ranked in the top 10 million. I was younger and quicker then; I suspect my ranking has since slipped.

The lessons to be learned is to be wary of emails that appeal to your greed, your need to help others and that ask you for personal information or will lead you to another site. The other lesson to be learned is to think very carefully about any list that some planner tells you that they are on. The odds are good that it is less than meaningful and may have required some sort of payment.

Sunday, March 09, 2008

If Tomorrow Never Comes

On the day it was confirmed that Patrick Swayze, the star of two of my favorite movies, “Dirty Dancing” and “Ghost” was being treated for Pancreatic cancer I received a phone call from the inquisitive and inspiring journalist Shira Levine who was working on a story for

She was seeking background on steps that people might take if they were told that they had a limited period of time left. She didn’t laugh when I said that I would listen to Tim McGraw's megahit “Live Like You Were Dying”

This request had a tremendous amount of personal meaning to me. On a Friday evening in February I was having a glass of wine with a friend, discussing nothing of importance when my friend’s eyes welled up and the words “I don’t want to die” struck my ears. It was the first time that anyone has ever said that to me and those are not words that I want to hear again. I was surely as stunned as much as my friend who said them was.

While the tests are not all complete there is a good chance that my friend may not see 2009.

When you have in your mind that your days are limited time indeed becomes “sweet time” as referenced in Tim’s song. That night we spoke about what was important to my friend, what did they want to do if indeed the prognosis is correct.

How would they be remembered? Who should be told about their death? How many things will they be able to accomplish in whatever time was left?

My friend didn’t have to mention anything like estate planning or beneficiary designations; nothing mundane and that is because they have always made sure that their own financial health was in order.

It wasn’t that hard for them to do. They had prepared a Will and knew that they may have to update it when anyone new and important came into their life or when certain laws change.

They also had in place a Living Will or Health Care Proxy which gave someone the authority to make health care decisions for them when they would be unable. They knew that this person would honor their requests. This document should be reviewed periodically and updated perhaps every five years. You would not want it being challenged as being out of date.

The last important document is the Durable Power of Attorney which will allow for someone to act on your behalf. Depending on the authority contained in the document that person that you have named may even change beneficiaries for you in retirement plans or insurance policies.

Equally as important as having these documents is the fact that they are accessible. In addition they had in a simple binder a list of all their important contacts, account information and insurance information.

When time becomes your most important currency you want to spend it all on the ones you love.

Wednesday, February 20, 2008

One Troubling Aspect of Politicians

When we decide to vote for a candidate we always think about the promises that they make and how they stand on the issues. The following is my reality check!

While walking down the street one day a US senator is tragically hit by a truck and dies.

His soul arrives in heaven and is met by St. Peter at the entrance.

"Welcome to heaven," says St. Peter. "Before you settle in, it seems there is a problem. We seldom see a high official around these parts, you see, so we're not sure what to do with you."

"No problem, just let me in," says the man.

"Well, I'd like to, but I have orders from higher up. What we'll do is have you spend one day in hell and one in heaven. Then you can choose where to spend eternity."

"Really, I've made up my mind. I want to be in heaven," says the senator.

"I'm sorry, but we have our rules."

And with that, St. Peter escorts him to the elevator and he goes
down, down, down to hell. The doors open and he finds himself
in the middle of a green golf course. In the distance is a clubhouse and standing in front of it are all his friends and other politicians who had worked with him.

Everyone is very happy and in evening dress. They run to greet him, shake his hand, and reminisce about the good times they had while getting rich at the expense of the people.

They play a friendly game of golf and then dine on lobster, caviar and champagne.

Also present is the devil, who really is a very friendly guy who has a good time dancing and telling jokes. They are having such a good time that before he realizes it, it is time to go.

Everyone gives him a hearty farewell and waves while the elevator rises...

The elevator goes up, up, up and the door reopens on heaven where St. Peter is waiting for him.

"Now it's time to visit heaven."

So, 24 hours pass with the senator joining a group of contented souls moving from cloud to cloud, playing the harp and singing. They have a good time and, before he realizes it, the 24 hours have gone by and St. Peter returns.

"Well, then, you've spent a day in hell and another in heaven. Now choose your eternity."

The senator reflects for a minute, then he answers: "Well, I would never have said it before, I mean heaven has been delightful, but I think I would be better off in hell."

So St. Peter escorts him to the elevator and he goes down, down, down to hell.

Now the doors of the elevator open and he's in the middle of a barren land covered with waste and garbage.

He sees all his friends, dressed in rags, picking up the trash and putting it in black bags as more trash falls from above.

The devil comes over to him and puts his arm around his shoulder. "I don't understand," stammers the senator. "Yesterday I was here and there was a golf course and clubhouse, and we ate lobster and caviar, drank champagne, and danced and had a great time. Now there's just a wasteland full of garbage and my friends look miserable. What happened?"

The devil looks at him, smiles and says, "Yesterday we were campaigning...... Today you voted."

Tuesday, February 12, 2008

Don't Be Afraid to Spend It!!

The talk of the town seems to be divided between Britney Spears and what you should be doing with your rebate check from the US Treasury. Since the talented Ms. Spears doesn’t listen to me let’s focus on the check.

By way of history, our economy has slowed down considerably over the last six months. Perhaps it is the years of high oil prices, high food prices and relatively stagnant wages catching up or maybe it is the gloom over the sub-prime mortgage mess coupled with falling house values and the schizophrenic market that is affecting the consumer. Something has and the Government has decided to take action to give a jolt back into the economy, and that jolt is the cumulative effect of taxpayers spending “free money” from the Government. The House of Representatives, the Senate and the President have all agreed that this is the policy that they want to employ. At this point in time the debate is over as to whether it is a good policy or not, it is THE policy and now the goal is to make it work.

That simple belief is one reason why I advocate spending. Now I know that my clients are all fiscally responsible but how about the person who isn’t and is facing foreclosure? The answer is obvious, use the rebate to help keep the house!

I was reading Suze Orman’s column and she advocates that you don’t spend it. Her advice is to pay down debt or invest it. In five years that check could be double! Her column reminds me of an advertisement where the annuity company points out that if you didn’t buy that expensive wrist watch now you could have an extra $323,765 in retirement, give or take. Now I truly regret buying Karen Becker a hamburger and milk shake 48 years ago. While the afternoon was enjoyable, I realize that I was depriving myself of future security. I digress.

Go out and spend the rebate money on something you need or want. Spend CASH. Do as the Government wants. Give their plan a chance of success. If you truly believe that the idea of the rebates is wrong and will not help the economy then void the check and mail it back.

I am not sure how successful the rebate plan will be however I do know that if we just put the money away and not use it for current consumption then the plan will fail.

The time for debate has passed and now let us play the game.

Wednesday, January 02, 2008

You Don't Own Me... with apologies to Lesley Gore

On a forum that I participate in there is a wonderful discussion developing which deals with how an investment advisory firm can prevent or make more difficult for an existing client to leave the firm with the intent of becoming a client of another firm/advisor of their choice.

Yes you have read that correctly, a discussion took place on how to place a roadblock on people that should have free choice in their selection of an advisor.

What makes this more interesting and in my opinion perplexing is that it is taking place in the forum of an organization whose leadership advocate full disclosure and fiduciary responsibility.

Allow me to ask this question of you. Would you do business with a firm if they told you up front that should the relationship not meet with your satisfaction that you may be unable to deal with the advisor of your choice in the future?

Now no one is suggesting that a representative of Don Corleone will be paying you a visit or that you may wake up to find the severed head of your favorite pet at the foot of your bed. That happens in Hollywood, what we are talking about happens right here, in Your Town, USA.

The online discussion started with a question on adding non compete clauses into contracts and also how to put a dollar figure on the client which according to some, is the property of the firm. Later upon realizing that ownership of a person is politically incorrect the term was changed to “client relationship”. Yet in reality they are one and the same.

Now we have all read about non-compete / non-solicitation clauses where important people usually cannot enter a similar business or talk to clients after they have left their employer however it is usually associated with expensive manufactured goods; goods that have required extensive research and development dollars to be spent. Industrial companies expect that their employees and the employees of the competition be covered by non-compete clauses. However I know of no instance where Boeing has allowed a salesman to join Airbus for a fee. After all how do you really value the future business of an airline?

It is not being said that non compete clauses are illegal, there has been enough case law to show that they can be enforced. However, when people are advocating full disclosure to potential clients I would hope that on at least an ethical if not moral standard that it would be disclosed to a potential client that they may be waiving some rights in the future.

Some fee only advisors are very critical of investment products that have back end surrender charges. They feel that it is simply wrong to penalize or place obstacles in the way of an investor who wishes to cash out. I cannot think of anything more penalizing than preventing a person the freedom of choice just because they are an ex-client of the firm.

The lesson to be learned is to ask your current advisor if they will place any impediments in your selection of a replacement advisor, and have them put it in writing!

Wednesday, December 12, 2007

When Is It Time to Give Up a Designation?

People who have read my blog and other articles are aware that at times I have argued against all the designations and acronyms that are available to planners. Many of them are fluff. The definition of fluff may be difficult to express in words because one man’s fluff is another man’s raison d’être, or corporate entity designed to collect membership dues and seminar fees. However, the holder knows when a designation is no longer valid in their practice and maybe it’s time to be put to bed.

Sometimes unrelated events will give one pause and have them review all the acronyms that they have. Such was my fate! I had to order some new business cards because I am moving my office and was looking at the credentials on my card and decided that it was time to do a housekeeping chore.

The CFP ® designation is one that I will keep, at least for a while. It is a basic designation to demonstrate that I have a core competency in planning, passed a grueling 10 hour exam and have at least three years experience. I hope that they do not damage the designation by making the public think that CFP designees have a legal obligation to act as fiduciaries when the obligation is enforceable in a non legal setting by the CFP Board of Standards and cannot result in restitution.

The ChFC is an almost CFP designation issued by the American College. I earned it by taking the courses that would satisfy the educational requirement necessary to earn my CFP designation and then two more courses. I don’t mind having it because there is no renewal fee and the CE requirements are met when I meet the CE requirements of my CFP designation. It is innocuous and shows the world that I studied at The American College.

The CDFA is the Certified Divorce Financial Analyst which used to be the Certified Divorce Planner designation. In 2001 I studied for a few days and passed four modules which had an emphasis on divorce issues. One was devoted to cautioning us not to breach the line and practice law, one was devoted to taxation, and if I recall one was marketing. About two years after I had the designation the joint partners of the organization had some disagreements and split apart. The new organization seems to have membership comprised of people affiliated with broker dealers, charges an annual fee and seems to put on the same seminar every year with few modifications. When I obtained the designation it showed that I was interested in divorce work however I knew that the education was on the light side and that experience and knowledge would come though networking, reading materials dealing with divorce and actually doing the work.

This is the designation that I am going to drop when I order my new cards and simply donate the renewal fee to the Children’s Law Center which is a charity that helps provide legal support in family matters for indigent children.

The AIF which is the Accredited Investment Fiduciary demonstrates that I have been trained in the fiduciary process and if I am smart, utilize the process in my work. I enjoy having it and all the organization does is promote the idea of what a fiduciary is and advocates that a fiduciary standard be in place. It does not put forth to the public that any of its designees necessarily are fiduciaries in the legal sense. For now it is a keeper.

The last designation, my Enrolled Agent (EA) is granted by the Internal Revenue Service and allows me to represent clients before the IRS. How can I possibly think of giving up anything issued by the kind and gentler IRS? Besides, they know where I live!

Monday, November 05, 2007

In the Client's Best Interest

Help me!!! I need comments on this one.

I was speaking with a real journalist (instead of a wannabe) who used the phrase in the "client's best interest" quite a bit in an article. I commented that I thought his use of the phrase was almost becoming cliched because the circumstances he cited seemed to me to warrant the phrase " In the adviser's best interest." A friendly discussion ensued and I asked the question exactly what is meant by " In the Client's Best Interest" and he said everyone knows that answer. Well that was good except what everyone knows and what the regulators know may be two different definitions.

I asked some advisers for their definition and I was somewhat surprised by the diversity. Now I would like to ask the question of you. Please tell me what you think that noble phrase means.

In the "clients best interest" means...........................

The Credit Crunch?

There was a popular game show many years ago where contestants could choose whats behind door 1, door 2,or door 3. Of course the doors weren't open and people could only hope that the prize was worthwhile and better than the trinkets that they were often giving up in exchange.

To a large degree the credit crunch is like that, banks and investors may be holding securities that resemble the prizes behind closed doors and are having great difficulty placing a value on the bonds which contain the mortgages. They cannot readily see what the makeup of the securities is. This is important because unlike on the game show the banks and investors are giving up a dollar in anticipation of getting that dollar back, plus interest,

If the underlying securities cannot be priced accurately then what do you do? They don't want to pay one dollar for something that is worth only 80 cents. Right now, banks are using pricing models that contained factors such as credit ratings and they have proved highly inaccurate and unreliable.

To be honest I am not sure that the billions of dollars being written off now will not be recaptured later on as capital gains as pricing transparency and accuracy become known.

That is just my two cents which might be marked down to just a penny in the near future!

Tuesday, March 06, 2007

Becoming Trustworthy

Many years ago, an attorney proposed what is perhaps the most succinct understanding of the term fiduciary that I have ever encountered. He said, simply, that being a fiduciary gives someone the legal right to trust you. Those are powerful words.

When all is said and done, I cannot think of any valid reason why an investor seeking advice would go to anyone other than someone who grants them this “legal right.” To me, it’s a no-brainer. It’s as if a car salesman asked you whether—for the same price—you would rather have the same car with a warranty or without one.

I was delighted when I first learned of NAPFA’s campaign to educate the consumer about what a fiduciary standard is and the reasons why they should use someone who is a fiduciary for all their planning and investment needs. The association’s Focus on the Fiduciary held promise.

NAPFA noted that “A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.”

But I was startled when they went on to say that CPAs, attorneys and doctors are fiduciaries—a statement that is blatantly incorrect. Of the three, only attorneys are fiduciaries by statute. Doctors have a high standard of care with their own professional hurdles to meet. A simple call to the AICPA asking if CPAs are fiduciaries yielded an immediate “no.”

When it comes to such an important issue, one would expect facts to be checked and double-checked. After all, NAPFA is asking the public to trust them to be their educator. How many “facts” can you get wrong before your credibility is seriously diminished?

Granted, the issue of who is and who isn’t a fiduciary is complicated. The Investment Advisers Act of 1940 requires that registered investment advisors be held to a fiduciary standard—but does not define fiduciary. The Act calls for registration by anyone holding themselves out as an investment advisor and offering advice on securities for a fee. If Congress had stopped right there, life would be easier. Instead, they decided to grant exemptions to certain occupations—among them any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession; any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who therefore receives no special compensation; the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.

But the word “incidental” has not been defined, either, and that seems to lead to even more confusion. (We can tolerate the need for free speech and will ignore the exemption to publishers.)

Back in 1940, the distinction may not have mattered much because few people had stock brokers and Registered Investment Advisors were firms managing portfolios comprised mainly of individual securities. That is quite different from today’s environment where a large portion of the population have relationships with a broker/dealer, and many RIAs are allocating assets among registered products. The forest and the trees have melded into one picture.

The issue today, then, seems to be whether the campaign to promote the benefits of dealing with a fiduciary is a wakeup call to the public on planning issues or just a revisitation of the old fees-versus-commission argument used for asset gathering.

This is important because to my knowledge, no one has suggested that the exemption for attorneys or accountants be rescinded. Yet why should the public, at a time of need, be subjected to possible poor advice from people who are not registered? We’ve all heard horror stories where an accountant focusing only on tax issues turns a good portfolio into trash, or an attorney looking at the face value of assets makes a judgment without proper analysis that leaves the client with a sub-par asset. If protecting the public is the primary concern, shouldn’t these professionals also be prohibited from providing [financial] advice unless it is incidental in the sense of being very closely aligned to the engagement. For example, the accountant could provide alternative outcomes based on tax strategies, but not recommend the purchase or sale of securities; and the attorney allowed to give advice on the characteristics of securities, but again, not their division, purchase or sale.

Instead, the focus is on the asset gathering and not financial planning, and it comes down to that tired routine of painting the RIA as holier-than-thou. References I find particularly contemptible and old-hat appeared in recent issues of the NAPFA Advisor. Referring to an article on fiduciary behavior , a NAPFA member stated that all a wholesaler needs to do is provide dinner and a lap dance, and the broker will turn around the next day and put clients’ money in that product And this remark comes at a time when NAPFA is relying more on sponsors and exhibitors to provide meals at conferences through the Dine Around concept where some 10 to 15 people are taken to dinner by a sponsor—lap dance optional! In this day and age, remarks like that are inappropriate and belittle the professionalism of brokers.

Perhaps that was just one advisor’s opinion, and perhaps, just a bad choice of words. Yet a NAPFA member who presents at confernces advocated that if you can’t say something bad about a particular broker, then bad- mouth the industry and aim for guilt by association. In my opinion, remarks like this should not be allowed at a conference and certainly not validated with CE credits.

If we are really interested in educating and protecting the public, I think it is time to stop the name calling and misleading characterizations and make the attempt to resolve the issue. First of all, everyone needs to agree on what is meant by a fiduciary standard and recognize that it is a term that affords legal protection—not a definition of a good guy or bad guy. The fiduciary standard is not a guarantee of superior investment results or financial planning. What it may provide is a legal remedy for a client who can show that his advisor did not act in his best interest or failed to disclose material facts.

The organizations leading the way in this effort are the Financial Planning Association—through the legal process—and NAPFA through its educational process.

TD Ameritrade has lent support to the effort by sponsoring polls that show Americans are hopelessly confused about the role of financial advisors and, given a choice (which they now have), would prefer to deal with a fiduciary (which, for the most part, they don’t do now).

In a poll of its own, FPA found that a vast majority of its members would like to be held to a fiduciary standard. They said the results were similar whether the respondent was independent or affiliated with a broker/dealer. (Note that this question was framed in the context of the CFP Board of Standards Code of Ethics.)

The question then, is how we the public and those advisors can be satisfied; and the answer of course is to change the law. Congress barely hears the voices of the two planning organizations, but it might react differently if those 30,000 voices were multiplied by 100.

And this could be accomplished through that good old grass roots tool, the petition. If every advisor who wants to be a fiduciary gathered the signatures of their clients, such a petition could be presented to the Senate Banking Committee, the House Banking Committee and the SEC. Perhaps even a broker/dealer supportive of a change in the law could devote resources, even part of their Web site, to an electronic petition.

Of course the best result would be achieved by amending the Investment Advisers Act of 1940 to align itself more closely with the realities of today; to define financial planning and recognize it as a separate profession; and to continue to educate the public.

Wednesday, February 07, 2007

Ooops, I Did IT Again!

The lovely Britney Spears isn’t the only person who should sing that song; our good friends at AXA Financial Services should as well.

Case in point: Single woman age 65, who is retired, receives a small pension and social security. She lives within her means and has some assets in an IRA and Annuity. She has no savings account per se, however she DID have about 43,000 in a non qualified portfolio which was divided 40% short term treasury fund and 60% in a moderate allocation fund. These funds could have been used in an emergency with limited impact on her taxes.

I went to see this person on some other issues and she started to show me a report that she had been given, a free financial plan. The person who made the plan used quite a few improper assumptions not the least was that the woman’s pension had a cola provision.

Anyway, she started to tell me how she had this visit from a firm that she had done business with for a number of years and her usual salesman didn’t show up, a new man did. She told him things were ok but that she may need to draw a small amount of money out of the accounts and that he said well your money has to work harder! He recommended that she liquidate the mutual funds (incur a 2% sales charge on some and who cares about the tax consequences) and put the money into an annuity. Of course the annuity is basically allocated 60/40. Oh yes, the annuity has a 7 year surrender period.

This is a tale that will be continued……….

Monday, January 22, 2007

The Value of Continuing Education

Learning is an ongoing process and hopefully we continue to learn till the day that our brain lets us down. There are some who say my day was yesterday, none the less I do not want the public confused with continuing to learn and those people who tout a particular designation because they require so many hours of continuing education a year or bi annually in order to maintain the registration.

CE as it is affectionately called is pretty much a joke. I have come to this conclusion as I think about the all day course I was required to take and Tom, the person who was authorized to teach it felt that he was entitled to a day off. Instead he had a subordinate teach it and report it as being taught by Tom. The person who did teach it also taught Ethics at a local college and the disconnect remains to this day.

Then there was a session on divorce planning which I attended. The only sad part about it was that there were severely fewer handouts than attendees and the attorney leading the discussion spent way too much time discussing her practice so that by the end of the time we had covered maybe ½ a page of a 6 page summary. Obviously the educational experience promised and paid for was not delivered yet the sponsoring organization reported that everything was fine.

The last instance covers a one day seminar that ran from 9 to 4 with 3 hours off for lunch and breaks. That means that there were four 60 minute periods and yet somehow the organization got 7 ½ CE granted for that day. Now one CE hour is 50 minutes and there is quite a shortfall.

I know that when it came time for me to report my own CE activity I did not include the first two and the last one was included but after I questioned how that many hours could have been granted.

The point is that much of the CE world is unregulated and filled with misrepresentations. I am not sure what a solution is, but I know that rather than having CE requirements, periodic testing on a knowledge base, done at a commercial location, may be more appropriate.

Next time an advisor is telling you how much CE they take or need, simply yawn and nod.

Friday, November 24, 2006

Leave Home Without Them

There are times when I see things done by other professionals that cause my blood pressure to rise to the top of the blood pressure contraption and words like incompetence and dangerous fill my mind.

The folks at Ameriprise, previously known as American Express Financial Advisors, the spin off from American Express are the latest to have caused me to experience this agita.

Last year one of my clients called to tell me that a family friend had inherited some money and wished to leave it to my client's children since the family friend had no heirs. That was a very nice gesture and I met the individual and my client at an attorney's office so that the family friend could create an appropriate will. It was a simple enough matter, leave the assets to the children and if they were under a certain age then the money would be left in a trust for the children and the parent would be the Trustee. A very simple thing to execute under a will, completing the wishes of both the giftor and the inheritee.

The person who had inherited the money was a man of simple means and wished to use the same financial advisor that the other family member, who had left him the money, was using. It was not my place to interfere nor was it my client's to suggest that any other changes be made. I wish I had interfered now.

Most of the time when a Will is created you never expect that person to die soon thereafter. Well, within 15 months of the Will being executed the person died of a massive heart attack.

The Executor of the estate contacted me and asked me to look at some of the documents found at the home of the deceased. Among them was a copy of an application signed and undated creating what is called a Transfer on Death or Payable on Death Account. That document named the parent of the children as beneficiary, directly, not in trust for the children or anything.

The deceased had three accounts at Ameriprise; a regular brokerage account, an inherited IRA and an inherited annuity. It seemed as if the regular brokerage account was being converted to a Transfer on Death account.

When I examined the account holdings I was shocked. The client was in a very low tax bracket and his holdings consisted of a state tax free bond fund. To compound matters, the same tax free bond fund was the IRAÂ’s only holding. God Bless Ameriprise, they turned tax free income into taxable!!!!

To be honest I thought that it was impossible to place a tax free bond into an IRA. I thought that there were safeguards in place obviously I am mistaken. However, I can think of no reason to place an instrument that produces tax free income into an IRA and I would welcome AmeripriseÂ’s explanation.

The use of a municipal bond fund in the IRA while incredibly stupid was the lesser of two evils. The implementation of a Transfer on Death Account without properly understanding the implications was the real act of negligence because while some of it may be undone by the Courts, the situation can never be made right again.

I have seen too many cases where people prepare Wills only to have their wishes undone when they are in the grave and unable to speak again.

Tuesday, October 24, 2006

How to Choose a Planner

A few weeks ago there was a discussion on how to choose a financial planner and while that question may be a simple one, I think it is anything but. Allow me to share a few random thoughts......

How to choose a financial planner is a difficult task compounded by the fact that many consumers don’t even know why they want a planner or what they are looking to achieve.

If you buy the argument that financial planning is all about defining your goals and then defining strategies that will help you achieve them and protect you from certain catastrophes then you may be on the right track. Financial planning is not about stock picking or selecting the best mutual fund, although many people think that is exactly what a financial planner does. I think the reason for the confusion is that in order to achieve goals you usually have to save and invest; and many people and organizations want your money, so although they may be investment advisors or salespeople, they refer to themselves as financial planners.

It is important that a consumer realize that they are bombarded with marketing material self promoting one group or the other. Any material that is presented by a membership organization will most likely be biased. This would include the Financial Planning Association, National Association of Personal Financial Advisors, American Institute of Certified Public Accountants and The Society of Financial Professionals. Each of those groups will be promoting the services of their own members and once you can realize that I think you may better off.

Financial designations abound but for financial planning I think that the best known credential is still the Certified Financial Planner designation. The CFP Board is not a membership organization, by design. In order to obtain the right to use the CFP mark you must now complete an educational track, have three years experience and pass a comprehensive 10 hour exam.

Bear in mind that not all CFPs have completed these tasks. Many have been exempted from taking the exam so caveat emptor!

I think that a consumer should be aware of how a planner is compensated, are you paying them or their firm directly or are they being compensated by other companies upon the sale of a product. I am not saying that one method is superior to another but the consumer must understand that it is quite possible that objectivity is being compromised when a third party is providing payment.

The consumer should be aware of the role that the planner has. If the planner is a registered investment advisor and not affiliated with a brokerage or insurance firm then he is most likely considered to be a fiduciary under the law. This affords the consumer some additional protection in the event that something goes afoul. A fiduciary must prove in court that they followed acceptable standards and always acted in the client’s best interest. A registered representative only has to show that the product sold was “ok for the client”

In my way of thinking, this is like going into a car showroom and being told that today and today only, for the same price you could either have a brand new car with a great warranty or one the was used and battered and has the skimpiest of warranties. I think that most of us would opt for the new car.

If a consumer is interested in retaining a fiduciary then it should be because of the legal protection afforded, not because they sign some membership oath. As a consumer you will be protected by the law, not some organization.

A planner should make you feel comfortable during meetings. You will be sharing a lot of intimate details and obviously chemistry is important. You must believe that the planner is listening to you and hearing you.

A planner should be familiar with your special circumstances. This means that if you are a foreign national working here and are seeking advice on tax or estate issues that the planner should have some experience or tell you that you are his first client in that area.

A planner should return calls and emails both before you become a client and afterwards. Communication is important.

A planner doesn’t have to be dressed in the latest fashions or work in a fancy office in order to be good. In fact the nature of the job does allow for some informality.

A planner should be prepared to always put everything in writing. You may not want to rely on your memory alone when it comes to strategies.

You have to realize that a planner may have to refer you to other professionals, such as a CPA or lawyer. You should ask if the planner is getting a referral fee. Hopefully the answer is no because you want to be referred to someone who is competent, not someone who is paying the highest price in order to obtain your name!

Tuesday, October 17, 2006

How Dark the Con of Man

I just started to read the DaVinci Code and have to admit it is a great book. I can barely put it down; I have read about 200 pages. “How Dark the Con of Man” seems to be the key phrase so far and I cannot help but wonder if there isn't a parallel between that and the argument for fee only planning. The phrase refers to creating a false picture of reality or history, perhaps hiding the truth and spreading a completely different version.

Don't get me wrong; I am a proponent of fee only planning and I do think that in many cases the consumer is much better served using a fee only planner versus a commissioned planner. I think that having the legal remedy of the Fiduciary Standard of Care is important but at the same time ask "Is it always necessary?"

I was speaking with another fee only planner who likes to toss the term fiduciary around. He was complaining because a broker in town had gotten a small account from a relatively young person. My fiduciary friend was saying.... "He is just a salesman... not a planner". I know the broker and he likes to use "A" shares of a very highly regarded fund family. I use their Advisor class myself. In my mind a 20 something year old comes in and says, "Listen I have 25K to invest long term and I don't really need that money”, then picking a quality growth fund doesn't seem to be doing anyone any harm. The harm may come about later if the consumer thinks that he is having the account managed when he's not, but certainly not in the original purchase.

Not every event in life requires comprehensive planning.