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Mentor RIA Consulting

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Is Robin Hood Right for You?

Posted on October 29, 2020 at 1:30 PM Comments comments (0)
A popular approach to investing is offered through the Robin Hood app. This service allows an investor to participate in the market without requiring any minimum investment and without charging any commission on the trades by an investor. Available investment choices include stock, ETFs, options, a number of ADRs, and even cryptocurrency. A margin account is also available, subject to meeting the regulatory requirement of a $2,000 minimum. The Robin Hood service is offered as a web platform or as a mobile app trading platform. This approach may satisfy the needs of many investors but it is important to understand its limitations.

At present, investing with Robin Hood is limited to taxable accounts and it cannot be used with one’s retirement accounts such as a 401(k) or IRA. Investment in mutual funds is not supported and some ETFs may not be available. Research and data on investment choices is very limited, though there is an option to purchase an upgrade to Robin Hood Gold, which does offer independent (Morningstar) research. Customer support is somewhat limited as well, relying on e-mail and social media to address investor issues.

Robin Hood (and its competitors such as SoFi and Interactive Brokers) provides an easy, inexpensive and useful way to handle investing within the limits described. These limitations should not be a bar to many investors, depending on their needs. Since accounts are taxable, an investor will benefit from remembering that short term gains for positions held for less than one year are taxed as ordinary income. Also be aware that wash sale rules require a waiting period prior to or after a sale before repurchasing the same or substantially identical security. With that knowledge in hand, happy investing!

Burden of the Net Investment Income Tax

Posted on February 11, 2020 at 10:05 AM Comments comments (0)
Speaking of fears of investing, investors may encounter the burden of the 3.8% net investment income tax in addition to many other potential taxes on income. Though the percentage may not seem very high when we consider the top regular income tax brackets, it is important to remember that it is a separate tax stacked on top of federal income tax, state and local income tax (where applicable), not to mention consideration of the other additional costs of investing such as advisory and other professional fees.
Investment income is broadly defined for this tax, including not just interest, dividends, rents, royalties, annuities and gains from the disposition of property but also reaching gross income from a trade or business. The threshold for the imposition of the tax is based on a taxpayer’s modified adjusted gross income – much broader than net investment income, of course – but applies only to the net investment income portion. The threshold for a single taxpayer is $200,000; for married taxpayers filing separately it is $125,000 while married taxpayers filing jointly face a threshold of $250,000. As you can see, the tax will apply to a significant group of taxpayers even if their net investment income is not substantial.
The tax also applies to estates and certain trusts, with some exceptions. Interestingly, the threshold for imposition of the net investment tax is much lower as the top bracket for these entities begins at only $12,950 of income. This is much, much less favorable than the rates for individuals.
The bottom line here is that in addition to other income taxes, the net investment income tax may be applicable to many taxpayers and is a burden not to be ignored. Even where a taxpayer is otherwise entitled to income tax credits, they will not apply to reduce the net investment income tax liability.

Overcoming Fears of Investing

Posted on February 6, 2020 at 10:22 AM Comments comments (0)
Educating clients on some of the basics of financial planning and investing can be both frustrating and rewarding. Many folks want to learn about these things and understand the importance of knowledge in building their financial future and protecting against mistakes and the markets. Of course, one of the first lessons they should learn is that an investor can only do so much to protect against the vicissitudes of the markets. Keeping the natural instincts of fear and greed under control can do much here, but is not always enough.
A frustrating aspect in some investors is the tendency to ignore advice and to assume greater knowledge than anyone else. For example, one family we’ve worked with follows the creed that ownership of real property is the central piece of their finances and that the equity markets should be avoided entirely. Although that might work some of the time, this family has seen significant erosion of their wealth due to ongoing property costs together with changes in demand for different types of property. In addition, they’ve missed out on some tremendous investment opportunities in the markets even avoiding lower risk plain vanilla index funds and the like. The attempts to teach this family the value of diversifying investments has not been wholly successful. 
Another example is the investor concerned about investment risk who seeks certainty at any cost. Here we see funds languishing in certificates of deposit earning interest that does not even keep up with the low inflation rates we presently enjoy. Alternatively, such an investor finds the bells and whistles of an indexed annuity’s guaranteed floor enticing, forgetting that the cap on the growth of that annuity (given in exchange for the protection against loss) means that most of the growth in the investment will redound to the benefit of the insurance company and not the investor. Once again, fear of the markets and of loss results in a different kind of loss which could be mitigated by sensibly diversifying investments.
Working with clients to show them the hidden costs of their behavior can help them to achieve much more with their finances once those constraints are reduced. A professional advisor can be a great help to such investors, but take care in making your selection of an advisor. 

Simplify Your Financial Life

Posted on August 14, 2019 at 8:54 AM Comments comments (0)
All too often, we see clients with a potpourri of investments, accounts funded from various sources, opened at different times and using different advisers. There is no overall plan or strategy and the client usually doesn’t exactly know what they have. This is a clarion call for the client to organize and simplify their finances.
What can one do? Merge similar accounts such as IRAs, CDs and brokerage accounts. Exit, combine or exchange products such as annuities and insurance. These actions not only make it easier for you as owner to keep up with what you have but it will save a great deal of effort and aggravation for your personal representatives when you either become disabled or die. You and your fiduciaries are much less likely to overlook an investment or fail to report income when things are streamlined.
Multiple accounts can lead to inefficiencies in investing, management and even estate planning. Although an investor is likely not to treat each account as requiring a similar allocation to every other account in their investment portfolio, and would be very wise not to do so, it is still necessary to have an overall strategy in mind and ensure some balance exists while considering the allocations in all of the accounts. Where there are different managers for accounts, inconsistencies in their style, approach, investment philosophy and more can lead to variations which may leave gaps in your portfolio as well as overreliance on some investments. This in turn can lead to volatility and unnecessary risk or even extra tax burden.
The use of beneficiary designations, including TOD or POD for taxable accounts, also can lead to problems when the account owner dies. When multiple accounts and beneficiaries are involved, care must be taken to ensure that the money goes where the account owner wishes and that includes not only the individual beneficiary but also to address the costs of funeral, estate administration and other expenses. With many accounts, it is easy for things to go awry.
The solution is to mindfully simplify and organize your finances. You and your loved ones will benefit.

What Clients Really Want

Posted on May 15, 2019 at 5:57 PM Comments comments (0)
A recurring theme in the financial industry media is pundits offering assertive statements (opinions) about what clients really want. It should be obvious by now that clients differ in what they want and it is not just as simple as getting the best investment advice. Recently, speaking with an experienced adviser, I heard first-hand what one client said during the course of a conversation with the adviser about the client’s investments in the context of whether to rebalance to the desired allocation.
What did this client say he wanted? Just low risk, high return and to not pay taxes. These certainly seem to be desirable goals. The real question is to what extent these goals are attainable in reality and what exactly are the tradeoffs among the goals which the client might be willing to make. We know that low risk and high return don’t always come together in an investment and that high return usually means that at some point there are going to be taxes. 
In this particular case, the client was balking at realizing a few thousand dollars in long term gains if the account was to be rebalanced to reduce risk in the portfolio. The same client recently had incurred tens of thousands of dollars in taxes to increase his cash position when fearing a market drop which did not occur. Why do you suppose clients so quickly forget mistakes they make (and losses or taxes they incur) and then turn around and complain about the lower cost of simple, relatively inexpensive steps to reduce risk? Quite possibly it is because of a tendency not to listen to advice from their professionals and instead to rely on emotion and opinion to make their decisions. What do you think?


Financial Transactions Tax Proposal

Posted on April 23, 2019 at 9:10 AM Comments comments (0)
Recently, the subject of a financial transactions tax came to the forefront of Congressional proposals for new legislation. The tax – denominated a “miniscule” 0.01% – is touted as a way to raise hundreds of billions of dollars in new taxes for the government to spend on various pet projects. Experience tells us that the applicable rate will not remain at the proposed initial low rate of one basis point and will no doubt gradually increase over time.
Additional factors argued to support the proposed tax include the desire of Congress to rein in high frequency trading and similar transactions by large investors and a claim that “fairness” would require such a tax since there is no sales tax currently imposed on financial transactions.
What will happen, of course, is that investments by people who are by no stretch of the imagination rich and who do not and cannot engage in high frequency trading will be subjected to this tax. Although the tax would also apply to institutional and other large investors, it seems likely that they will pass the costs on to individual investors or develop other workarounds. When one considers that this proposal means taxing every contribution an individual makes to one’s qualified retirement account as well as each rebalancing event in the account, it becomes evident that this tax over time will have an undoubted impact on these small savers as well as the large accounts which are ostensibly the primary target of the tax.
Even more discouraging is the fact that the government is moving to force workers to contribute to retirement plans containing investments selected by the government and then taxed at the outset and every step along the way. Once again, government taxation will not be progressive but instead will burden all investors and not just the “rich”. There is likely to be a better way and our next blog will suggest one possible approach.

401(k) Plans: Stay or Go?

Posted on March 15, 2019 at 9:42 AM Comments comments (0)
A decision facing many 401(k) participants as they near retirement is whether to leave their deferred contributions in the employer plan or rollover to their own IRA. With all the attention given the various fiduciary rules, this issue has become even more important. Not surprisingly, there are good arguments supporting a decision going either way as well as counter-arguments against each approach.
Some employer plans encourage retired or departed employees to take their money with them and for the smallest accounts will insist. However, most plans seem to welcome the former employee leaving the money in the plan. If that is the case, the next question should be about the investment choices in the employer plan. The broader the choices, the better, but it is important to know that an IRA will almost always have more choices than an employer plan, including certain investments no plan will be able to allow.
Another important factor is the costs related to the investment choices in the plan and in the IRA. Low cost choices can be very important to long term performance and should be considered. An advantage the employer plan carries is the absence of an adviser fee while IRAs, though sometimes self-directed, will be subject to the fees of an investment adviser if the participant employs one. Note that some financial/investment advisers charge a fee for planning for non-managed investments such as a 401(k) which means that the move to an IRA may not be so different after all.
As you can see, there are several different considerations to weigh if you are retiring (or separating) from an employer and participants should feel free to choose whichever option appears to give them the best situation. Ask your financial adviser directly about the costs and options and why one choice is better than another. If that adviser can’t reasonably explain why you should move to an IRA, don’t.

Considering Donor Advised Funds

Posted on December 19, 2018 at 5:34 PM Comments comments (0)
Currently a very popular charitable giving technique, the donor advised fund makes it easy to fulfill donative intent without a great deal of effort. With the very low contribution thresholds some of the funds allow (Schwab, Fidelity and Vanguard for example), donor advised funds are available to practically any investor for a small initial investment. That investment could be in cash, mutual funds/ETFs, stock and other types of investments. What’s more, the funds offer a wide variety of choices of charitable recipients as well as in the investment allocation of the funds.
Some interesting attributes of these funds include the ability to take the income tax deduction for a charitable donation immediately while deferring the actual distribution to charities for some time. The transfer is of course irrevocable – hence the availability of that immediate deduction –but it permits one to pick and choose the charitable recipients and timing. Of course, it is also important to note that there are administration fees and investment costs associated with the funds and that will effectively reduce the total passing to the ultimate charitable beneficiaries.
If you are considering a donor advised fund, do your homework and understand the costs, limitations and requirements associated with the fund you are considering. Compare this approach to the making of a direct gift to a qualified charity which will be deductible without the additional costs and steps coming with the donor advised fund. For some, the additional control with your own direct gift is more important while others will be very happy with the ease of use and convenience of the donor advised fund. Happy gifting!

Fun with Capital Gains

Posted on December 10, 2018 at 9:16 AM Comments comments (0)
One thing most investors have in common is dealing with capital gains and losses in their investment accounts. The capital gains tax can be a deterrent, particularly where the investor doesn’t have any losses to set off against those gains. The good news is that under current tax law, it is not necessary that the investor die in order to allow his or her heirs to take advantage of the step-up in basis so that the gains in the investments can avoid the capital gains tax.
Where an investor has total income from all sources that is lower than the top of the 12% tax bracket plus the standard (or itemized) deductions, the tax on that portion of income which is capital gains will be zero. Now the top of the 12% bracket is not all that high ($38,600 for individuals and $77,200 for joint filers) and although your capital gains may not be taxed, other income after deductions will be subject to the applicable bracket rate. So this technique benefits those taxpayers, often recent retirees, who have little or no earned income.
Those investors who have some choice or control over where they take income – from taxable investment accounts as opposed to other assets or income streams – will be able to make the most of this technique. Remember that qualified retirement plans or other tax deferred accounts do not recognize capital gains and will instead give one ordinary income on distributions and never capital gains no matter how low your income. This makes it clear that deferring that source of income as long as possible allows one to benefit from the beneficial treatment of realized capital gains in the taxable investment accounts.
If you are not certain whether you can benefit from this approach, discuss your options with your accountant or investment adviser. The window for transactions affecting your 2018 income tax is coming to a close.

Are Annuities an Asset Class?

Posted on December 3, 2018 at 5:33 PM Comments comments (0)
Recent articles in the financial industry press have suggested that annuities should be considered as an asset class for investors seeking to reach an optimal allocation for their investment portfolios. It comes as no surprise that for the most part these articles are written by and for insurance companies which are the creators and sellers of annuities. (In the interests of full disclosure of potential conflicts with their customers, it is useful to know who is touting these products and why).
First, it is important to understand that an annuity is a contract with an insurance company and the insurance company takes the investor’s money and invests it in equities and bonds and other traditional asset classes so as to be able to pay for its promises to the investor, along with expenses. Unlike many asset classes, the annuity as a single product entity is not something the investor can buy and sell at will or adjust freely when the mood strikes. Surrender charges and the built-in fees and restrictions in an annuity keep it from being very liquid.
Do these factors mean the annuity is really not an asset class? The answer is these factors are not inconsistent with the annuity being looked at as an asset class since there are other asset classes which are equally or even more illiquid and are based on contracts or are subject to restrictions and limitations on sale or exchange. That said, it is important to understand the nature of the annuity if you are considering making one a part of your investment portfolio exactly because it does not perform like the traditional asset classes we know. For example, the more traditional asset classes have much history and analysis that can be helpful in making investment decisions. Annuities don’t have the same benefit and are very dependent on the insurance company’s choices and requirements, which are constantly changing and driven by the insurance company’s interests first. The investor, in effect, is adding a layer of uncertainty to the investment portfolio because instead of choosing the investments (with or without an adviser) the investor is choosing the annuity and having the insurance company make the selection of the underlying investments.
Other considerations with that annuity decision should be the nature of the guarantees offered by the insurance company (and their cost) and how dependable that insurance company is and is hoped to be. The annuity can hold an important place in your portfolio but only if you do your homework and fully understand what it is and how it will work for you. 


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