Bond Mutual Funds

[Corduroy Frog]

Admittedly, I'm not the biggest fan of mutual funds to begin with.  I have seen a trend this year:  High income bracket taxpayers are receiving 1099-DIV statements showing an increased investment in Bond funds.

Bond funds are usually high-levered, and are ALWAYS producing non-qualifying dividends.  Are they so wise an investment that their return should outweigh the tax implications, as that is sometimes the case?

I doubt it.  The last year or two have seen interest rates rising, and that causes bond values to crash.  The only explanation i have is that they are so hard for stockbrokers to sell that the commissions have created incentive for the stockbrokers.

Unfortunately, for many of my clients, they simply trust their investment advisors to do what is best for them.

Is this subject worthy of comment?

[joanmcq]

I've seen more clients with bonds & bond funds too, but thought it was just because of rising interest rates.

[BrewOne]

We have to be careful with comments on clients' investments.  I tell the client do not tell your advisor that your accountant thinks this is a terrible investment (learned the hard way).

But I will speak my piece on Limited Partnerships and Publicly Traded Partnerships that brokers buy for a client without running it past them first and with no regard for the tax preparation consequences.  I just told a client with what should be a simple return that last year their broker had invested $3,500 of their money in a PTP that generated a -$400 loss and about $1,000 worth of tax forms.  Another PTP they owned had $30 income but about 20 entries on the K-1.

[BulldogTom]

I just had this conversation with a client yesterday.   I question if they understand the MLPs they are in and what a 1256 Straddle is and why that needs a separate form and yes, I do have to charge you for each K-1 and yes the K-1 shows a loss as well as the 1099B.   

I have been with this client for a long time.  They at the beginning of their retirement and really scared that they will not have enough in the retirement piggy bank to live out the rest of their lives.  It is the first time I have spoken out about the investments they are in - it used to be a lot simpler (4-5 mutual funds and a couple of stocks).  This year the broker churned their investments to the tune of 44 trades and 2 K-1s for MLPs that were held for less than 60 days.   I could not hold my tongue this time.

Tom
Longview, TX

[Margaret CPA in OH]

I had a recently widowed client several years ago with an investment account and so, so many st transactions that had never happened when spouse was alive.  I believed the client was being taken advantage of and suggested that she interview a couple of other investment firms to ask how they would manage her account.  She swapped brokers within months.  Sometimes you just have speak up to alert folks to the possible ramifications of what is happening.  It is then their decision to do nothing or take a more active interest.  Horse to water, etc.

[jklcpa]

Yep, I have a 95 year old client whose broker is following her conservative risk tolerance but then purchased an oil and gas PTP. No way this woman would ever understand this investment; she hasn't even been able to recognize the 1099-SSA for the last 2 years and was in tears yesterday over the "lost" 1099 that she had all along after we requested a duplicate.  She found it today.  

[JohnH]

So many transactions on brokerage statements are clearly motivated by the commissions or bonuses the financial advisor receives.  The transactions are relatively small in comparison to the size of the portfolio, so even large gains on a few trades would not move the needle significantly on the whole portfolio. 
 

Plus, a disproportionate number of the trades either lose money or eke out tiny gains at best, especially after transaction costs.  I’ve always suspected that numerous transactions in a managed account when the client isn’t an active investor are often simply to confuse the client regarding actual performance.  
 

It’s pitched as maintaining a “diversified portfolio”, but in fact the best method of diversification is buying and holding the broadest index available with low transaction costs.  Rather than looking  for needles in a haystack, just buy the haystack.