Financial Planner didn't warn us of LT Capital Gains

For not warning you? Nothing, really. You both should know taxes are due when you sell stock held for a gain in an account that's not tax-deferred. She's afraid of losing your account, that doesn't mean you should take advantage of her.

Joe

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I cannot believe that someone in the financial industry was not aware of capital gains tax. Then again, there are people who are just that dumb, and they seem to get away with it. I can see it go either way.

The advice to diversify looks like it very well could have been good advice. You would have had to pay the capital gains someday, and the rate is low right now. As a result, I don't see how you were damaged.

If you really want to push this, get a 2nd opinion from another planner. You want to see if your planner was doing a legitimate transaction, or was just doing a churn and burn on you.

If it was a mistake, and you really are not out that much, then maybe ask for a refund of her fees for the year. In any case, I'd consider moving my account to some other planner. If she made a mistake on taxes, who knows what other major mistake she might make further down the line?

-john-

You would have had to pay the tax eventually when you sold, and there is talk that the favorable capital gains tax may go away. So perhaps you sold at a fortuitous time. It may turn out that you owe her rather than her owing you!

Dave

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Agree with Joe. Besides, something is missing here... the idea that a person in this business with 15 years experience and lots of clients and who is unaware of an elementary tax concept lacks credibility.

On another matter, the OP wouldn't have saved taxes by not selling, he would have merely postponed them. And remained non-diversified. Now THAT would be something to be upset about.

-HW "Skip" Weldon Columbia, SC

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"HW "Skip" Weldon" wrote

The OP has not presented enough facts to conclude this. For example, it's possible the OP is older and plans on passing on an estate to children, etc. whence the basis steps up, and no taxes will be owed.

If I paid someone for financial planning advice, I would expect "tax effects" to be part of any discussion the planner and I had. I wonder where some of you draw the line for what a client is expected to know.

Disclosure: I am not and have never been paid for my services for financial suggestions. I am an individual investor who does her own financial planning and taxes.

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It's true an advisor with a big name firm should have warned you of the tax consequences of any move. OTOH, some questions to ponder: How long would you have waited to diversify had she not been in the picture? Would this have hurt you by a lot more than $2500? If in 2008 your new allocation does, say, some $5000 better than your old allocation, are you going to give the advisor/firm a cut of your net? Lastly, as others suggest, long term capital gains taxes may be rising soon, so selling and taking a LTCG in

2007 may have been prudent; it depends on other details of your taxes. Overall it's a very tricky matter to deduce whether her advice actually helped or hurt you, overall. So many questions; so much speculation.

Care to share what you paid for this firm's service? I can't tell what "big name firm" means, except that in my experience, a lot of big name firms charge little and have advisors who are proportionately inept. One gets what one pays for is something to bear in mind.

I suppose I personally would either (1) let her compensate me (because she did do wrong in not warning you about the tax consequences) but then I'd feel obligated to keep using her services, for the reasons above; or (2) give her up and get another advisor, with a different firm.

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The advisor definitely should've known. There is no rule that says the client should've known. The fact that a financial advisor didn't know about the potential of a cap gains tax is a major red flag.

I'd say ditch her fast.

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Not if OP never sells and his heirs inherit the holdings on a step up basis.

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The OP used a new (to them, but seasoned) financial planner who recommended they diversify their portfolio, which they agreed to. However, the FP did not warn them that they may incur additional taxes due to any related capital gains associated with the diversification of their portfolio. They paid an extra $2,500 in taxes, are a bit mad at the FP and are curious as to what would be a fair settlement in this matter.

Their original message has been snipped to comply with the rules of this NG.

My response -

You took the time to meet with a financial planner to get financial advice, but didn't think to run this idea past your tax accountant? Shame on you for this. The resulting tax hit is yours alone!

You went to a financial planner and got exactly what you paid for - financial advice. Had you gone to your tax advisor and asked for tax advice you would have been told that there may be some related tax issues due to the rebalancing. For that matter, did you even ask the financial planner if there MIGHT be tax consequences associated with the rebalancing? I doubt it, most people don't. However, if you did ask and were told that there would be no tax consequences then this is a horse of different color and my comments should be ignored.

When you first met with the financial advisor, either this one or any other one that you've ever used, have you ever asked would you be getting guidance on tax issues related to your portfolio? Have you ever even told your financial advisor that you had concerns about tax issues? Most people don't.

Most people try to do the right thing most of the time - this includes you and your FP. Yet when we miss something our first thoughts turn to "who can we hold responsible, other than ourselves?". In my opinion, this is just plain wrong. We have to take responsibility for our actions, or lack thereof. This means you as well as your FP.

You hired someone with expertise in a particular area (financial planning), you got (what sounds like) very good advice and you followed it. Your portfolio is likely less risky now that it was before. Doing this cost you some tax money.

The question you should be asking yourself is this - you already admit that what she suggested was a good idea, so would you have done it IF you had KNOWN that there would be additinoal taxes as a consequence of rebalancing? The answer to this question should be YES - doing the right thing means doing the right thing, even if it costs you a little money. But even if the answer to this question was NO, it was still your responsibility to ask the right question of the right person.

FYI - I am BOTH a Financial Advisor and a Tax Advisor. I specifically got licensed in both discplines because I believe that one shouldn't make decisions in one area without considering the impact of the other. And there is no way I can give advice in either area without being versed in that area. Hence, I do both. Unfortunately, most advisors focus on one aspect - this is the standard and it is how most advisors work. It is perfectly legal and an a generally accepted practice.

It is unfortunate that you got a surprise, but is this really much different that having to pay tax on capital gains distributions?

Good luck in the future, Gene E. Utterback, EA, RFC, ABA

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More generally I wonder whether the advisory/account agreement specifically states something like "consult your tax adviser, we do not provide tax advice". This is one of my long-standing beefs with the financial services industry (of which I am part) -- the paradox that taxes are an extremely important component of financial planning, yet many doing business as financial planners disclaim tax advice as a provided service.

"Just learned of this rule" - meaning just learned about capital gains taxes - after 15 years in business? Either that's a sincere statement, or a failure to admit an oversight (which is worse?). But I'm guessing tax considerations were not a significant factor in choosing the three new mutual funds; do you want that as part of the bundle of "financial planning" services that you receive from an adviser?

-Tad

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[...]

Just think if you had had a large carryover capital loss, what a great idea it would have been, then you'd be owing your F.P. a nice dinner!

My impression is that you'd have a hard time proving damages in court, so if the F.P. (financial planner) kicks back some money, that's gravy for you. You might also want to ask over in misc.legal.moderated whether you have a legal standing to collect from the F.P.

-Mark Bole

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I do not use a financial planner, but if I did and she said to me that "she had just learned this rule too", I would run, not walk, to a different planner. How can any financial planner worth their fee not already be aware of the capital gains tax consequences of the trades they are recommending to a client.

I am quite surprised at the number of people defending the financial planner. This was not some random advice posted on a newsgroup, where you get what you pay for, this was someone getting paid to provide sound financial advice!

Marco Polo

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I for one did not excuse the "financial planner", but rather wondered aloud how it could be that someone in the business for 15 years and who had lots of clients would be unaware of such a basic tax concept. My suspicion is that we weren't getting the whole story.

But assuming this is as presented, the "financial planner" was at fault and should pay a penalty. The greatest penalty would be for the OP to spread the word about her.

Also, as was previously mentioned, some "financial planners" do not give tax advice and instead refer their customers to those who do. Of course, how they then describe themselves as "financial planners" is another matter...

-HW "Skip" Weldon Columbia, SC

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But the fact is the OP did not have a cap loss but rather an unanticipated cap gain. And even if he has a cap loss, the advisor still should have advised him of the tax consequences of the move. He owe the advisor a swift kick in the butt.

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In reading over the OP's post again, I did not find anything about a fee being paid. I wonder if it could simply be a case of a commissioned salesman pretending to be an expert. On the other hand, the "willingness to compensate us for some or all of the loss" does not ring true. Something is rotten in Denmark.

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"Don" wrote

In 25 years, I have had a few transactions with at least three financial institutions go in a way I did not like. All bent over backwards to please me, including offering compensation. One time, with a Fidelity rep that was determined to refund me a certain fee that actually was completely correct, I was all but ordering, "Down doggy!" I had to emphatically tell the rep it was okay; my mistake; please do not give me money that I realized, after he explained it, most certainly was not due. The rep finally accepted my assurance that I had absolutely no hard feelings and knew it was my mistake. I do this because I don't like jacking up fees for everyone else; on principle yada.

In one instance with a brokerage I was not fully satisfied. The initial wrong snowballed after the brokerage's 800 number reps repeatedly refused to connect me to the local branch office or even give me the number, so I could talk to someone I had actually met face-to-face. Being put off like this was not good enough for my $80k (at the time) of assets. Within hours I had commenced arrangements to move my assets from it. The next day, after its reps finally figured out that my foot was halfway out the door, they called, begging and offering compensation, but not such that I felt made whole. I said no thank you, politely told them what I hoped would happen should I ever do business with them again, heard them out, and walked.

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My experience with banks has been similar. The people have always been apolegetic and made things right after goof ups. But I wonder if losses from stock transactions may be a different ball game. There are so many sales people around promoting the latest hot mutual funds to unsuspecting customers, when things go wrong it is hard to tell what are honest errors and what is fraud.

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I agree, my post was hasty and incomplete, especially since $2,500 is less than the amount of a loss carryover that could be used to offset ordinary income anyway.

I would only echo points made by others:

1) neither party had an expectation up front that the F.P. was providing tax advice, otherwise a complete interview encompassing the client's entire tax situation should have been performed (this is the point I was trying to make). 2) while the F.P. should have mentioned the tax effect, I don't see any way in which it represents a loss or damages to the client, only a surprise. The tax tail should not wag the dog, and the advice was sound and probably would still have been followed even if the tax effect had been mentioned up front.

One exception: if the client was in such a tight cash flow situation that they could not possibly make a timely payment on the tax bill, then I could see where maybe the penalties and interest on the late payment could be the F.P.'s fault. But the OP stated only a smaller refund resulted, hardly a catastrophe.

-Mark Bole

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"Don" wrote snip, hopefully w/o losing context

Oh, I see what you are driving at now. None of the few transactions that I had and that went amiss involved disputes over what one might call theoretical losses.

Though to me, it's nearly a hard fact that the OP's financial planner made a serious professional mistake. The only thing theoretical is the amount of loss. Very much to the financial planner's credit, she's owning it and offering compensation. I think this is the sign of a real professional (assuming she does not bungle something else). What's fair for compensation? John Week's suggestion of foregoing a year of the firm's (or her) fees is one I think might be reasonable. It's a token rather than what would be necessarily a lame attempt to compute actual loss. Punitive damages vs. actual, say.

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