Mutual funds end of year

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Nov 12, 2005 1:40 pm

I know it's not always prudent to buy or sell mutual funds right before they pay out their end of year cap gains.


In real life how does this work.


Do financial consultants  delay investing their clients money until the distributions are paid or in the long term view of things is this impact negligible so why wait?


Just curious


scrim


Nov 12, 2005 2:47 pm

Great question. I'm not an expert, but I do know this....


Last year about this time, I had a pretty good sized position in Aurora fund from Black Rock. The fund was doing very well for the year , then they paid a huge divy ($3.50 ?) the NAV took a dive, and never came back. I would wait. It's not a fun conversation to have with a client

Nov 12, 2005 6:32 pm

Scrim:



The mutual fund wholesalers can give you an estimate of year-end

dividends. Some popular funds are still carrying forward a tax loss from

previous years so your clients won't get burned.



If you position them in a tax-deferred account...then its a mute point. But

make the calls and get the details.

Nov 12, 2005 7:30 pm

"The mutual fund wholesalers can give you an estimate of year-end
dividends. Some popular funds are still carrying forward a tax loss from previous years so your clients won't get burned. "


EXACTLY. You definately want to make sure that you dont invest and then your clients get a nicer tax bill for growth that they didnt partiicpate in. I had a client recently that wanted to invest some proceeds from a home sale. They wanted to get in right away ( because the market was going up of course...). Some of the funds in our matrix were due to pay out some nice cap gains, so I advised them to wait a few months and get in in January. In the meantime they are getting about 3.25% in a VRDO and are content to wait it out... I came off as someone who wasnt dying to drop tickets right away and make a couple bucks, and they responded by moving in an additional 70K from a CD that had just matured.... BUT- for those IRA's and such, just get the money in there....

Nov 14, 2005 11:47 am

additional info:


it appears that around the last week in December the funds I mostly use will pay their CG distributions.    They are estimated to be about 2% of the share price.


Based on this info at what point should I use a "cutoff" and invest my client's money after the distributions?


I mean if a client walked in today I assume it would not be negligent to invest it now as we still have six weeks to go.


I'm just wondering in the real world what others do.


Trying to do the right thing,


scrim

Nov 14, 2005 12:43 pm
scrim67:

additional info:


it appears that around the last week in December the funds I mostly use will pay their CG distributions.    They are estimated to be about 2% of the share price.


Based on this info at what point should I use a "cutoff" and invest my client's money after the distributions?


I mean if a client walked in today I assume it would not be negligent to invest it now as we still have six weeks to go.


I'm just wondering in the real world what others do.


Trying to do the right thing,


scrim



You are correct that it would be unwise and poor client care to allow folks to invest taxable funds only six weeks before an anticipated CG dividend......


Look for funds who do not expect to pay realized gains, wait, or consider UIT's as an alternative....

Nov 14, 2005 12:45 pm

Scrim,


Just had this conversation this morning with wholesaler. He was talking about how much inflow of money they get typically after a distribution is paid.


As others mentioned, Fund rep could give you heads up. second, it is not only ethical, but good planning to wait till after the distribution. If it is an appropriate investment today, than it should be appropriate 1 month from now. Even better if NAV is down after distribution.  Any time after distribution would be good. As you know, If client is in non discretionary account - you have to keep them in the loop as to when you are buying the fund. Blarm is right on, you will look like a hero by not being greedy, and explaining to the client what your strategy is.

Nov 15, 2005 9:21 am

Before you go calling wholesalers for this info you might first check w/ your b/d's mutual fund dept -- my b/d (RJ) tries to gather as much of this info as possible from the funds and posts it for us.  Might save you some time calling around.


Also, this year's distributions, in general, are expected to be about the highest for many funds since 2000 because the losses after 2000 were already substantially, if not totally, used to offset gains in 2003 & 2004.

Nov 15, 2005 10:40 am

So I have a client with a bunch of Fidelity funds.  He can cash out with no penality and then come right on my Ark.  But how would I find out if he will incur penalities if I bring him over before the end of the year?

Nov 15, 2005 12:32 pm

Ask your gods who work at Raymond James- I am sure they will have the answer....

Nov 15, 2005 2:56 pm
maybeeeeeeee:

So I have a client with a bunch of Fidelity funds.  He can cash out with no penality and then come right on my Ark.  But how would I find out if he will incur penalities if I bring him over before the end of the year?


Not sure what your question is.  But, if by "cash out" you're talking about liquidating the funds, why would you necessarily do that?  As I recall, you're at RJ and we have both fidelity & fidelity advisor funds.  The point is, you should be able to move them over into our fee accounts (I'd check w/ MF marketing to make sure all the funds are covered by our selling agreements).  You can then make whatever asset allocation decisions after they're over.  And, re no "penalty", while there may not be a CDSC if it's a taxable account there obviously may be a tax cost if you liquidate.


Again, maybe (no pun intended) I'm missing your question.

Nov 22, 2005 10:02 am

What is the best response to a client who does not want to move their account before the end of year (cause they don't want to lose the dividends).  But, you think they should move to you now because you offer superior investments.

Nov 22, 2005 10:38 am

Can they keep the same funds and transfer in kind?  I would suggest that they do that and then if they want to liquidate do so after the dividends are paid.  That way you will have the AUM and the client knows that you have his best interests at heart, or that at least you are listening to him

Nov 22, 2005 11:19 am

"What is the best response to a client who does not want to move their account before the end of year (cause they don't want to lose the dividends).  But, you think they should move to you now because you offer superior investments"


You can express to the client that their decision is fine, but proceed with opening the account on your end, and have the client sign ACAT's, so when Jan 1, 2006 hits, you can submit the transfer forms and the process is already under way...

Nov 22, 2005 2:20 pm

Blarmston


As a client, I wouldn't do that...would you???  I'd just tell the advisor I'll sign at the 1st of the year.

Nov 22, 2005 4:20 pm

why wouldnt you do that? if the only reason the client doesnt want to transfer the account before year end is to receive the dividend, then you can at least get the commitment to have the account established. Have the strategy conveyed to the client in the next 5 weeks, and when Jan 2nd hits, call the client, revisit the process and the strategy with them, once again get their approval, and send the ACAT's. You are elminiating timely steps, so instead of chasing the client into January to have them sign, you are seeing the funds hit sometime in Jan.

Nov 22, 2005 5:10 pm
maybeeeeeeee:

What is the best response to a client who does not want to move their account before the end of year (cause they don't want to lose the dividends).  But, you think they should move to you now because you offer superior investments.



If you're talking about mutual funds, then the dividends are mererly a method of accounting for taxable gains.  They are built into the NAV right now, and when they are paid out they will be subtracted from the NAV.  Other than perhaps any taxable impact, your client will not be any better off by waiting for the 'dividends'. They will pay him/her a dividend of 50 cents per share from XYZ Growth Fund, and then the NAV of said fund will drop from $11 to $10.50  Impact on their bottom line from this is exactly ZERO!



So there's no need to wait, even more so if it might be in a tax sheltered account.

Nov 22, 2005 6:21 pm

That is what I am talking about Joe.  I thought there was no real benefit.

Nov 22, 2005 7:35 pm

Based on what has been described, it seems to me to be a stall tactic. The

prospect is not willing to commit. Joe D'broker's explanation is accurate,

however, reasoning will not work with prospect.



Blarmston's tactic is too strong-armed for these days.



P.S. If this is a current client, then I think the relationship is lacking

confidence.

Nov 22, 2005 9:17 pm

"Blarmston's tactic is too strong-armed for these days".


Why Skee, I think I may be insukted by that comment... Oh wait, no.. no I'm not... Based on the information that was provided, if the client said they were committed to transferring accounts after year end, you can simply position my stated strategy as the 'most efficient and time sensitive' way to begin the transfer process.. Strong arming is shoving a ball point at the guy, whispering that you know his home address, giving him a wink, and mentioning that they 'boys' are gonna come knocking tonight to break his legs and arms, if he doesnt sign up today..