2 Minutes With Magis Wealth Planning 4/14/17

“2 Minutes With Magis Wealth Planning” is published on the second Friday of every month.  It is comprised of five brief thoughts that we’ve come across during the course of our daily reading and research.  It summarizes data points that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc. 

  • With tax day right around the corner, recent IRS data indicates the likelihood of getting audited has decreased for five consecutive years. The IRS audited ~1.2 million individual tax returns, or about 1 out of every 120 of all individual returns filed (i.e. 0.8%) in 2015. Details by AGI are in the Chart of the Month below, but in summary your chances of being audited are less than 1% if your adjusted gross income is above $25,000 and below $200,000.  Over 70% of all audits in 2015 were correspondence done by mail (vs. field audits).  Which brings up a side note – don’t fall for phone scammers claiming to be calling from the IRS.  The IRS does NOT call people!    https://www.irs.gov/uac/enforcement-examinations
  • A recent article in the Wall Street Journal addressed the ongoing debate of whether low cost passively managed investments are as good as or better than actively managed funds. The tone of the article is slanted toward passive and cites recent statistics that indicate 82% of all U.S. funds underperformed their respective benchmarks over the 15 years ending 12/31/16. Obviously we are firm believers in low cost passive investments as our own research suggests actively managed funds have a difficult time overcoming the high fees they charge. But investment advice isn’t free and investment risk and personal goals and circumstances must be factored into the asset allocation process.  An investment plan is not the same as a financial plan.    https://www.wsj.com/articles/indexes-beat-stock-pickers-even-over-15-years-1492039859
  • We mostly agree with another recent article in the Wall Street Journal titled “Why Your Financial Adviser Can’t Be Conflict Free”. The author makes the assertion that all advisers have conflicts (regardless of what they tell you) and he cites several examples to make his case, including that advisers can make more money if they:
    1. advise clients to roll over a 401(k) account instead of leaving it in a former employer’s plan
    2. sell proprietary investment products
    3. recommend borrowing for a large purchase rather than drawing down investible assets
    4. charge higher fees to manage stock vs. bond portfolios

Our thoughts: While these blanket claims are true for the vast majority of investment advisory firms out there, none of them apply to our business model – asset based annual fee (regardless of location), with no other outside compensation. We also think it’s important to note that regardless of the business model, there are many advisers that act ethically and in the best interest of their clients.  The mere existence of inherent conflicts doesn’t prevent someone from doing the right thing, but proper disclosure and client awareness are crucial. https://blogs.wsj.com/moneybeat/2017/04/07/why-your-financial-adviser-cant-be-conflict-free/?emailToken=JRrydf5zYnqSi9Ayb8wW8BgNRINNVr7TFgk

  • Chart of the Month:

IRS Audits by AGI

Source: 2016 IRS Data Book;  https://www.irs.gov/uac/soi-tax-stats-examination-coverage-individual-income-tax-returns-examined-irs-data-book-table-9b


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