Top 10 Mistakes with IRAs

A Boston mutual fund company, MFS Investment Management, pointed out in a recent edition of Investment News the top ten mistakes made by investors concerning IRAs. Starting from the last, the following applies, according to MFS.

10. Making inappropriate spousal rollovers
9. Assuming that a non-working spouse cannot contribute to an IRA
8. Skipping “catch-up” contributions by people over age 50 ($3,000 plus $500)
7. Beneficiaries failing to take advantage of income tax deduction for estate taxes paid on IRAs
6. Placing title of an IRA in a trust, which causes immediate taxation, as opposed to simply naming the trust as the IRA beneficiary
5. Taking the wrong minimum required distributions
4. Missing important dates for distributions
3. Not taking advantage of increased contribution limits, which are now $3000/year for people under 50
2. Not listing or updating beneficiaries

The #1 mistake, according to MFS, is not taking advantage of, or not properly establishing the “stretch” distribution option which allows non-spouse beneficiaries to maximize payouts over their life expectancy.

If any of these points might apply to your IRA, please feel free to call us, so we can check the details of your account. We might remind you that many of our clients have IRAs in other places, as well as with us. Contact us and we’ll give you assistance in handling those outside IRAs as well as those with Omega.

John, Ext. #18

Tom, Ext. #19

"Read the Charges, Please"

While most of our clients have no reason to be concerned about the charges that have been made against mutual fund companies, we thought we would bring you up to date – at least of this writing.

The scandals of mutual funds are not necessarily spreading, but in many cases, they’re simply getting deeper. The Canary Capital hedge fund has been hip-deep in the scandals and many new things are coming to surface. For example, Bank of America’s connection was initiated in April 2001, when a Bank of America broker made a cold call on the Canary Capital executives. Bank of America asked if they would be interested in trading mutual funds through the bank. “It was,” says one person familiar with the case, “like a fly cold-calling a spider”. According to a 2004 Fortune publication, the bank offered up its own Nations Funds for timing. It even provided a credit line for Canary (ultimately $300 million). Bank of America was lending the hedge fund money that was used to market time the bank’s funds, according to an ex-Canary employee.

Among other fund companies that have agreed to pay restitution money and cut fund management fees was Alliance Capital. MFS has agreed to pay $225 million and slash their fees by $125 million. Bank of America, eager to complete its merger with Fleet Boston/Columbia, agreed to a package for both itself and Fleet totaling $675 million-$515 million in cash, plus another $160 million in fee cuts. All the firms have fired executives and agreed to management reforms, according to the Forbes article.

And there was more to come. Invesco and its CEO, Raymond Cunningham, are facing civil fraud charges from both Elliott Spitzer, attorney general of New York and the SEC. Janus, of course, is up to its neck in the scandal and has volunteered to pay $31.5 million dollars in restitution, after allowing a dozen timing arrangements. Morningstar has recently put their stamp of approval on Janus. How soon they forget

"Don’t do as I do, do as I say…"

As most of us know, Mr. Warren Buffet is known as the Oracle of Omaha. He is the chairman of Berkshire Hathaway Inc. in Omaha, Nebraska. In his 2003 annual report, he advised independent mutual fund directors to “take a look at other management companies” before blindly agreeing to a particular fund advisory contract with a particular company. Well, we’ll see how he comes out on this one, since Berkshire Hathaway is expected to become part owner of the Safeco Fund Group later this year.

If the independent fund directors at Safeco take Mr. Buffet’s advice, they will have to consider giving advisory contracts to another money manager. Safeco Funds have a mediocre track record, according to a prominent fund analyst. While Safeco has shaken up its fund group in 2003, resulting in new management for some funds, they still have a long way to go.

Interestingly enough, at the end of 2003, Berkshire Hathaway also had 11.3% stake in New York based, American Express Company and a 3.3% stake in San Francisco based, Wells Fargo and Company. Perhaps Mr. Buffet will take a harder look at the American Express group. That company’s 18 domestic equity funds have been a poorly performing group, and Wells Fargo is rumored to be attempting to buy the scandal-tarred Strong Capital Management Group in Wisconsin.

"So..Do I Roll My Money Over to Uncle Charlie Schwab - or Do it Myself?"

Does anyone, except me, remember when Charles Schwab ripped the advisor community and advertised its position in the investment world as being direct-brokerage only -“passing brokers and broker fees”? Well, now the whole basis of their operation seems to be advice rather than suggesting investment decisions and research being made by the individual investor. Schwab has now figured out what we’ve known for 40 years, “If you’re going to invest, hand your money over to a well-trained, disciplined, long-tenured, low cost investment manager”. However, if you have seen television advertisements lately on CNBC, you can sense the come-back of the stay-at-home day trader… When will Americans learn? In the next 7 years, $2.7 trillion of $4.0 trillion will roll-over from qualified retirement plans into IRAs…We at Omega Financial Group look for long-tenured managers, low portfolio turnover in the investments, low cost, sensible risk factors, and long-term consistent performance. We also consider very important the servicing of the IRA business. The fund management companies that we use provide solutions to sometimes complex technical issues. We try to keep updated on current regulations and a streamlined process of rolling over the business from qualified plans. We see people every day who have resigned their position as “Do-It Yourself” investors. If you haven’t, but would like to, we have a place for you.

"Too Much Too Late?"

Attorney General Elliott Spitzer of New York has been the driving force behind much of the apparent improvement in the mutual fund industry. As he has taken the lead, the SEC has attempted to “out aggress” the ambitious attorney general. We are certain that Mr. Spitzer is accomplishing these reforms with no thought of running for a higher office. (Ha!)

In this era of shortages of money at the state level, the fines and penalties states have been able to levy on mutual fund management companies have certainly lessened the short-fall experienced by most states. One of the methods the government uses is that the target company is asked to waive their attorney-client privilege or face the threat to increase the pressure in civil litigation from outside sources. This is not as bad as holding them by their feet out a fourth story window and suggesting they would be better off giving up their 5th Amendment Rights.

In our opinion, the regulators are over-reaching. However, isn’t that how everything works? Doesn’t the market have to “over-reach” before we figure out that it is overbought? And, doesn’t the market have to go below bargain prices before we figure out it’s time to buy?

The industry will be better off when all of this is over, the dust settles, and reform is put into place. Most officials believe as we do, that the guilty should be punished. I personally believe these offenders should suffer severe penalties which would include jail time. Go-ahead “fine” them. That’s easy – but jail time sends the message.

Omega Additions, Subtractions, and Changes

It has been a few months since we reported personnel changes at Omega. Before moving into new quarters, we lost Joan Crowther to retirement in the Spring of 2003. We will miss Joan and appreciate the years she gave us. New additions are receptionist Amity Martin. We like to call her the Director of First Impressions! Other additions include Sandra Pennington who has been with us for quite awhile and acts as the Senior Service Administrative Assistant. Sandra comes from an insurance background. Also new is Kami Schlossnagle, Joe Hardgrove’s sales assistant. Kami is in the office 3-4 days per week, and we have accused Joe of not putting in as many hours as his assistant! Melissa Collins is new to our group. She comes from the financial service industry and is initially working as a sales assistant to John Dickens and Tom Hardgrove. Tammy Bryant has continued to manage the office and act as COO.

We have continued to believe that the sure way to grow our business is to take care of our clients and shareholders. Thus far it has worked, and we are currently in an excellent financial position with the youth movement firmly in place!

REFLECTIONS

When you think of it, 40 years is a long time. In fact, my biblical studies have shown me that it represents a generation. Well, my 40th Anniversary in the financial business is coming up in July. Besides the obvious “Thanks” to everybody who has helped us along the way, I will say that I never would have dreamed that 40 years would have turned out this way. I’ll not make the mistake of telling you that I plan on retiring because that isn’t a consideration. But 40 years is an excellent milestone that gives me a chance to reflect a little on some of the things that have happened along the way.

While I began my career on a part-time basis in 1962, I came full-time with the “Financial Advisory Clinic” (!) in 1964. In those days, there were very few of us who were what we called, “dually licensed”, cleared to sell insurance and also securities.
In November of 1963, we suffered the tragedy of President Kennedy’s assassination. 1964 and ’65, we were struck with the revelation of the Civil Rights marches and as the 60’s progressed, we watched the Vietnam War escalate. By 1967, we were in a nice up-market despite the riots in Newark, NJ and our country suffering more and more with the conflict in Vietnam. We were busy then working with helicopter pilots in Mineral Wells, Texas, helping them accumulate assets for the future as they did their duty in that terrible war.

In 1969, we underwent a downturn caused by tight money as the market fell and on into the early 70’s as Cambodia was invaded. We went through the wage-price freeze and sadly, Watergate, where we watched the televised proceedings. We were unable to realize that this was a portent of things to come.

Our securities business suffered in the years ’73-’74 during the oil embargo and during the scandals of the Nixon presidential administration. Those years were tough, as many of you know. (Today. those are the years that we review hypothetical illustrations to show you the worst years in the last few decades.)

Things snapped back in ’75, as our troops were withdrawn from Vietnam. It was then we became involved with the Southern Medical Association Retirement Plan and began to expand our markets through the southern states and Eastern Seaboard.

Our relationship with this physician group lasted 20 years.

Do you remember when New York City almost went bankrupt? The market continued to rise in 1976 in spite of the New York crisis.

There were many reasons not to invest in the ‘70s and probably the main reason was the energy crisis. However, those of us who did, and have held on, have discovered that the wait was worth it. We ushered the 80’s in, as well as President Ronald Reagan.

It was 1983 when I purchased, what is now Omega Securities from World Service Life Insurance Company, here in Ft. Worth. Little did we know that we were coming into the business with our own brokerage firm at the beginning of the broadest, most exciting, bull market in history. Talk about “tail wind”! Many clients came with us during those heady times, riding the Bull Market. And only a few left after the internet bubble burst and 9-11 awakened the world with a new war. Those who stayed, incidentally, have watched their accounts come back in beautiful fashion.

Since we had been through the ’73-’74 market, at the end of the 90’s the bear market did not affect us psychologically as much as those grueling years in the early ‘70s. So, we are now back on the upside as has always happened. The economic turn-around has continued to remind us that a democratic government coupled with a free market society will always win in the long run.

Finally, when our clients began to wonder about the future and my longevity, John Dickens joined us in 2000, Tom Hardgrove in 2001, and Tammy Bryant celebrated her 10th year in 2003. All three are now partners. The future looks good (and young!).

“So what else has that generation of 40 years brought?”

If an observer analyzed the performance of one of our favorite funds, Investment Company of America, he would discover that in those 40 years there were only 6 negative 12 month periods. 34 winners and 6 losses are not too bad.

The family who invested $10,000 in ICA with full sales charge on my second day on the job, July 16, 1964, and had the courage to hold on would have seen on March 31, 2004, their account with a value of $931,527.*

On the other hand a $10,000 investment in the S&P500 Stock Index would have grown to $507,777 by March 31, 2004.**

My friend, Kevin Clifford, President of American Fund Distributors, when asked about what to do when there are so many thousands of mutual funds out there - how do you decide which ones to buy? Kevin gave an old Kentucky horseman’s answer,

“When there are too many horses, you got to bet on the jockeys.”

This is what we have done. We are convinced that you, our clients, are well positioned with your investments in the American Funds. We’ve spent 40 years checking the jockeys. The ones you have are the best!

MORE LATER

In winding down this emotional odyssey, I’ll steal a line or two from Garth Brooks (with apologies!)

“Yes, I could have left my life to chance.
I would have surely missed the pain,
But I’d also missed the Dance.”

* Ok. Here is the disclaimer: There’s nothing guaranteed here. The results in the next 40 years may be better or worse (take your choice). This fund is not guaranteed by a government agency or a bank (Thank God!) We offer these funds through a prospectus, which is, surprisingly enough, easy to read. Some funds charge up front sales charges which carry a hefty annual expense. (Except, some are managed by a computer and do no research and have lower charges, like an S&P Index Fund)** Other funds, like the one shown, charge a onetime sales charge (in this case 5.75%) and very low expense costs annually. Larger investments reduce the up front charge and…Well, you know the rest.

Have a great summer!

You can contact us at:

Joe Hardgrove: jh@omegasecurities.com
Tom Hardgrove: th@omegasecurities.com
John Dickens: jd@omegasecurities.com
Tammy Bryant: tb@omegasecurities.com
Sandra Pennington: sp@omegasecurities.com
Amity Martin: amity@omegasecurities.com
Melissa Collins: melissa@omegasecurities.com
Kami Schlossnagle: kami@omegasecurities.com