In This Issue:
Regulators Descend on Robinhood
The legend: Robin Hood famously steals from the rich to give to the poor. Today’s less chivalrous version: Robinhood is an app that encourages young, inexperienced investors to trade stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. in part to line its own pockets.
The pandemic has forced us all to pick up a few new hobbies to combat cabin fever—but for some young investors, we’re worried they may be picking up some bad habits. Digital trading platforms like Robinhood, Ally Invest and WeBull have skyrocketed in popularity during the pandemic, especially with millennials and Gen Z-ers. These companies say their apps are aimed at making it easier and more enticing for young people to invest, and they often offer free trades and fractional shares that let newbie traders buy a stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. for as little as a buck.
We’re not so sure a program that shoots off virtual confetti every time you buy or sell, as Robinhood’s app does, is the best option for serious investors. And it looks like regulators may agree: The company is being sued by Massachusetts state securities overseers who claim the app fails to protect customers and their assets and falls far short of the fiduciaryA person or organization who manages assets for a third party, and is legally bound to act in the best interests of that third party, putting the third party’s interest before their own. standard broker-dealers are held to.
The feds have also taken notice. A failure to be transparent in how it makes money recently earned Robinhood a $65 million fine from the Securities and Exchange Commission.
The SEC alleges that until 2018, Robinhood failed to disclose profits from agreements with high-speed trading outfits, including Citadel Securities and Virtu. By sending Robinhood trades through these operators, which pay Robinhood for the privilege, the app is incentivized to encourage users to trade more often—thus increasing its own revenues—rather than securing the best price on each trade for its users.
These payments, known in the industry as “order flow,” made up Robinhood’s biggest revenue source as of October 2018, yet according to the SEC, the practice was excluded from a report on the app’s website titled, “How Robinhood Makes Money.” Customer-service reps were also instructed not to divulge the practice if customers asked about the company’s revenue streams.
Robinhood, while preparing for a potential IPO next year, neither confirmed nor denied the allegations, but they paid the $65 million penalty while noting that the practices “do not reflect Robinhood today.” The company also pledged to hire an outside consultant to review payments for order flow and follow its duty to execute trades in the best interests of its users.
Digital investment start-ups that offer lower barriers to entry, cheaper commissions and an entertaining user experience have a seductive appeal, especially for enterprising young people stuck at home. And we encourage teenagers, college students and all young people to explore the benefits of investing (and, especially, compounding). But treating investing as all-fun-and-no-cost games is a good way to find yourself on the wrong end of Robinhood’s sword.
Prepare Your Portfolio for 2021
Tax preparation may not seem like the most exciting way to ring in the new year, but it’s your final opportunity to take steps that can pay real dividendsA cash payment to investors who own stock in the company. next year and beyond. So what are some tax-saving moves you can make? Here are five we’ve found valuable over the years for our clients as well as ourselves.
1. Consider Rebalancing
Conventional wisdom holds that investors should regularly rebalance the funds in their portfolios to reset to their original allocations. This may mean selling top performers and reinvesting the proceeds into positions that have become proportionally underrepresented, perhaps because they didn’t put up equally good numbers.
The Adviser Investments team takes a broader view: Unless your portfolio has significantly diverged from the original allocation, rebalancing may be unnecessary and more work than it’s worth. Our research shows little-to-no performance advantage in automatically rebalancing portfolio allocations every year. And that’s before considering that rebalancing includes costs that can lead to higher tax bills and transaction fees.
There aren’t any universal rules, and rebalancing might make sense for you. We recommend talking with your adviser to see if it’s something you should do this year.
2. Think About Tax-Loss Harvesting
Nobody likes to see numbers in red on the returns column, but those underwater positions aren’t always without value. If you sell shares at a price below what you paid for them, the losses can be used to offset other gains and income in your portfolio, reducing what you owe to Uncle Sam.
Even if you’re looking at a loss in a fund or position you consider a long-term winner, selling is still an option. Under the “wash-sale” rule, you can sell positions at a loss to offset some of your tax burden, and then repurchase the original position as long as you wait at least 30 days for the repurchase.
Who knows? You may even get to buy back shares at a lower price than what you initially paid. And note that the wash-sale rule also applies to shares acquired through reinvested income—so check your funds’ distribution dates.
Before using this maneuver, however, you should confirm that you’re not selling shares of a fund that you can’t replace. If a fund is closed to new investors and you sell your entire position, you won’t be able to buy back in. And remember, these tax tips are irrelevant for funds owned in tax-deferred retirement accounts such as 401(k)s and IRAs.
3. Give Yourself Some Flexibility
One strategy we utilize in some of our clients’ taxable accounts is putting income and capital gains distributions into a money market fund rather than automatically reinvesting the proceeds back into the funds that generated them.
Keeping this cash on hand gives us the flexibility to reinvest in the fund at a later date or, as part of a rebalancing strategy, use the cash to add to other funds we like that may have had an off year and are priced attractively.
4. Maximize Opportunities for Tax-Deferred Growth
401(k)s, IRAs and other retirement vehicles are a great way to keep your savings growing tax-free while you lower your taxable income. If you can swing it, contribute the maximum amounts allowable to each account every year.
Depending on your employer’s plan, you may be able to defer up to $19,500 in earnings into a 401(k) or 403(b) account in 2020. If you turn 50 before December 31, 2020, and your plan allows it, you can add an additional $6,500 “catch-up contribution.” For IRAs, the maximum contribution in 2020 is $6,000, plus a catch-up contribution of $1,000. (And these limits will be the same in 2021.)
For 401(k)s, you have to act by the end of the calendar year, while IRAs give you until April 15, 2021 to make your 2020 contributions. But sooner is better to give your tax-deferred money maximum time in the market to compound your gains.
5. Be Charitable
Year-end is a busy time for charitable giving. A few guidelines:
- Don’t Cash Out; Give Assets Directly. From a tax standpoint, donating cash can be a bad idea. Rather than sending a check or selling assets and donating the proceeds, donating long-term appreciated assets directly to a charity can have tax advantages. You’ll usually get a tax deduction at full, fair-market value, and because you avoid realizing gains (taxed at either your income-tax rate or the long-term capital gains rate), you’ll be donating up to 40% more than if you sold the holding and contributed the proceeds.
- Start Spring Cleaning Early. Donating clothing, furniture and kitchen or office supplies can do more than tidy up your home. Itemizing deductions on items given to charities can help you take a healthy bite out of your tax liabilitiesLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.)..
- Make the Holidays Merry for Others. Feel generous or want to move into a lower tax bracket? You can give up to $15,000 to as many people as you want without gift tax implications. (Couples can give $30,000.) You are also entitled to pay tuition or medical costs for another person if the payment is sent directly to the billing party.
- Pay for Higher Education. 529 college savings plans can be a great way to provide gifts to family members. If you can afford it, you can even circumvent the annual $15,000 gift limit to fund higher learning by using a special rule called “superfunding,” which allows you to contribute up to five times the annual tax-exempted gift limit (so up to $75,000) without triggering your lifetime gift or estate tax exclusion. (You can only “superfund” once every five years.) For a married couple, that superfunding can be as much as $150,000, which is a great way to start a newborn on the road to a fully funded private school, college or graduate school education.
Fine-tuning your portfolio now may help prevent headaches and tax bills come April. That said, restructuring a portfolio, moving assets and determining appropriate gift or charitable donations can all be tricky, which is why we recommend you consult with a professional tax or investment adviser before doing so. Give us a call. We’re happy to help.
Podcast: Discovering International Small-Caps
With the U.S. stock market hitting new records in 2020, do investors need to look beyond the border to find opportunities for profit? We think so. Simply put, smaller foreign companies aren’t on most investors’ radars, and therein lies an opportunity.
In our latest podcast, Director of Research Jeff DeMaso and Research Analyst Liz Laprade cover some of the hidden upside of small-cap stocks, including:
- The expansive investment universe of small-cap foreign stocks
- Increased capacity for outperformance under the right manager
- The surprising riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. profile of small-cap foreign stocks—they haven’t been as risky as you might guess
We think there’s more to foreign small-caps than meets the eye—click here to learn about the potential benefits of this under-explored sector.
Adviser Investments’ Market Takeaways
Between the election, the pandemic and its impact on corporate earnings, economic data and interest rates, there’s no shortage of hyperbolic headlines and provocative punditry in the financial media. Not here. In our Today’s Market Takeaways, members of our investment team provide timely videos that clearly and concisely explain what we’re seeing in the markets.
Recently, Liz Laprade spoke about Bitcoin’s 2020 surge and how it compares to gold, while Vice President Steve Johnson reflected on his wish list for 2021.
We hope you find them engaging and accessible, and please let us know if there are any topics you’d like to hear us address by sending an email to email@example.com!
About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the eighth consecutive year, Adviser Investments was named to Barron’s list of “America’s Best Independent Advisors” and its list of the top advisory firms in Massachusetts in 2020. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016, 2018 and 2019.
For more information, please visit www.adviserinvestments.com or call 800-492-6868.
Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time, without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
The Barron’s America’s Best Independent Advisers rankings consider factors such as assets under management, revenue produced for the firm, and quality of practice as determined by Barron’s editors. According to Barron’s, “around 4,000” advisory firms were considered for this recognition in 2020; with about 1,200 firms receiving recognition. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2020. Years Received: 2020, 2019, 2018, 2017, 2016, 2015 & 2014.
The Barron’s Top Advisor Rankings by State (Massachusetts) (also referred to as Barron’s Top 1,200 Financial Advisers) considers factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. According to Barron’s, “around 4,000” advisory firms were considered for this award in 2020, with about 1,200 firms receiving recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2020?mod=article_inline. Years Received: 2020, 2019, 2018, 2017, 2016, 2015 & 2014.
The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times and Ignites Research. According to the Financial Times, in 2019, approximately 2000 firms were invited to be considered for its list; 740 responded, with 300 being named to this list. The listing reflects each practice’s performance in six primary areas: Assets under management (70-75% of a firm’s score), asset growth (15% of a firm’s score), years in existence, compliance record, credentials and online accessibility. For more information and a complete list of recipients visit https://www.ft.com/content/44d2b2b2-6cef-11e9-9ff9-8c855179f1c4. Years Received: 2019, 2018, 2016, 2015 & 2014.
Awards referenced above do not consider client experience and are not indicative of such. Nor are awards indicative of future performance. Unless otherwise noted, Adviser Investments does not pay a fee to participate in any of these awards. Additionally, awards typically only consider and recognize participants that choose to participate; and are often based on information supplied by the participants—such information should not be assumed to be verified by the sponsor of the award.
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