All posts by Lawrence Chin

Check Those Beneficiary Designations

When was the last time that you checked all of your beneficiary designations? Beneficiary designations determine who gets certain financial benefits when you die. They are commonly found in workplace retirement benefits, life insurance policies, annuities, retirement accounts, pay-on-death bank accounts, and transfer-on-death investment accounts. It is important to check your beneficiary designations regularly because such designations can override your will. Otherwise, your loved ones may not know that there is a problem until it is too late.

So, how do beneficiary designations work? Let’s say that John Doe names his wife, Jane Doe, as the sole primary beneficiary of his IRA account at ABC Brokerage Company. When John dies, Jane notifies ABC Brokerage Company of John’s death. ABC Brokerage Company may request that Jane complete a simple form and send a copy of John’s death certificate. Once the appropriate documents are received, ABC Brokerage Company will retitle John’s IRA account in Jane’s name. After that, Jane can treat the account as her own. The entire process can take as little as a few days. There are no probate court proceedings involved in this scenario.

Who should you name as your beneficiaries? That depends on your wishes. Be sure to coordinate your beneficiary designations with your overall estate plan. As for beneficiaries, you can specify one or more individuals, an existing trust, a trust that will be created after your death by your will, a charity, or your estate. If you name a minor as a beneficiary, a guardian may need to be appointed to receive the assets on behalf of the beneficiary. If you name your estate as a beneficiary, the assets will need to go through the probate court process.

Check your beneficiary designations regularly! It is especially important to do so if you experience changes to your family situation.

A Few Financial Tips That Not Everyone Knows

Sometimes, little known rules can mean big money. Here are a few examples:

  1. A Roth IRA conversion is possible even after Required Minimum Distributions have started at age 70½. Just be sure to withdraw (not convert) the RMD for the year from your Traditional IRA before doing any Roth IRA conversions that year. A Roth IRA conversion is especially worth considering if you do not need all of your Traditional IRA funds to support your retirement expenses. Any funds converted into a Roth IRA will no longer have RMD requirements during your lifetime.
  2. Are you near the Social Security retirement age? Have you heard of strategies like “file and suspend” and “restricted application”? If you are married, you are entitled to a Social Security benefit based on (1) your own work record or (2) your spouse’s work record. It is possible to receive a spousal benefit while allowing your own work record benefit to grow until age 70. If any of this is news to you, do some research now!
  3. When a married couple holds community property in a community property state, 100% of the asset’s cost basis (not just one spouse’s 50% interest) gets reset at the asset’s fair market value at the death of the first spouse. This feature of the tax law can potentially save you big money on capital gains taxes. If this situation applies to you, consult a tax advisor about whether you should file an estate tax return (IRS Form 706) for the deceased spouse to document the new cost basis. You may need a valuation appraisal for real estate or closely held business interests. For publicly traded stocks or mutual funds, you can just use market trading prices.

Seven Ways to Organize Your Financial Life

Do you know where all of your financial accounts are located? Do you have a list of your insurance policies? Can you easily gather your tax records? Do you know how much cash flow comes in and goes out? If you answered “no” to any of these questions, do not feel bad. I think most people have room for improvement when it comes to getting financially organized. Here are a few tips:

  1. Take control of your paper. Gather and file important paper documents (e.g., birth certificates, real estate title documents, automobile titles documents, Social Security cards, estate planning documents). Shred any unnecessary documents.
  2. Limit paper documents. If a scanned copy is acceptable for a particular document, scan it into your computer and shred the original. Choose e-delivery (instead of paper delivery by mail) of bills and statements whenever possible. Of course, backup your data on a regular basis.
  3. Make lists of financial accounts, insurance policies, and debts owed. These lists may be helpful to your family members in the event of an emergency. In addition, you might uncover accounts that you forgot about, insurance policies that are redundant or unnecessary, or loans that can be paid off.
  4. Consolidate your accounts. Do you have five 401(k) accounts from prior employers? Unless you need a particular feature of an old 401(k) plan, roll over your old 401(k) accounts into a IRA. Do you have accounts at multiple banks? Unless you need multiple banks to magnify your FDIC insurance coverage, consider consolidating your bank accounts into two banks: one local bank for your everyday checking account and one online bank that offers a savings account with a high interest rate. Do you have five credit cards? You get the picture…
  5. Automate your finances. Do you want to save 10% of your paycheck? Set up a recurring transfer from your checking account to your online savings account after every paycheck direct deposit. Consider automatically reinvesting mutual fund dividend and capital gain distributions (especially in tax-deferred or Roth accounts).
  6. Develop a financial planning calendar. See my article posted on April 22, 2013. You can use software like Microsoft Outlook or just manually create a calendar.
  7. Track your cash flow. This is probably the most time consuming recurring task on this list, but knowing your cash flow is crucial to meeting your financial goals. I think the best way to track your cash flow is to use software like Quicken. If tracking every minor cash expenditure is too tedious for you, then track everything else (e.g., bank, credit card, and investment transactions) and assign all cash withdrawals to a “cash expense” category. You should be able to answer questions like: Do you spend less than your earn? In what major categories do you spend your money?

Financial Planning on a Schedule

I happened to drive by my local post office on April 15 and noticed more cars than usual around the post office. Then, I remembered that April 15 is the deadline for filing income tax returns. Why do people procrastinate on preparing and filing their income tax returns? Well, let’s face it. Preparing tax forms is not a fun activity for most people. So, it often gets left for the last minute.

Similarly, financial planning is not a fun activity for many people. Unlike income tax returns, however, there is no annual April 15 deadline for financial planning. So, I can understand how it would be easy to ignore financial planning until there is some triggering event, such as retirement. Some financial planning strategies are complicated. Many of the most successful strategies, however, are simple and just require consistency and self-discipline. To take advantage of these opportunities, I suggest using a tool that many of you already have – a calendar. There are no government mandated deadlines for financial planning. So, make some deadlines for yourself.

In the remainder of this article, I will provide a sample financial planning schedule. This schedule is meant to give you an idea of the concepts behind financial planning on a schedule. To keep the length of this article manageable, I will not provide a comprehensive list of every possible financial planning activity.

The first thing you need to do is to make an initial assessment and set some goals. Let’s say that it is January right now. Here are some topics that you may want to cover in your initial assessment:

  • What are your financial goals?
  • What are your assets and liabilities?
  • What are your cash inflows and outflows?
  • Set a goal on how much of your income you want to save each month
  • Plan where you want to direct your excess cash flow (e.g., emergency fund, debt reduction, 401(k) account, Traditional or Roth IRA contributions, 529 account, etc.)
  • Are you maximizing any employer matching on retirement plan contributions?
  • Does your employer offer a Roth option in its 401(k) plan? Should you take advantage of it?
  • Review your insurance policies – missing any necessary coverage? any unnecessary policies?
  • Review your investments (e.g., asset allocation, diversification, cost and tax efficiency)
  • Review your estate plan – do you have wills and other documents in place?
  • Check all of your beneficiary designations

Let’s say that you accomplished all of the above in January. Then, address the following questions in February as you get ready to prepare your income tax returns:

  • Are you using the most advantageous filing status? If you are single, do you qualify to use “head of household” instead?
  • Are you claiming all of the exemptions possible? Did you have a child born during the prior year? Did you recently start financially supporting your retired parents?
  • Are you claiming all of the deductions and credits for which you qualify?

Schedule the following activities for July:

  • Review your savings and/or debt reduction vs. targets during the past six months – are you on track?
  • Review your investment portfolio – do you need to rebalance or reinvest excess cash?
  • Check to see if you are maximizing your employer matching contributions to your workplace retirement plan
  • Check your payroll income tax withholdings – are you withholding too much or too little?

Schedule the following activities for December:

  • Review your savings and/or debt reduction vs. targets during the past year – are you on track?
  • Review your investment portfolio – do you need to rebalance or reinvest excess cash?
  • Check your workplace retirement plan account – did you contribute as planned?
  • Contribute to a Roth IRA if you qualify
  • Consider Roth IRA or 401(k) conversions
  • Consider tax loss or gain harvesting, depending on your situation, in your taxable investment accounts

I believe that financial planning on a schedule is effective because (1) it forces you to set goals and periodically check your progress and (2) it forces you to address opportunities that disappear with the passage of time (e.g., income tax opportunities, contributions to tax-advantaged investment accounts, Roth IRA conversions).

How to Buy a New Car

I recently purchased a new car and want to share the process that I used to get a great price without haggling or stress at the dealership. The first step, of course, is to pick the model of car that you want. I will leave that up to you. After that, a common way to buy a new car is to go to a local dealership and negotiate back and forth with the sales staff, debating things like sticker price vs. invoice price vs. the dealer’s true cost. None of this is important, however. The only thing that matters is your alternative course of action if you do not get the deal that you want at the dealership. Usually, that alternative is to go to another dealership. You could spend your time going from dealer to dealer and seeing what prices you can negotiate, but there is a better way. Here is the process that I used:

  1. Choose the specific model of car that you want, including the colors and options. For this example, let’s say that you are interested in a 2012 Toyota Camry SE V6 with the Convenience Package in Super White.
  2. If you are a member of Costco, obtain a quote from the local Toyota dealer that participates in the Costco Auto Program.
  3. Make a list of all the Toyota dealers (other than the Costco dealer) within a 60 – 70 mile radius. This can be done easily on the Toyota website.
  4. Call each dealer and ask for the name and fax number of the fleet sales manager or internet sales manager. Most dealers have one these days. If not, ask for the name and fax number of the general sales manager.
  5. Create a one-page form letter that reads some like this. “I am in the market to purchase a new Toyota Camry. I am writing to Toyota dealers in the area to request sales offers on a new 2012 Toyota Camry SE V6 with the Convenience Package in Super White. If you have one or more Camrys in stock that fit these specifications, please fax your best offer to [fax number] by [3 days]. In your offer, please include the last four digits of the VIN, your offer price before taxes and fees, and your offer price after all taxes and fees. If you choose to fax me an offer, I will contact you to let you know whether or not I want to proceed with your offer. I reserve the right to decline your offer for any reason. Thank you.”
  6. Fax the one-page letter to all dealers on your list. Address each letter to the fleet/internet sales manager. I suggest using the mail merge function in your word processing program to create the letters and using an online fax provider to send the faxes and receive the offers. Some online fax providers offer a free trial.
  7. Once you receive the offers, arrange them by offer price from low to high, including the quote from the Costco dealer. Ask yourself whether you would be willing to purchase the car at the best offer price that you received. If so, proceed to the next step. If not, assess whether you should consider shopping for a less expensive model.
  8. Call the dealer offering the second lowest price and offer to purchase the car for some amount, say $200 – $300, lower than your best offer. If they accept, proceed with the deal. If they say “no” or try to negotiate with you, politely decline. Then, call the dealer offering the third lowest price and make the same offer. If they accept, proceed with the deal. If they say “no” or try to negotiate with you, politely decline. Then, contact the dealer offering the lowest price and proceed with the deal.
  9. After you purchase your new car, contact all the other dealers that sent you an offer to thank them for their offer and to let them know that you have purchased the car elsewhere.

So, how did this process work for me? I obtained a quote from the Costco dealer. Then, I faxed 28 other dealers requesting offers. I received faxed offers from eight dealers. Three of these offers were better than the Costco price. I made counteroffers to the second and third lowest price dealers but they both declined. Then, I went to the dealer that offered the lowest price and purchased the car at that offer price, which was about $1,400 below the invoice price.

I think this process works well because it allows you to obtain multiple offers without haggling at multiple dealerships. There are various car buying websites that will contact local dealers on your behalf and request quotes, but I believe that directly contacting dealers by fax works better. I think that sales managers take faxed letters more seriously than impersonal internet leads. Also, car dealers must compensate car buying websites, say around $300 per transaction, if they sell a car with the help of a third-party website. So, a dealer is more likely to offer you a better price if you help them avoid this additional cost by contacting them directly.

Roth IRA Conversion – Even for High Tax Bracket People

Roth IRA conversions allow you to move pre-tax funds in a Traditional IRA into a Roth IRA. Once the funds are in a Roth IRA, you will no longer pay any income taxes on future earnings or withdrawals as long as at the time of withdrawal (1) you are at least age 59½ and (2) at least five years have passed since the conversion. The cost of a Roth IRA conversion is paying ordinary income taxes on the conversion amount in the year of conversion. Because of this tax cost, individuals in high income tax brackets are often reluctant to do a Roth IRA conversion. I believe that even those in high income tax brackets should consider Roth IRA conversions if they have excess cash outside of their retirement accounts to pay the income taxes due on conversion.

First, let’s discuss some math. Ignoring estate planning considerations, you are no better off or worse off doing a Roth IRA conversion if the following two statements are true: (1) the funds that you would use to pay the income taxes due on conversion earn the same rate of return outside of your Roth IRA as they would inside of your Roth IRA and (2) your marginal income tax rate stays the same throughout your life.

On the first point, the funds that you would use to pay the income taxes due on conversion are likely to earn a lower rate of return than your Roth IRA since the outside funds are subject to ongoing income taxes on interest, dividends, and capital gains even if you diligently invest the outside funds. Alternatively, perhaps the outside funds would just sit in a bank savings account earning minimal interest or, worse, you would simply spend the money. In any scenario, I believe the first point strongly favors a Roth IRA conversion.

The second point (marginal income tax rates) often causes high income tax bracket people to pass on the Roth IRA conversion. Lower marginal income tax rates during retirement would favor not converting to Roth today. Let’s think about this, however. The current top federal income tax rate is 35%, which is low by historical standards. Your marginal income tax rate during retirement could be higher simply because the government decides to raise income tax rates overall. Also, consider all the sources of taxable income that you might have during retirement: required minimum distributions from IRAs and 401(k)s, pension income, Social Security income, annuity payouts, interest income, and dividend income. If your mortgage is paid off by retirement and you no longer have dependents, then your deductions and exemptions could be lower too. Also, the differences in marginal income tax rates among the highest, second highest, and third highest federal tax brackets are not large.

If your estate is likely to be subject to estate taxes, then there are estate tax benefits to doing a Roth IRA conversion. By converting pre-tax funds to a Roth IRA, you remove the income taxes paid on conversion from your gross estate while creating an investment account that is free of income taxes, subject to certain rules, for your heirs.

If you have excess cash to pay the income taxes on a Roth IRA conversion, I believe the strongest argument for doing a conversion is a behavioral one. A Roth IRA conversion allows you to pay a one-time cost today (the income taxes on conversion) to save a significant amount of income taxes, most likely, during retirement. You do not have to do anything further to achieve the future payoff other than keep your Roth IRA invested and not withdraw from your Roth IRA until retirement. Think of it this way. Paying the income taxes on a Roth IRA conversion is like making a one-time contribution to your Roth IRA, except that you are not limited to $5,000 or $6,000 per year. For many people, the alternative to a Roth IRA conversion is not to diligently invest the funds outside of the Roth IRA but to simply spend the money. A Roth IRA conversion makes it less likely that you will do something unwise with the money that you would otherwise use to pay the income taxes that will be due on conversion.

Roth IRA – The Ultimate Retirement Account

You can think of retirement investments like a box of rocks. In this analogy, the rocks represent the types of investments in your account, such as stocks and bonds. The box represents the type of account, such as a taxable account vs. an IRA account. In this article, I am going to discuss the type of box without discussing the rocks. When it comes to retirement investing, I believe that the Roth IRA is the ultimate account type. It is the best “box” to hold your retirement investments.

Some people go to great lengths to defer income taxes on investments, such as by entering into a deferred compensation arrangement with their employer or by contributing to deferred variable annuities. Of course, many people defer income taxes in more ordinary ways by contributing to 401(k) plans and Traditional IRAs. Deferring income taxes can be okay if you plan for the income taxes that you will ultimately pay when you withdraw your tax-deferred funds. IRS rules require holders of 401(k) and Traditional IRA accounts to start withdrawing funds at age 70½. I think that many people who have amassed large amounts of tax-deferred funds will be shocked at their income tax bill when they start withdrawals.

The Roth IRA eliminates the issue of deferred income taxes. Once you put money into a Roth IRA account, it grows income tax-free, and no income tax is assessed on future withdrawals as long as the withdrawal occurs after age 59½ and you have held the account for at least five years. Unlike with contributions to 401(k)s and Traditional IRAs, you do not receive an income tax deduction for Roth IRA contributions. For most people, however, I believe that this is a small price to pay for not having to worry about future income taxes at withdrawal. Income tax rates are currently low by historical standards. With growing government deficits, income tax rates could easily rise in the future, even if your level of taxable income decreases during retirement.

For those of you who may not need the money in your Roth IRA account during your lifetime, the Roth IRA has even more benefits. Unlike 401(k)s and Traditional IRAs, there are no required minimum distributions for Roth IRAs during the life of the account owner, even past age 70½. So, you can have your Roth IRA account grow income tax-free for your entire life. If your spouse inherits your Roth IRA account, he or she can treat the Roth IRA account as his or her own account and allow it to continue growing income tax-free during the life of the surviving spouse.

So, how do you get money into a Roth IRA account? If you have taxable earned income and your Modified Adjusted Gross Income is under certain limits, you can contribute directly to a Roth IRA even if you participate in your employer’s retirement plan. If your employer’s 401(k) plan allows, you can designate 401(k) elective deferrals as designated Roth 401(k) contributions. After you change jobs or retire, you can roll over the designated Roth 401(k) portion of your account into a Roth IRA. You can convert a Traditional IRA into a Roth IRA and pay income tax on the conversion amount. If your employer’s 401(k) plan allows, you can do an in-plan Roth conversion. Finally, when you leave your employer, you can roll over any pre-tax qualified retirement plan amounts (e.g., a regular 401(k) account) into a Roth IRA; this will be treated like a Roth IRA conversion, and you will need to pay income tax on the converted amount.

Roth IRA/401(k) – Better Than Tax Deferral

One common piece of investment advice is to defer investment related income taxes whenever possible, especially through the use of 401(k) and Traditional IRA accounts. The underlying concepts are (1) your tax-deferred account will grow faster than otherwise because investment related income taxes are deferred until withdrawal and (2) you will receive current income tax deductions for your contributions, which you can invest in addition to your tax-deferred account. Some financial advisors take this concept even further and recommend that investors also use variable annuities after maximizing contributions to 401(k)s and IRAs to defer additional investment related income taxes.

I believe that maximizing “tax-deferred” investment accounts is not the best advice for many if not most people. It is true that 401(k) and Traditional IRA accounts grow tax-deferred, but your eventual income tax liability also grows. For example, let’s say that you contribute $1,000 into a Traditional IRA at age 35 and that it grows at 5% a year for the next 30 years. Then, by age 65, your $1,000 contribution will be worth $4,322. If you withdraw this entire amount at age 65, you will have to pay ordinary income taxes on $4,322 of income. This tax liability may not be too burdensome if you took your income tax savings from your $1,000 contribution and invested it consistently for 30 years. I wonder, however, how many of us really think, “I saved $300 in income taxes on my $1,000 IRA contribution so I had better invest that $300 carefully and consistently until retirement.” I believe that most of us do not bother to calculate our income tax savings on 401(k) or IRA contributions much less actually invest it.

The other issue with tax-deferred investment accounts is that it converts long-term capital gains into ordinary income for income tax purposes. Some of your investment return is from capital appreciation. If you have long-term (i.e., longer than one year) capital gains within a taxable account, it is taxed at favorable long-term capital gains tax rates under current law. If you have long-term capital gains within a tax-deferred account, it is taxed at less favorable (for most people) ordinary income tax rates at withdrawal.

I am not suggesting that 401(k)s and Traditional IRAs are all bad. If your employer’s 401(k) plan offers employer matching contributions, you should try to contribute at least enough to receive the maximum employer matching. This is what is called “free money.” Beyond that, however, I believe that most people should maximize contributions into a Roth IRA or Roth 401(k) account before making further contributions to a tax-deferred account. With a Roth account, you do not receive an income tax deduction at contribution, but the account grows tax-free (not just tax-deferred) as long as you wait until age 59½ before making withdrawals and meet certain other requirements (e.g., the five-year rule). So, if you were to contribute $1,000 to a Roth account at age 35 and it grows to $4,322 by age 65, you can withdraw the entire $4,322 at age 65 without paying any income taxes on the withdrawal.

There are several ways to get money into a Roth account:

  1. Roth IRA Contributions. You can contribute to a Roth IRA if you have taxable earned compensation (e.g., W-2 income or self-employment income) and your Modified Adjusted Gross Income is under certain limits. The maximum that you can contribute to a Roth IRA is $5,000 per year ($6,000 if you are age 50 or older). Being an active participant of an employer retirement plan does not affect your ability to contribute to a Roth IRA.
  2. Roth 401(k) Contributions. The IRS allows, but does not require, 401(k) plans to allow employees to designate their elective deferrals as Roth contributions. Many 401(k) plans now allow designated Roth contributions; so, check with your employer’s benefits department. Only employee elective deferrals (up to $17,000 a year or $22,500 if age 50 or older) can be designated as Roth. Employer matching contributions must be pre-tax (i.e., non-Roth).
  3. Roth IRA Conversion. If you have money in a Traditional IRA, you can convert some or all of the account into a Roth IRA. You will have to pay ordinary income taxes on the conversion amount in the year of conversion.
  4. 401(k) In-Plan Roth Conversion. The IRS allows, but does not require, 401(k) plans to allow employees to convert pre-tax amounts in their 401(k) account into a designated Roth 401(k) account in the same plan. The IRS has restrictions on the types of contributions that can be converted into Roth; so, check these rules carefully. As with a Roth IRA conversion, you will have to pay ordinary income taxes on the conversion amount in the year of conversion.

Why People Do Not Plan

How much time and effort did you put into planning your last vacation? If you are married, how much time and effort did you put into planning your wedding and honeymoon? Now, how much time and effort do you put into planning to meet your financial goals, such as personal cash flow management, risk management, tax management, college funding, retirement funding, or estate planning? It is my belief that most people put little time or effort into financial planning. The following are some possible reasons:

  1. It is not required. If you have more than a minimal amount of income, the law requires that you file an income tax return every year. If you own a car, you must obtain automobile liability insurance or post a bond in most states. There is no law, however, that requires people to implement a financial planning process.
  2. It may expose difficult choices. The first step in the financial planning process is to establish your financial goals. “That’s easy,” you might say. “I want to live in a nice house, send my children to private school, help those in need, and retire comfortably.” To that, I would ask, “how would you place these goals in priority order?” Financial planning might force some difficult personal decisions. I believe that it is human nature to avoid difficult decisions until some external event forces us to make them.
  3. It requires organization and effort. Just gathering data to prepare a financial plan is a lot of work. You will need details about your assets, liabilities, income, expenses, income taxes, insurance policies, investments, retirement benefits, etc.
  4. There are no easy and comprehensive tools for the non-professional. Sure, there are online retirement calculators that will estimate how much you need to save for retirement based on a few simple assumptions, like your retirement age, current savings, and assumed investment return. Generally, these calculators cannot, however, account for complications such as fluctuating income, equity compensation, pensions that do not adjust for inflation, required minimum distributions, varied tax rates, support for dependents, and asset sales. There are professional-grade financial planning software packages that might be able handle some of these situations, but they generally cost over $1,000 and may be difficult to learn and use for the layperson. For my clients, I create customized spreadsheet models that can account for these types of financial complications.
  5. It is expensive to hire a good financial planner. For a professional financial planner to create a proper financial plan, it takes substantial time and effort to understand your personal and financial situation, gather and organize relevant data, make judgments about assumptions, prepare financial analyses, and explain the results to you. Accordingly, a comprehensive financial plan might cost several thousand dollars.

Despite these obstacles, the benefits of implementing a financial planning process are significant. You will have more clarity about how your personal values relate to your financial goals. You will know whether you are on track to meet your goals. The planning process may expose opportunities and risks that you did not know previously. Finally, planning should give you more confidence about your financial decisions.

Be Vigilant Against Financial Fraud

Financial fraud seems to hit the news headlines on a regular basis these days. By fraud, I am referring to Ponzi schemes or other illegal activity designed to steal your money. So, how can you protect yourself against financial fraud? Here are some practical steps:

  1. “Trust, but verify.” If you initiate a money transfer from one account to another, check both accounts to ensure that the transfer occurred properly. Reconcile your bank, credit card, and investment account statements against your own transaction registers. If you pay a vendor through direct debit of your bank account, then call the intended recipient of the money to confirm that the appropriate funds were received. Check your account activity online on a regular basis. Review your credit reports on a regular basis. Be suspicious of anyone who you do not know that calls you on the telephone and asks you for personal or financial information.
  2. Know where your money is located. If you deposit money at a bank, your money is held at the bank. If you deposit money into an investment account, is your money held at the investment firm that issues the account statements? It depends. Say you purchase shares in the Vanguard 500 Index mutual fund. Does Vanguard hold your shares? Surprisingly, no. Mutual fund managers are required to hold fund assets at an outside custodian. The assets of the Vanguard 500 Index fund are held at Brown Brothers Harriman & Co. You can find this information in the mutual fund’s “Statement of Additional Information” document, which is available on Vanguard’s website. Also, be aware that some smaller brokerage firms hold their customer accounts at a third-party brokerage firm, which is known as the “clearing” broker. The largest clearing broker in the U.S. is Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation.
  3. Separate investment management and asset custody. This is just a fancy way of saying that the person or firm that manages your investments should not also hold your account assets. If you hire an investment advisory firm to manage your investment portfolio, then your account should be held at a third-party brokerage firm that issues statements and trade confirmations directly to you. Review those statements and confirmations on a regular basis. This was one of the fundamental flaws in the Bernie Madoff fraud. The client funds that Madoff “managed” were held at his own firm. If someone comes to you with an investment opportunity and asks you to write a check payable to him or his firm, politely decline.
  4. Be suspicious of exotic or exclusive investments. If someone pitches a complicated investment to you, then consider a more straightforward investment instead. Words such as “exotic, exclusive, private, etc.” that are used to describe an investment opportunity should raise immediate red flags.
  5. Be wary of claims that sound too good to be true. If someone promises an attractive investment return with little or no risk, then assume that the investment is fraudulent unless you can prove otherwise beyond any doubt. Legitimate investments that have the potential for attractive returns have risk.