Tags: investors | truth | future | Vanguard

Is This The Future That Investors Want?

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Sunday, 22 Feb 2015 09:16 PM Current | Bio | Archive


Sitting around on Sunday morning with my breakfast buddies having our coffee and bagels, the mood was something less than cheerful.

Like everyone else around the country, the guys are steamed about all the uncertainties impacting their retirement investments. Yields, taxes, management fees, Congress, the Federal Reserve, and, of course, what good would complaints about the government be without including the IRS.

All these grievances are both well-documented. I’ve been hearing these same criticisms and denunciations since the start of my professional career.

The problem for investors is that the less-than-obvious after-effects of the federal income tax may well be the most dangerous.

Let me give you an example of what I’m thinking about.

Millions of investors, including some of the largest companies in America, have money invested in mutual funds which support their pension, health, life insurance, and other financial plans.

Among the most popular are the Vanguard funds. Vanguard Group is a private investment company that is owned by its affiliated mutual funds. This structure is similar to a mutual insurance company that is owned by its policyholders.

The purpose of this arrangement is to maximize the financial returns to the customers who are also the owners. As owners they have no need to charge excessive management fees which only go to reduce the effective yield on their own investments.

Now comes along a whistle-blower. Not just any garden variety whistle-blower, but one of Vanguard’s own tax lawyers.

He claims that Vanguard built up its $3 trillion dollars of investment by using an illegal tax strategy for the last 40 years. How this eluded notice by all the regulators, auditors, financial analysts, and competitors who have scrutinized Vanguard for four decades remains a question.

Apparently, the lawyer claims that if the management fees were done correctly for tax purposes, then Vanguard owes about $1 billion in tax.

A whistle-blower gets 10 percent. A real "score," as they would say in the old neighborhood.

So if he is right, then Vanguard winds up spending millions in legal fees in defending, pays $1 billion in tax, plus likely a couple of billion more in penalties and interest.

This comes directly out of the investor’s account value in the mutual funds so millions of otherwise innocent people wind up paying. Then going forward, the management fees go up, more federal and state income tax gets paid, and yields to the investors go down.

There are serious implications that come from this.

All lawyers become suspect as potential turn-coats on their clients and employers who have no qualms about violating their ethical obligations, disclosing confidential information, violating privilege, because they can become potentially really wealthy by doing so.

It boggles the imagination to think of all the potential tax violations that can be dreamed up by a creative lawyer with a Croesus size incentive which will have a great appeal to the government for them to jump on.

It's things like this that are causing Americans to further lose faith in their governmental institutions, the financial industry, and lawyers.

Is this the future that investors want for America?

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Kleinfeld
It boggles the imagination to think of all the potential tax violations that can be dreamed up by a creative lawyer with a Croesus size incentive which will have a great appeal to the government for them to jump on.
investors, truth, future, Vanguard
516
2015-16-22
Sunday, 22 Feb 2015 09:16 PM
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