Discount brokers will tell you that they don’t work on commission, but that may not be the end of the story. Many discount brokerages pay bonuses based on the products they sell consumers, products that may not be in your best interest. In addition, with tax season comes the additional threat of tax scams. Learn how to protect yourself against both of these in this episode.
Also, would you like to watch this show instead of listening to it? We have begun to simulcast the show with a video stream that you can watch on YouTube. Here is the link.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Private Client Capital Group.
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Make It Last – Ep 41 – Beware Discount Brokers and Tax Scams
Click below to read the full transcript…
Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney, and certified financial planner.
Victor J. Medina: Hey everybody, welcome back to Make It Last. I’m your host Victor Medina. I’m so happy you can join us this Saturday, January 27th. I’ve got to welcome a whole bunch of people here in addition to our listeners, because for the first time we are simulcasting this show onto video.
In fact, the recording of this show was done on Facebook Live. Some people were able to watch that as well. It’s interesting for me to branch out in this new area. I don’t know that anyone’s going to want to watch 30 minutes’ worth of me talking. We might chop this up into smaller segments.
If you are the kind of person that is more interested in watching this show, as opposed to listening to this show, we’re going to give you that opportunity to do that and not miss out.
We’re still going to have everything here on the audio. If you’re a podcast listener, you’re going to be able to do it that way. Really trying to reach this content as far out as we possibly can. That’s something new and exciting.
I do have to let everybody in on, I guess, a new change coming up which is that if you were a radio show listener and you tuned in on Saturday morning at 7:30 AM, I, first of all, have to say thank you for doing that.
Second, I’m not here. [laughs] I’ve already prerecorded this show. In large part, because of the number of family obligations that I have. Those things that keep me away from Saturday mornings and sitting in a radio station.
Now that we’re able to do a little bit more with a small studio inside of my office, with both the recording equipment for audio, as well as for video, we’re in a position now to prerecord the show and put it out there. I hope that doesn’t tune anybody off, that I’m not sitting there in the morning. I promise you, I’m already up. I’ve got a four‑year‑old, and he doesn’t sleep in. [laughs]
He’s up and I’ve got my coffee. Listen, on the show today, I’m going to cover a number of topics. We’ve spent the last few weeks covering the issue of tax reform and what that means for retirees.
In fact, I’m proud to say that we will have the opportunity to showcase a seminar on this. We’re going to be hosting it on the campus of The College of New Jersey in Ewing.
We’re going to be doing it on February 5th. There’s going to be two times for that. We’re going to do it at two o’clock in the afternoon and five o’clock in the afternoon. All you have to do to attend is navigate to this website. You’re going to go to, trumptaxreformtalk.eventbrite, that’s E‑V‑E‑N‑T‑B‑R‑I‑T‑E, .com.
Now, we’re doing this as a service to our existing clients. You’re going to see some of our clients there. They’re going to be our Client Care Program members, people that are on our Legal Maintenance Program. They are our guests. They don’t have to pay anything for attending, as well as our financial services clients.
Those people are also going to be showing up as part of their services, what they receive as being a member of our client family. If anybody else is interested in doing it, we do need to cover some of the costs for that. We’re not being paid otherwise. There’s a very small registration fee for general admission. It’s just $11, which I think is a very reasonable amount.
The seminar is going to go about an hour and a half. You’re going to have that wide open to questions. We will be advertising it widely to our network. If you’re interested, I recommend that you go on to the website and register early because the room does have limited space.
I’m anticipating that. In fact, we’re going to see a number of people attend this because there are so many questions that deal with the Trump tax reform and what that entails for them. We’re going to focus specifically on retirees because that’s the majority of the consumer population that we serve.
We will be covering some of the subjects that are related to corporations and how that bears on them. Again, if you’re interested in coming, you go to trumptaxreformtalk.eventbrite, that’s E‑V‑E‑N‑T‑B‑R‑I‑T‑E, .com. Go ahead and register for that. Again, it just takes you through a whole PayPal thing. Once you’re on, we’ll see you there.
We’re looking forward to seeing some of our listeners there. Drop by and say, “Hello,” if you’re the first time meeting me. That’s going to be coming on the Trump tax reform.
In the show today, I did want to talk about something that comes up every year. Every year, there any number of tax preparation or related to tax prep scams that are out there.
I want to walk you through that because I think it’s going to be important for you to know what they are, and then learn how to avoid them when you are in those circumstances. I want to cover that. I just want to cover a bit of news that came out related to discount brokerages and the way that they work. Let me tackle that one first.
We’re not going to get all the way through the end of this first segment before the break, but when we come back, I’ll cover the rest of the discussion on it, and then we’ll move forward from there on the tax preparation scam tips, [laughs] tips to avoid.
If we look at this concept of discount brokerage, that’s a big draw for a lot of people. A lot of people have decided that they don’t want to be working with the traditional brokers ‑‑ the Merrill Lynches and the Morgan Stanleys, these large organizations ‑‑ they’re going to go to a discount broker.
If we think about the discount brokers, they fall into a few categories. They are household names. They’re the people that deal with Schwab, and their advisor, Alliance. They’re TD Ameritrade, Fidelity, Scottrade.
These places have retail establishments. What I mean by retail establishments, they essentially have storefronts in major retail thoroughfares for you to go up and visit.
In my area, there’s a Fidelity right on Route One. There’s a Charles Schwab on Route 31, in Hunterdon County. You can see these places where you can show up and walk in as a customer, as somebody who is there for…like you were going to a store, like you’re going into Lowe’s and you’re going to buy something.
The advantages of the discount brokerage tend to be that the people there are employees of the company. The advisers that are there are employees of the company.
They will tell you that they don’t work on commission. In fact, if you ask them that question, they will affirmatively say that they don’t work on commission.
For a lot of people that is a net win, a net benefit for them, because if you’ve heard me at all on this show, you’ve heard me rail about the fact that part of the problem is the incentivization of people who work in financial services to sell you something because it pays more than something else.
That incentive, the fact that it exists, can lead to conflicted advice, specifically, if people do not take a fiduciary pledge, don’t take a pledge to essentially work in your best interest.
That’s been the case for traditional brokerages for a long time. One of the advantages of the discount brokerage houses is that they will say that they don’t work on commission. In fact, they don’t get paid on commission, because those people may just be employees.
They may be employees who are incapable of receiving commissions by their security licensure. Maybe not. Maybe they’re there without the ability to get it. Many times, contractually, they’re prevented from receiving commissions.
Consumers go along pretty comfortable with the idea that the advice that they’re getting is not conflicted advice, because if the people aren’t working on commissions, then what does it really matter what they’re recommending, because they won’t get paid differently on it. Naturally, they’ll be recommending the thing that is right for you.
All of this being said, you can guess where I’m leading, which is that, we got a recent news report ‑‑ I think it was done by the Wall Street Journal ‑‑ that went and investigated essentially how their employees do get compensated.
Victor: When we come back, I’m going to open your eyes a little bit to the way discount brokerages work and the incentives that they place on their employees, and why you should be as wary of them as you are of any traditional broker.
We’ll cover that when we come back from the break. This is Make It Last, and we’ll be right back.
Victor: Welcome back, everybody. This took a little break there in the middle as we usually break in the recording for the radio show.
It was amusing that I had to sit here as we were on Facebook Live and doing the video recording going, “What do I do on this break? I better make the really, really, really fast.” [laughs] Because people who are watching the stream, they just want to jump right back into the show.
We are talking initially today about the concept of discount brokerages and the idea that the people who work for them maybe giving you conflicted advice. How’s that possible when this people don’t work on commissions?
The reason why it’s possible is because they do get incentivized based on what they sell. This is the very nature of not working with somebody who is independent, working with somebody who is captive.
If you work with somebody who is in Fidelity, or if you work with somebody that is with Charles Schwab or TD Ameritrade or any of this other places, they are by definition employees of the company. What does that mean?
It means that the company pays for their letter‑head and their business card and their office space and many times there are insurance malpractices. They cover everything for these individuals as their employees. That means that these employees they basically have to do what the company tells them to do.
If the company wants to maximize profits, one of the things that they are going to do is that they are going to go ahead and offer proprietary products. Proprietary products are those products that are exclusive to the company and in which the company has placed an incentive to sell one over the other because it makes more money.
Fidelity in addition to being ‑‑ I use the term loosely unadvised company ‑‑ is also in the business of creating funds for you to invest in. Those funds pay Fidelity more money because of the embedded operating costs that are in the mutual funding. It has an operating cost.
That means the overall profit remains with the company like Fidelity if you invest in their funds. To that end, anybody who works for Fidelity has been given information that says, “Look if you sell more of the stuff that we make more money on, we will pay you more.”
While they are not working on the basis of commission, per se, they are working on the basis of essentially getting a bonus.
I said to you before that this came up, I think, with respect to Wall Street Journal. This was an article that was in January 10th and we discovered this about essentially TD Ameritrade. TD Ameritrade, they are being incentivized to sell more of the things that pay them out more money and they are being paid a bonus.
If you look at that, what they figured out for, let’s say Fidelity first of all. Fidelity, they were paid twice as much to recommend things that generate higher annual fees for Fidelity, such as managed accounts, annuities, and other referrals, for recommending that over something else twice as much.
They were interviewing somebody that worked for there from 2011 through 2016 who ended up believing it because what they concluded, and I’m quoting his words is that he would say, “If I was sitting in front of somebody and there were 20 different ways we could have chosen and we chose Fidelity’s managed account, and that is what paid us more, there exists the conflict.”
We are back again in this idea that if you are going to be seeking out financial advice from anyone, you should be working with somebody that is worked to minimize if not eliminate the conflicts that exist in the advice that they are giving.
One of the ways that you do this is to work with somebody independent and to work with somebody that’s made a fiduciary pledge so that what they recommending is in fact in your best interest verses something that pays more.
In my own firm, we do not accept commissions on the investments that we recommend. If we recommend a mutual fund, that mutual fund in fact is one that doesn’t pay commissions at all.
For that reason, we’re pretty clear that that works out to the client’s best interest because we’re not in a position to be conflicted in the advice that we are giving.
What can you take away from this? I think that the general consumer probably approaches the discount brokerages with…giving them a bigger hello because if they are there and they are driving down costs. If that’s part of their mantra, then the advice that they are receiving from those individuals should in fact probably be conflict‑free.
What you are here to learn is that in fact it’s not. It’s not conflict‑free because of the incentives that they are providing for their employees. Not just to do great work because we could certainly see the benefit of encouraging employees to do well by clients.
In fact, they are encouraging them to sell the stuff that makes them more money when in fact it might not be in the client’s best interest.
If you are working with a discount brokerage or if you are thinking about working with a discount brokerage, I will tell you that part of what you want to look at is whether or not they are being compensated differently.
They may not even have the obligation to tell you whether they’re being compensated differently but it’s up to you as a savvy consumer to understand when that is happening so you can avoid it at all costs.
I have sucked up two segments [laughs] going on to this, which means we only have one more segment left to talk about the tax prep scam but I will tell you, in promising you, this is going to be enough time.
It’s going to be enough time because we are going to hit this. You are going to walk away as educated consumer and somebody will totally be able to avoid this when you see them coming.
Stick with us because when we come right back on Make It Last, I’m going to talk to you about top tax preparation scams or the things that IRS is warning you about so that you can super, super savvy, Make It Last. All right. We’ll be right back on Make It Last, stick very close.
Victor: All right. Welcome back to Make It Last. We’ve been talking about discount brokerages and why we should look at them with a skeptical eye. They’re not necessarily the conflict‑free places that other people are making them out to be, that they’re making themselves out to be.
There are conflicts that exist. We have to make sure that we’re avoiding them at all costs, because this is our money. We want to make sure that we are good stewards over that going forward.
I promised you, in the show, we’re going to talk about the top tax preparation tips. If I do that five times fast, I think I’m going to get my tongue in a knot. We are aware that these things exist. More and more, the tax preparation stuff is trying to consolidate information.
If I’m going to give you a few tips, they go like this. The first is, be extremely wary of tax preparation services that they’re being offered to you for free. Let’s boil this down. I was watching the football game this weekend. I will have to confess that my team is New England Patriots.
Very excited that they’re going to be in the Super Bowl again. I was watching the game, and there were at least, least, three different companies advertising that their tax preparation services were costing $0. The advertising to be on that football game is not zero. [laughs] Can we start with that?
It means that they’re making money somewhere else. How are they making money? They’re making money one of two ways. The first way is in collecting your information and selling it. I’ve talked about this last year, I’m telling you about it now.
You trade away privacy when you give them this information. It’s buried in their terms of service that you are never, ever, ever going to read. There’s another report that came out recently about Ancestry.com.
A lot of people submitting their DNA to learn about what makes up their genetic background. In the terms of service, you give over complete rights to your DNA to Ancestry.com, which means that they can resell it, do anything they want with it, mapping yada, yada.
This is the biggest scam out there, because most reports show that even what they come back with is not any really hard science. It’s not hard science.
Anyway, tax preparation services are either selling your information, which is definitely one of the things that they’ll be doing, or they’re selling to you additional services and products as a way to generate revenue.
Remember, the commercial at the football game is not free. They’re running it all the time. They’re going to run it from January all the way through April. Excuse me. They’re going to be running it for a long time. It’s going to be really expensive. How are they going to make up that money?
They’re going to make up the money by selling you additional services many times. Many times, they’re selling you those services in the financial services field. They’re going to sell you a credit card you’ve got to open up. They’re going to sell you an investment.
They’re going to sell you something that you think that you need, or that they’re going to recommend that you need, based on reviewing the information that they see in the tax return. We definitely want to avoid that if we can.
I don’t believe that you should pay zero for your tax preparation. In fact, you should probably be working with somebody who is a tax preparer. Even with that, there are a couple additional scams that you have to be wary of.
The first is, there are some unscrupulous preparers. The vast majority of tax professionals are honest and they provide quality service. Every once in a while, if it sounds too good to be true, it probably is.
You should be wary of tax preparers that are new in town, that are promising you the world, because these are the people that are perpetrating fraud in preparing the tax return.
You should also be on the lookout for things like fake charities, and if the preparer is promising outlandish refunds, they’re offshore shelters. Look, you’re smart enough now to realize there is no such thing as a free lunch. Be wary of anybody that’s promising you the world.
Few other things that come up from time to time, the biggest one is identity theft. While the IRS continues to crackdown and aggressively pursue criminals that file fraudulent returns using somebody else’s Social Security number ‑‑ they’re making progress on that front ‑‑ taxpayers still need to be extremely cautious.
One of the things you can do, by the way, is there’s often a race to the IRS. The way that you figure out that there’s been some identity theft is that you try to file your return, and somebody else has already filed it using your Social Security number.
Because they’ve used your Social Security number, then it comes up, “Hey, two people trying to file the same return.” Filing your return a little earlier in the season is definitely a way that you can avoid this identity theft.
Similarly, there are people that are contacting folks trying to talk about, either a threat, or the announcement of the return. They’re basically impersonating somewhere someone from the IRS. Either as your agent or something else, you got to be wary of that.
Definitely, do not take any information regarding the IRS from the phone. Anything that the IRS are going to talk to you about, not only are they going to send you a letter, it’s going to be certified mail. You can contact the IRS.
You call them to try to figure out what’s going on. That phone scam happens. Lastly, here I am doing a show. The show is now going to be a video show. Everything is up on the Internet. One of the things that we tend to trust the most has to be email and stuff on Facebook.
You’ve got to watch out for that. If there’s anybody that is purporting to be somebody from the IRS, they’re not going to be asking you for your information on an email. They’re not going to ask you to go to visit a website to fill something out.
That’s not how they operate. It can be very convincing. These folks have spent a lot of time essentially trying to figure out how to get you to give up your information so that they can go and do bad stuff with it. Let’s summarize.
If you hadn’t taken out the notepad, this is the time. What you want to do is make sure that you’re not working with a zero cost tax preparer. You, as a smart Make It Last listener, are not willing to trade your privacy for a free lunch.
You’re going to maintain your privacy, and you don’t want to be subjected to further sales tactics on that. No zero preparation. We’re also not going to go with the fly‑by‑night person that’s promising outlandish returns.
We’re going to be wary of any fraudster, trickster people doing…go with somebody reputable. In fact, you should probably be asking your lawyer or your financial advisor for a recommendation, because they tend to vet those people out.
Be careful about identity theft, specifically in filing multiple returns. Get your return there a little bit early. Watch out for scams ‑‑ scams on the phone, scams on the Internet, scams coming in an email.
Do not trust anything that isn’t coming by certified mail from the IRS, or that you didn’t contact the IRS on your own with the questions that you had. If you follow these, you’re going to be ahead of the game from 95 percent of the people. Maybe even 99 percent of the people.
I have to tell you, I’m completely making that number. I have no idea. You will be ahead of most of the people that didn’t listen to the show and couldn’t figure it out at all. We’re done for the show for today.
I want to thank you for joining us. I want to thank the folks that are on Facebook Live, that have joined us for the recording of this. As well as those people there are now subscribed to the YouTube channel.
Again, if you are interested in doing that, you just do a search for Make It Last. You’re going to be able to find essentially all of our video and audio recordings. You can subscribe on podcast. We’ve got a thousand different ways for you to get this content down, and learn the way that you learn best.
If that ends up being something that is on video, great. If it’s audio, fantastic. Finally, I want to leave you with this. If you’re interested in learning more about the Trump tax reform, we’re doing a talk. You can register for the talk. It’s just $11 for you to do that.
It just covers the cost of the room and the cookies there. You go to trumptaxreformtalk.eventbrite, E‑V‑E‑N‑T‑B‑R‑I‑T‑E, .com, and that’ll get you there on February 5th, either at 2:00 or 5:00 PM at the College of New Jersey.
Otherwise, come early, find some parking because it is a college campus and you know what that can be like. That’s it for today’s show. I want to thank you for joining us. We will be back next Saturday with a new episode.
Victor: Again, all of these different formats. Thanks. This has been Make It Last, where we help you keep your legal ducks in a row and your financial nest egg secure. Bye‑bye.
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