Friday Financial Five – August 8th, 2014

Friday, August 08, 2014

Dan Forbes, GoLocalWorcester MINDSETTER™

Bank of America to get hit hard

After reports of a smaller settlement earlier in the year, BOA and the government will apparently agree to a deal between $16 and $17 billion. BOA was holding a mountain of toxic debt courtesy of Countrywide, but did they pay a large premium by waiting so long to settle? The news of a possible settlement was coupled with the company’s announcement that they would be raising their dividend for the first time in seven years.

401(k) returns and financial literacy

The National Bureau of Economic Research assessed the correlation between 401(k) performance and the strength of participants’ financial knowledge. Findings suggest that those with a higher level of knowledge were able to add over 1 percent to the yearly return in their retirement plan. These results aren’t all that surprising and emphasize the need for participants to either educate themselves about investment options or consult with a professional for guidance.

The U.S. still holds the lead in billionaires

According to Forbes and Cerulli Associates, the number of billionaires in the world is around 1,600 and almost a third of them live in the United States. Of the world’s top 20 richest people, 14 of them are Americans. Two-thirds of billionaires created their own wealth, while only 13% became billionaires through inheritance. In the last 10 years, China has gone from zero billionaires to the number two country in the world with 152.

Suggestions to improve Dodd-Frank

From the time it was passed, the Dodd-Frank bill has faced scrutiny from many sides worried that excess regulation would stifle business growth. The Bipartisan Policy Center released a list of recommended changes to improve the bill. Suggestions include the creation of a consolidated exam force and the proper implementation of the Volcker Rule. The BPC also stresses transparency of Fed minutes, improved clarification on the liquidation of failed institutions, and changes to the processes by which the Consumer Financial Protection Bureau operates.

Hedge fund’s tax avoidance strategy brought to light

Hedge funds and tax avoidance are under the microscope, so a story involving both is sure to get one’s attention. The Senate is investigating a Renaissance Technology LLC hedge fund that reportedly avoided close to $6 billion in income taxes. The basic premise is that the hedge fund engaged in transactions that most would consider “short-term”. Through a technicality available through the use of options within banks, the fund paid taxes as if the transactions were “long-term”. The difference in paying a long-term capital gain versus an ordinary income tax is huge. The Senate panel is charged with obtaining answers as to whether this practice passes the smell test and should be allowed to continue.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].