Look How Tech-Savvy Crooks Have Become

Plus, mutual fund dividends vs distributions 

Ric Edelman: It's Thursday, July 18th. On today's show, wait till you hear about this latest scam. Truly scary. I want to tell you the story of a company called Arup. It's an engineering firm based in London. Pretty big company. 18,000 employees worldwide, annual revenues of $2.5 billion. 

In February, an employee in the finance department got an email from the CFO, inviting him to a virtual meeting, you know, Zoom or Teams or whatever. In this meeting, there were a to discuss a quote unquote confidential transaction. The employee accepted the invitation and showed up at the meeting. And there, the employee saw the CFO and several other employees. It was a normal meeting. By the time it was over, the employee was told to transfer funds from London to five of the company's Hong Kong bank accounts. All told, the staff member then made 15 transfers totaling $25 million dollars.  

And it was all a scam. The email invitation was fake. There were no employees in the meeting. The people who the employee thought he was talking to in the Zoom meeting were all digitally cloned versions of real people, the CFO and the other managers. So when the fake CFO ordered the transfers, the employee did as he was told. 

The bank accounts in Hong Kong were fake, and as soon as the money got there, it was immediately transferred to unknown places. Hong Kong police have called this one of the world's biggest known deepfake scams yet. Nobody has been arrested so far. The Financial Times also reported that the big international advertising agency WPP was targeted by the same type of scam, but that one failed. 

Just think about all the technology that the crooks brought to bear in this scam against Europe. First, they had to identify the employees to engage. Then they had to break into the email systems at the company. Then they had to discover and replicate their virtual meeting protocols. Then they had to create fake bank accounts that looked like real ones. And then hardest of all, they had to create the digital twins of the CFO and the other employees, not just faces and voices, but also make them able to interact with the real employee in real time. This, this is all straight out of a script from Mission Impossible. And yet, it's all too real.  

So what are the lessons here? Well, be aware that if crooks can do all of this to one of the largest companies in the world, a company filled with IT security personnel, just imagine what they can do to you. If anyone, anywhere, asks you to wire them money, think twice, even if, maybe especially if, you know them.  

Coming up next on the show, a question that I got from one of our listeners. 

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Welcome back to The Truth About Your Future, I'm Ric Edelman. I got a question from James in Ohio. Here's what he wrote. 

“I have a dividend versus distributions question. I cannot seem to find anyone with an informed answer, so I am giving you a shot. Some mutual funds pay dividends, but some, they call them distributions. What's the difference?” 

James, I'm really glad you're asking this question because there's a huge difference between a dividend and a distribution. Now that difference might not seem important, but it really, really is. And so I'm astonished that you haven't been able to find anybody to give you the answer. Any good financial advisor should be able to do this. Certainly any tax advisor or accountant should be able to do this for you.  

But anyway, you wrote to me and I'm going to give you the answer. So when you own a mutual fund, the mutual funds might pay dividends. Not all mutual funds do. If you own a mutual fund that invests in small cap stocks, for example, or emerging market funds, they often do not pay any dividends because they invest in stocks that don't. Small cap stocks, young growing companies generally don't pay a dividend. They're reinvesting all of their profits. If they have any into the growth of their business. So they generally don't pay dividends. It's only when companies become big, they're mature. They're generating so much profit that they can't redeploy all of it back into their business. They're generating so much profit that they pay out some of that profit to their shareholders. That's called a dividend. And companies that do this generally pay a quarterly dividend. Many investors like to invest in companies that pay dividends because it produces income for them on a quarterly basis. So that's what a dividend is. And dividends are subject to ordinary income taxes. So getting a dividend from a stock is kind of like getting interest from a bank CD. In terms of its taxation, they both are taxed at ordinary tax rates.  

Now, in addition to dividends, now, like I said, some mutual funds might pay a dividend and some might not. So let's take the dividend conversation, set it aside because in addition to, or maybe even instead of dividends, there are these things called distributions, more specifically, they are called capital gain distributions. This is how they work. When you put your money into the mutual fund, the fund manager will take your money, pool it with all of the other investors, and then go out and buy the stocks that are the target goal of the fund's strategy. During the year, that fund manager may decide to sell some of the shares of those stocks. They may decide to get out of the stock of one company and buy the stock of another company. If they sell stocks within the fund, if those stocks had a profit, then that creates a tax liability and on an annual basis, typically around December sometime, the fund will take all of the profits that it earned during the year from the buying and selling of stocks and distribute those profits to the shareholders of the fund. They will take all the net capital gains that they've accumulated and send them out. That's why it's called a capital gain distribution. This occurs typically in December. You don't really know when it's going to occur. You certainly don't know the amount that it's going to be, but the overwhelming majority of mutual funds do incur this capital gain distribution on an annual basis. 

Sometimes these distributions can be 20%, 30%, 40% of the value of the fund. So, everybody gets their share of this, regardless of how long you've been an investor. So, if you bought the shares on December 1st, that was when you made your investment, that fund may issue a capital gain distribution a couple of weeks later. And you could be hit with a 20% or 30% or 40% distribution, even though you've only owned the fund for a few weeks. And that distribution will be subject to taxes at capital gains rates. So theoretically you could get hit with a big tax even though you own the fund only for a couple of days or a couple of weeks. 

Now, sometimes people say, this is a reason not to buy mutual funds in December, wait until after the distributions are declared so that you don't get hit with this surprise tax on a relatively new investment. That's a silly point of view, ignore that. And it's silly for two reasons. Number one, you are going to incur that capital gain eventually anyway. In other words, if you miss this year's capital gain distribution, you're just going to get next year's capital gain distribution. And eventually when you sell your shares, you're going to incur the capital gain on all of your shares. So just because you incur a capital gain distribution right now, doesn't mean you're paying more in taxes. It just simply means you're paying some of those taxes now. And by doing so, you're not going to have to pay those taxes in the future. So it's really not that big a deal.  

And the second reason why you should ignore this is that if you do delay your investment, well, you might be delaying the investment to a future higher price. In other words, if you invest today, the share price might be lower than if you invest a few weeks from now. So for both of those reasons, I tend to poo-poo this as a problem, but it is something you need to be aware of. 

And here's the short answer to the whole conversation. This really fundamentally explains why you shouldn't be buying mutual funds in the first place. Why are you buying an investment that throws off annual capital gain distributions, annual tax liabilities? What's the point? It doesn't do you any good. It doesn't help you. Why do it? Instead of buying a mutual fund that has this issue, buy an exchange traded fund instead. ETFs don't declare annual capital gain distributions. They are far more tax efficient. They're also generally cheaper to own because their annual fees are substantially lower than for most mutual funds. So, why own a mutual fund in the first place? Too often, the only reason people are buying mutual funds is that they're being sold by some commission-based broker who makes more money selling you a mutual fund than they would by selling you an ETF. So James, challenge the entire premise. Why are you owning a mutual fund or considering buying one in the first place? 

You can send me your question as well, just send it to Ask Ric at TheTruthAYF.com. The link is in the show notes.   

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Ric Edelman: Hey, Spot Ethereum ETFs begin trading on July 23rd! So on July 24th at 2:00pm ET, join me and Bitwise CIO Matt Hougan for our exclusive webinar, The New Ethereum ETFs: Answers to the Big Questions. We will outline the differences between Ethereum and bitcoin, discuss the investment strategies for both and how they fit in a portfolio. Matt and I will also answer your questions live. Plus, earn 1 CE credit! Register now at DACFP.com. The link is in the show notes. 

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Ric Edelman: On tomorrow's show great news, we're making progress on Alzheimer's. Plus, the Nasdaq you don't know. Everybody knows Nasdaq. Of course, it was found that in 1971 operates in 29 markets, 5,000 companies trade on Nasdaq, including Apple, Microsoft, Meta, Amazon, Tesla, you name it – but what most people don't know is how Nasdaq is helping financial advisors manage and grow their practices. So I'm going to be talking with Jillian DelSignore, the Vice President and Senior Investment Officer of the Nasdaq. She's going to give examples of how Nasdaq is helping advisors in new ways so they can better serve their clients. 

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Ric Edelman: I’m glad you’re with me here on The Truth About Your Future. If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube – and remember leave a review on Apple podcasts. I read them all! Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app. 

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Links from today’s show: 

The New Ethereum ETFs: Answers to the Big Questions (7/24 Bitwise Webinar – Register Now!): https://dacfp.com/webinar-the-new-ethereum-etfs-answers-to-the-big-questions/  

Ask Ric: https://www.thetayf.com/pages/ask-ric 

WPP boss targeted by deepfake scammers using voice clone (Financial Times article): https://www.ft.com/content/308c42af-2bf8-47e4-a360-517d5391b0b0  

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