Where does the CPA fit in
This article was primarily directed to CPAs, yet clients could
find the article quite helpful as the clients develop their framework
for how they are working with their financial advisors including
their CPA. Among professional advisors, a client’s CPA
is in a good position to help that client with investment-related
decisions, assuming the CPA has taken an active role in the client
relationship to understand the client’s objectives, goals,
needs, sensitivities and temperament, family situation, financial
circumstances, outlook etc. Often the CPA has the client’s
trust and a long history of helping the client arrive at sound
decisions, often due to the CPAs skills at gathering information,
analyzing the data, applying solid reasoning abilities, and arriving
at a conclusion that is objective and fits the context. However,
most CPAs do not have the specific knowledge, training or experience
in personal financial planning and advisory services (sometimes
referred to as "PFP"), or the appropriate licensing
such as the AICPA’s P designation (Personal Financial Specialist),
Certified Financial Planner, Registered Investment Advisor, securities
licensing such as Series 6 or 7, etc. When the CPA is leading
or very much involved in the personal financial planning process,
as is the case for thousands of CPAs who are actively pursuing
that specialty, the guidelines are numerous and quite complicated.
Chicken and egg situation? Not really. Until the CPA obtains
those skills and experience, the CPA could still be involved
in the investment-related decisions, perhaps as quarterback of
other advisors who are more experienced and have the appropriate
experience and licensing, or as an assistant in providing solid
objective analysis. In this context, the following guidelines
about using conservatism and simplicity can help the CPA who
is becoming more involved with clients in the personal financial
planning process and in investment decisions that are part of
that process.
Major aspects of personal financial planning include helping
clients with investment decisions such as how to best allocate
total investment funds among the various investment categories,
counseling on how to properly integrate investment planning with
other areas of PFP such as projected cash flows, budgeting, or
tax planning.
Conservatism
Many clients invest in a quest to earn the highest return possible,
without realizing how significant the risks could be. CPAs should
become familiar with the possible pitfalls of investments and
explain these to clients via probing questions. When in-formed,
many clients will shy away from the risky investment and place
money into one better suited to their needs and risk tolerance
level. To be a successful planner, the CPA must become familiar
with investment vehicles even if recommendations are limited
to allocations. One way to probe is to ask many open- ended questions.
If your client has the impression that stocks always provide
a better return over the long term, you might consider asking
whether your client is aware that over an 18-year period the
Dow Jones Industrial Average actually declined 13% from 891.71
on November 18, 1964 to 776.92 on August 12, 1982. Such a long
period if it were repeated might be too long a wait for the client.
On the subject of protecting principal, the CPA should discuss
how the client views equity-related investments which protect
principal, such as certain special mutual funds and variable
annuities, or the clients views on put options and other protective
measures.
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- One way to assist the client in understanding a potential
investment in a bond fund would be to compare the bond fund with
investing directly in a diversified portfolio of bonds, which
has the advantage of lower costs and definite maturity dates.
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- In regard to life insurance, you will be amazed at how little
so many clients know of their investment, and the great diversity
that exists among insurers and policies. The passage of time
exacerbates these differences. Suggest that an insurance advisor
review the companies and their products. An advantageous change
may be possible. For example, many companies have lowered their
term insurance rates over the last few years, and have extended
the period of time which rates are guaranteed not to rise. Even
though older, many clients who qualify the underwriting can save
money on premiums.
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- Concerning municipal bonds, inquire whether the client thinks
a lesser rated revenue bond backed by an insurance fund is really
safer than a AAA rated general obligation state bond. Does
your client really understand the importance of purchasing noncallable
bonds as a way to protect against declines in market interest
rate
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- Ask if your client is prepared for declines in investments
when the economy sours. Ask at what level he or she would consider
selling investments if they appreciated significantly. Ask whether
the client has projected his or her investment growth over the
next several years, and to retirement. Ask at what point conservatism
becomes more important than growth.
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- Ask the client to replay his or her thought process in arriving
at current investment decisions. Sometimes a client may consider
a particular risky investment based on rumor or a friend's advice.
The client may be seeking the thrill of a gamble or feeling the
need to do what others have done. In some cases the nonfinancial
need can be vented elsewhere with your conservative guidance.
For example, a small business person could often earn more money
redirecting his or her time away from public investments and
toward his or her own business or field of expertise.
Simplicity
Keep your report simple, but your discussion thorough and interactive.
If your client requests that you prepare information on how to
best allocate funds, your information should be structured so
that it facilitates a thorough but concise discussion of your
suggested allocation. Use a personal computer and electronic
spreadsheets, creating reusable templates. Make the material
as simple, neat, and attractive as possible. Don't mail it to
the client. Instead, sit side by side, and go over your prepared
material, elaborating and demonstrating each point by drawing
on examples from your experience and news articles from well-known
reliable sources. Make it tailored and very personalized. Dissuade
your client from getting involved in too many different investment
vehicles with too many institutions. The extra portfolio protection
from a lot of diversification may not be worth the paperwork
nightmare and the additional time and cost for record keeping,
and possible commissions and fees involved. A burgeoning simplicity
trend is "account-aggregation" which involves the consolidation
of a clients many investment accounts and insurance and liability
accounts all in one place, usually on one website. The client
gets easy access to information, both current and past, which
can be quite helpful to the client and the client’s advisors,
including the CPA, in evaluating the successes of personal finance
decisions and accumulating information important to future planning,
including tax planning by the CPA. The CPA has an extraordinary
opportunity through account aggregation (perhaps partnering with
an aggregating firm) to make the client’s life simpler and
their financial decisions better-informed.
The planner should develop a network of contacts in the investment
field. Get brokers to send you duplicate statements so that you
can help your clients if they have questions about their investments.
Get on several brokerage mailing lists for their publications,
which often contain a lot of valuable information that will help
to keep you informed. Maintain a well-organized database of literature
and information, and you'll find you can prepare a presentation
for a client quickly and effectively. Befriend brokers on whom
you can rely to obtain timely information by email, phone or
fax, further cutting your research time. Some brokers may even
refer clients to you because they respect your knowledge and
diligence. Get expert at using the internet in obtaining information
and staying informed. Often, setting up a customized web page
with key internet links that are checked regularly is as important
to the CPAs quest to staying up to date as reading key financial
magazines. Certain CPA portal sites, such as CPAdirectory.com,
can help the CPA use the internet effectively and with simplicity.
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- By using conservatism and simplicity in helping clients,
the CPA will provide a very valuable service and enhance the
growing role the CPA has in the personal financial planning process.
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