Don’t Invest for Clients—Plan for Them

Why investing is not financial planning.

AS CPAs ADD FINANCIAL PLANNING services TO their professional offerings, it’s important not to limit planning to just discussing investments. Effective planners must develop an in-depth strategy by examining all aspects of a client’s financial affairs including assets, liabilities, insurance, investments and employee benefits.

BY TAKING A MACROECONOMIC APPROACH TO PLANNING for their clients, CPAs can create a better client relationship. Rather than just being simply the client’s accountant, he or she can become a trusted financial adviser. Every strategy a macroeconomic planner recommends can be boiled down to a simple rule: Maximize protection at no cost and maximize wealth at no risk.

FOLLOWING THE INITIAL MEETING, CPAs CAN BEGIN gathering information about the client. The client completes a confidential questionnaire and provides documentation about investments, insurance, mortgages and legal documents such as wills and trusts. The questionnaire and accompanying documentation offer the framework for future client meetings.

ARMED WITH INFORMATION ABOUT THE CLIENT, THE CPA now can do the actual financial analysis. The best way is with a broad financial planning model that goes beyond asset allocation or estate tax calculations. Before recommending any new investments or strategies, CPAs should make sure the client understands what he or she already has.

KEITH R. KNELL, Esq., is a partner with Knell & Seel LLC in Pittsburgh. He can be contacted through his Web site, .
n today’s changing market for accounting services, many CPAs have begun adding financial planning to their list of professional offerings. Despite good intentions, there’s a chance these CPAs might limit this service to merely discussing investments rather than helping clients to develop an indepth plan. By restricting their professional services to investments and related subjects, CPAs may miss significant opportunities. For instance a complete and thorough plan can help clients reduce income and estate taxes, decrease insurance costs and debt and better manage retirement plan distributions.
There is another way to do business that allows CPAs to develop a comprehensive financial plan and build better long-term client relationships. An effective financial planner must examine all of a client’s assets and liabilities. No detail should be overlooked. Although such planning may take more time initially, the extra effort is worthwhile in the long run as this approach creates a uniquely better client relationship. A CPA can transform himself or herself from being merely a client’s accountant or investment broker into a trusted adviser.

While giving only investment advice has merits, it leaves the task of true professional planning only partially done. Unless a CPA can analyze, explain and coordinate the entire gamut of a client’s financial life, he or she runs the risk of mismanaging the client’s affairs. CPAs entering financial planning must provide comprehensive services or lose clients. Even highly skilled CPAs might fall into the trap of financial planning mediocrity. The result: Clients are left with a poorly executed and alarmingly inefficient financial plan that subjects them to a limited outlook for the future.

Take the case of Mary, a 20-something client who is investing $500 per month in growth mutual funds, which had a 12% return last year. Some financial planners might congratulate Mary for having the discipline and vision to start investing at her age. But what if, in fact, this strategy is losing Mary money? Although the fund earned a healthy 12%, Mary is paying off a car loan, which also carries a 12% interest rate. By investing in the mutual fund instead of using that money to repay the loan, Mary is actually losing money—a fact most investment advisers would overlook—due, in part, to annual income taxes on the mutual fund. After paying taxes on capital gain and dividend distributions, Mary’s return shrinks to 8%. Why invest at an 8% aftertax return and pay 12% on a car loan? Mary should quickly repay the loan and then resume her saving.

How Values Influence Investing

Sixty-five percent of religious Americans who currently invest are influenced by their faith or by personal ethical values compared with only 33% of nonreligious investors.

A majority—56% of all U.S. investors—make faith or personal values part of their financial decision-making process.

Religious and nonreligious investors share similar outlooks on key business issues. The top five corporate ethical issues—product safety, involvement in sweatshops, environmental impact, labor relations and equal employment opportunity—are the same for both groups.

Source: “Where Faith and Wall Street Intersect,” Mennonite Mutual Aid (MMA) and MMA Praxis Mutual Funds,

How can you figure out if Mary and clients like her fully understand the implications of their financial decisions? Just ask some questions like these and listen to the often sheepish responses:

What was the rate of return on your entire portfolio last year? And the year before that?

Is that return before or after taxes? Before or after fees?

Are you confident your debt is structured in the best way possible?

Are you certain you are getting the highest overall rate of return on your combined assets?

Are you getting maximum benefit from all of your insurance policies; have you eliminated or reduced unnecessary insurance costs?

How much do you add to your investment portfolio each month? Is this investment automatic?

Are your assets operating at their peak performance?

Do you know how wealth creation really works?

Have you planned so that wealth creation will continue for your family in the event of your death or disability?

I have asked countless people these questions. Often, by the time they ponder the answers, they have begun asking themselves just what their financial planner has really done for them beyond making investments. Even worse, some people discover, after an in-depth analysis, that they have already forfeited thousands of dollars in lost opportunities.

As Mary’s situation illustrates, too often investment advisers focus only on the microeconomic aspects of a client’s financial plan. Fortunately, a good macroeconomic plan need not be complicated. In fact, the process can be boiled down to four steps.

The initial meeting lays the foundation for all future planning. Use this opportunity to get to know the client and discuss the philosophical framework within which you will work together. The goal is to make every strategy in the plan satisfy each component of a four-part test. The strategy must (1) maximize protection, (2) maximize wealth, (3) maintain or reduce risk and (4) do all of the above at no additional out-of-pocket cost. This test enables a client to begin grasping the big picture and move beyond looking just at investments. Ultimately, rather than focusing only on buying stocks, bonds or mutual funds, every strategy a macroeconomic planner recommends can be boiled down to these simple dictums. Maximize protection at no cost and maximize wealth at no risk. (See “Wealth at No Risk” below for more risk-averse strategies.)

Wealth at No Risk?

A savvy CPA can help his or her clients build strong estates without their going out on a limb. These three techniques can help:

Quintuple cash flow into savings at no new out-of-pocket cost. Clients often have little idea of the possible savings sources they already have. Take the case of a couple in their early 40s who had been putting $5,000 per year into their 401(k)s and about $250 per month (or $3,000 a year) into their savings account for vacations. What they didn’t realize was just how much money they were allocating to unnecessary debt. For instance, they had a 15-year mortgage in its 12th year, which, including their prepayment, cost them $1,650 per month or $19,800 annually. But they also had enough in their savings account to pay off the debt entirely.

The couple used their savings to repay their mortgage. While this meant their low-yielding vacation account was gone, they reallocated that money, as well as the $3,000 a year that used to go into the vacation account, into investments. In addition, they got so excited about saving that they were able to salt away another $250 a month.

The couple also was overpaying their income tax—they received a refund of approximately $3,600 each year. They changed their withholding to free up that cash on a monthly basis and put the money into investments as well. Now they put $29,000 per year into investments, in addition to funding their 401(k)s. As a result, these clients have gained an incredible degree of confidence in their financial lives.

After doing well, play it safe. One client, a dentist in his mid-40s, had $2 million in his IRA stock portfolio in April 2000. Taking into account what he really needed, with inflation, for the rest of his life until the age of 100, we discussed investing a large component of his portfolio in simple certificates of deposit. The CDs, which earn interest at a rate of 6.5%, would guarantee sufficient income for him, even under the most conservative assumptions. He could have locked in his assets for the rest of his life—and not incurred any risk. Since he plans to work for another 20 years, his CDs, including accumulated compound interest, would reach a whopping $5,143,000 when he was 65. Unfortunately, he chose to stay with his stock portfolio, was badly stung by the dot-com technology crash and lost more than $1,400,000. He may never recover from that loss.

Control your assets. One fundamental macroeconomic planning technique is phenomenally simple: Set up a “wealth accumulation account,” a primary account that automatically transfers funds into investments. This account serves the same function as payroll deduction plans—it forces people to save money. Clients who use this strategy are inevitably more in control of their cash flow than those who fail to do so. CPAs can recommend clients contribute regularly to a bank savings account and then set up a program whereby automatic withdrawals from the account flow—on a monthly or quarterly basis—into a mutual fund. Many mutual funds allow investments of as little as $50 or $100 a month under such circumstances.

At the first meeting, CPAs should pose a question that is of paramount importance not just to a client’s financial well-being but also to his or her peace of mind. Has the client prepared adequately for an uncertain future? Any plan put together today is guaranteed to look and be different three years from now (or for that matter, three weeks). The numbers may be different than projected, the client’s personal relationships may have changed and his or her home, job or health may no longer be the same.

A client could have a car accident and become disabled. If he or she dies unexpectedly, the federal and state death taxes on the client’s assets (until the federal estate tax phases out) could devastate survivors. The client could also lose his or her job or suffer a major lawsuit. In addition, tax law changes can derail even the most carefully constructed portfolio. Clients need a financial plan that will work whether taxes rise or fall, and should not rely on a plan based on today’s tax structure. (See “Changing Tax Laws,” below.) CPAs can plan for all of these contingencies. Good macroeconomic planners should be able to help clients create wealth under any circumstance—even in the dramatic economic, political and international events of the last six months. (See “Macroplanning at Work,” at the end of this article, for one example.)

Changing Tax Laws

CPAs should be extremely wary of basing tax savings only on current tax laws, since these laws are in a constant state of flux. The estate tax provisions of the recently passed tax law are supposed to expire in 10 years. Many financial planners may have boxed their clients into what eventually will be outdated tax shelters—irrevocable life insurance trusts created only to pay estate taxes. With the estate tax phase-out Congress passed in May of last year, a client who implemented an irrevocable life insurance trust may be saddled with a totally useless and costly vehicle. In addition, such trusts are usually very restrictive and contain policies that will cover only the expected estate tax obligation on the day the policy is issued. This is a problem because the amount of insurance a client needs to pay estate taxes is guaranteed to be wrong the day after the plan is in place. Simple asset growth in the client’s taxable estate will automatically increase the amount of tax due.

Here’s another example. Currently, heirs don’t have to pay a capital gains tax on the profits from a decedent’s stock portfolio because of the automatic “step up” in tax basis. But the 2001 tax act eliminated this provision effective in 2010. (Ironically, although the Bush Administration wanted to eliminate estate taxes, many heirs will be faced with a much larger income tax on investments that appreciated at death.)

While life insurance trusts can be used to cut estate taxes, clients are often far better off if CPAs help them add flexible provisions to their policy. For instance, someone can be given the power to alter the provisions of the trust if the tax laws change. Clients might also elect to add a provision to allow family members to access the cash value or death benefit proceeds for reasons other than tax payments. Another solution might be to simply eliminate the trust and have the children as alternate owners of the life insurance policies. By the same token, flexible provisions might need to be made to help heirs pay their capital gains tax when the basis rules change.


Once a client understands and agrees to the planning process and philosophy, he or she is ready to gather documentation and complete a confidential questionnaire. For this step, CPAs need information on every investment and savings vehicle the client owns, including series E bonds, money market funds, credit union accounts, mutual funds, stocks, limited partnerships, 401(k)s, IRAs and insurance policies.

To fully understand a client’s financial life, CPAs should examine the client’s life, disability, homeowner’s and auto insurance coverage, the terms of his or her mortgages and car loans, and the client’s will. During this process the CPA should ask the client to bring all financial paperwork to the next meeting to double-check the details.

The data-gathering questionnaire should cover the client’s entire financial life. In addition to the items mentioned above, the CPA should ask clients to list all of their sources of income—from rental properties and commissions to royalties or trusts. The CPAs should also request details of all of their employment benefits and copies of recent income tax returns as well as ask for the names of the client’s other financial advisers so he or she can work closely with them as a team.

The questionnaire and its accompanying documentation offer the framework for the second client meeting. This meeting usually involves listening very closely to why clients are doing what they’re doing with their finances. At this meeting a CPA can begin to truly understand a client’s financial management style and belief system. Clients also begin to better understand their past decisions: Why did they choose that investment and how did they select that insurance policy? Are they comfortable with the recent market downturn and its causes? How do they plan to fund their next automobile purchase? How do they finance their short-term and long-term business debt? There are myriad questions that vary from client to client. CPAs must learn to tailor each discussion to an individual client and his or her life circumstances.

For instance, a CPA might ask a wealthy client—conditioned to believe that estate and income taxes are inevitable—to consider making charitable donations to reduce taxes. Less affluent clients may not have the resources to consider such a suggestion and may not reap the same benefits. Similarly, it’s a good idea to ask a client planning his or her retirement to carefully consider all of the potentially damaging variables his or her retirement portfolio is exposed to, including inflation, spending habits and how stock market fluctuations could affect distributions.


The next step involves the actual financial analysis. It’s crucial for CPAs to use a broad financial planning model that focuses on the flow of money to increase performance. A good planning tool should focus on effectively creating wealth by examining long-term costs, comparing investment opportunities to ensure maximum results and identifying the crucial variables for each client’s financial success. Whatever model CPAs choose, they should be careful not to rely solely on a standard asset allocation or estate tax calculation program. They don’t allow the user to look at the big picture, and typically function better as sales aids than as comprehensive planning tools.

Of course, it may be possible for CPAs to do a full analysis without a model. After all, Henry Ford used to run Ford Motor Co. on the back of an envelope. But this technique is analogous to doing an audit without the standard framework of a balance sheet or income statement—it’s possible, but a whole lot harder. A strong financial model simply makes a CPA’s billable hours much more valuable and helps a new client better grasp the breadth and depth of the accountant’s expertise and planning.

In the first part of the analysis, the CPA makes sure the client truly understands the financial products and legal instruments he or she already has. Even sophisticated clients are confused about what their auto insurance, life insurance or will really entail. They also may have misconceptions about their investments. It’s not unusual for a client to believe his or her portfolio is very conservative when in fact it’s overloaded with aggressive growth stocks.

After analyzing the client’s holdings and debts the CPA should make sure all the pieces fit together. The overall plan—like a jigsaw puzzle—may work poorly if even one piece is out of place. Each part of the plan should coordinate with the others. For example, CPAs should cross-check their clients’ wills with their life insurance policies, to make sure the beneficiary designations are correct. And if a client is prepaying $100 a month on a mortgage rather than his or her car loan, the CPA should check the interest rates on both—the car loan rate probably is higher and should be paid off sooner.

While these examples may seem obvious, sometimes a lack of coordination can be incredibly subtle. For instance, one client wanted an estate plan. He brought in—as requested—all his financial records. An examination of his auto insurance policy proved particularly important to maintaining his estate. On the surface, estate planning and car insurance have absolutely nothing to do with each other. But to save money on estate taxes, we recommended this client and his wife separate their assets from joint to individual ownership. When that occurred, additional liability protection would be necessary because individual assets are much easier to seize than joint ones. One tragic automobile accident could result in the loss of half the couple’s estate.

In this instance, because the couple had only $250,000 of liability coverage on their auto policy, we advised them to purchase a separate $1 million umbrella policy; for roughly $150 a year, they could keep their entire estate safe.

This same couple planned to retire in two years. They wanted to cash in some mutual funds to build a $300,000 mortgage-free, “golden years” dream home in North Carolina. This decision, if implemented, would have adversely affected the funding mechanism in their wills, which currently serves to reduce estate taxes. After their financial planning session, they decided that instead of paying cash for the home, they would use the $300,000 to fund a trust to save estate taxes. This strategy let them finance their dream house at no cost. After income tax deductions, the couple, in the 31% tax bracket, could reduce their real cost of financing the house to just 5%. So as long as the mutual funds earned an aftertax return of 5% or above, they could pay their mortgage debt and maintain their portfolio at the same time. (If and when the estate tax repeal takes effect, planning for this couple will change.)


The final step is one most CPAs are already good at—giving clients top-notch service. After all, the very nature of audit and tax work keeps accountants communicating with their clients on a regular basis. CPAs can apply this practice to financial planning. For instance, accountants can use annual and quarterly reviews not only to examine portfolio returns, but also to educate and update clients on the strategies and effectiveness of their overall financial plan. Such meetings also are an opportunity to stretch your mind—as well as the client’s—and think of innovative solutions to common problems. Sometimes, in an outstanding creative session, clients have made life-changing decisions. This aspect of macroeconomic planning is perhaps the most rewarding because it really makes a difference in people’s lives. But for clients across the board, a true, in-depth plan is of infinite value. By helping to prepare it, CPAs enable them to truly take control of their financial affairs—and be poised for the best life has to offer.

Macroplanning at Work

How can CPAs help wealthy clients retire comfortably and still pass the bulk of their assets to their children instead of the IRS? One client provides a textbook study for some macroeconomic practices.

Tom is 59 years old and worth $9 million. A self-made man, he started his own construction company, worked hard and was frugal with his expenses and gradually branched out into real estate. Currently, $2 million of his assets are in taxable mutual funds, another $2 million are in tax-deferred annuities and the remaining $5 million are still invested in his business and in real estate holdings.

Since Tom is in a high-income tax bracket, the need to reduce estate taxes is obvious. To pay these taxes at his death, Tom already has purchased a $750,000 term insurance policy at a cost of $3,800 per year. After meeting with his financial planner, he has switched to a permanent death benefit policy, with an annual premium of $40,000.

On the surface, this new policy sounds much more expensive. But the traditional whole life policy carries a large growing death benefit of more than $1 million and should earn a decent nontaxable rate of return. Given these factors, he has reallocated some of his other investments so he can purchase the new policy at no new annual out-of-pocket cost. How? First, by turning in the term policies, he saves almost $4,000 a year on premiums. In addition, Tom was holding a number of municipal bonds in his portfolio that were yielding 5%—roughly the same as his prospective life insurance policy. In fact, if he drew money from his municipal bond portfolio to pay for the new insurance, the municipal bonds would yield less than the whole life policy, with a projected accumulation of $2 million (vs. $2.4 million for the policy) by his 85th birthday. So he cashed in some of the bonds and reallocated them into the insurance policy. Tom continues to achieve the same return on his investment, but now he has a much stronger and more valuable insurance policy in place.

In addition to providing for his family, Tom tithes to his church and has a long history of giving to other charities. He has decided to give his remaining annuities to charity upon his death—saving federal estate taxes, federal income taxes and state death taxes.

We advised Tom to tithe by giving his church stock instead of cash. This enables him to rebalance his mutual fund portfolio without getting hit with a capital gains tax. And, of course, his contributions are still tax-deductible.


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