What’s Hot, What’s Not.

What every CPA should know to keep pace with the changing investment climate.

o be successful financial planners and investment advisers, CPAs must keep up with a wide range of changes in investment products, technology, economic conditions and client management techniques. While the body of required knowledge may at times seem overwhelming, much of it is in fact just common sense. Here are some of the “hot buttons” CPAs should take into account as they seek to develop and grow their financial planning practices.


F ear and greed are the two things that routinely guide people’s attitudes toward money and investments. While a certain amount of these is healthy, too much of either can overpower an individual’s judgment. CPAs need to help clients reduce fear so they can move forward and help them keep greed in check so they don’t do anything foolish. Excessive stock market volatility and shattered trust in “white-collar leadership” have left clients fearful their “survival” is threatened. How fear operates varies within each individual—some people manage it creatively, others wreak havoc on themselves and those around them.

Fear about money is a big deal because of the attachments we have to it. We often give money too much power in our lives—weakening ourselves in the process. Markets have no power to hurt or help anyone—they function impersonally and equally for all. It’s how we interact with a market that has the potential to cause problems.
Hype, greed and panic have always been the enemies of investment success. But if you, as a planner, are able to keep a cool head on behalf of your clients, you can do something tremendously valuable: create a safer, saner investment route to guide them through an unfolding economy. Planners can refuse to allow clients to be taken in by hype, keep them from being too greedy or stop them from giving in to panic. CPAs must help clients articulate their goals—because goals are the fuel that move client investments. Failure to set goals results in an inability to control fear and greed and has the potential to overcome even the soundest investment plan in the strongest financial market.

How can CPAs help clients control greed and not panic? The best way is to advise them to continue following the recommended asset allocation—even during periods such as the boom of the 1990s or the more recent market downturn. Advise them to resist the temptation to jump to a hot hedge fund or shift money into fixed income investments. Abandoning a well thought out strategy to reap windfall profits or sell into a falling market is the quickest way for clients to undo the benefits of a comprehensive investment strategy and miss out on future opportunities.


A re you using account aggregation? Have you heard of it but believe it to be another dot-com dream that will go bust? A few years ago some financial advisers viewed it as a cool new Internet tool, but in 2003 it still has few uses. In the first three months of last year just 1% of U.S. online households used such a service according to Forrester Research.

Account aggregation lets you collect all kinds of information on one Web page. It lets you keep track of information as diverse as bank and credit-card balances, the value of investments, 401(k) accounts and frequent-flier miles without having to jump from site to site. The data are collected and displayed in a format you can use. Many banks offer aggregation on their Web sites. If your bank or credit union doesn’t have a Web site, you can sign up directly for My Yodlee ( www.yodlee.com ), a company that provides aggregation technology to most banks.

Aggregation for financial planning is in its early stages and will likely include a range of products. Clients might have insurance, annuities, ordinary equities, mutual funds, bonds and multicurrency ADRs. To handle this diversity of products, CPAs will need a full range of flexibility.

ByAllAccounts ( www.byallaccounts.com ) a leader in the field, is aiming its services at financial planners. State Street, the giant global securities custodian, provides a robust utility tool and infrastructure that combines securities processing, settlement, trust accounting, performance reporting and private-labels the entire service with the CPA/investment advisers’ firm name. The result is a middle office and a back office in a box that includes ByAllAccounts and an integrated asset-servicing platform for securities brokerage and asset management services.

WealthTouch ( www.wealthtouch.com ) also uses ByAllAccounts. It serves firms that manage the financial affairs of high-net-worth individuals with complex portfolios and accounts in a variety of financial institutions, providing specialized accounting and investment tracking along with proprietary online reporting designed specifically for wealthy clients. These services include investment reporting, data aggregation, account reconciliation, expense management and tax compliance.

1st Global, a broker-dealer for CPAs, has two platforms using an online application from ByAllAccounts—one for financial advisers and one for clients. WebPortfolio automatically aggregates account information from approximately 900 different financial institutions, including brokerage firms, banks, trust companies, mutual fund families and insurance companies, to create a comprehensive “snapshot” of a client’s total wealth. CPA advisers can use the information to assess risk and return, analyze appropriate asset allocations and track a client’s financial goals.

But just listing a client’s financial information all in one place isn’t enough. The client will need planning help and advisory services to develop a financial plan and an asset-allocation model. In the future, wealth management must combine aggregation with advice, allowing CPA advisers to use applications such as Financial Profiles, DirectAdvice, Financial Engines or NetDecide to offer financial planning and investment counsel. These products include a comprehensive suite of investment and planning tools and can provide a seamless link to client accounts managed by the adviser and by others. The end result is increased client satisfaction and retention and an opportunity to capture assets now managed elsewhere.

What does the future hold for aggregation? Given how slowly the concept is catching on with both consumers and the financial community, it’s not surprising many observers predict it will fail. If the service manages to hang on, CPAs should look carefully before recommending clients use an aggregator to track their financial affairs. In the next phase of its development, as this technology becomes part of a comprehensive wealth management platform, some CPA firms will embrace it and use it to the dual advantage of themselves and their clients.


M ost professional advisers recommend clients diversify by owning some fixed-income investments. Bonds typically fluctuate in value less, and at different times, from stocks. There are essentially two ways to make money from bonds: (1) capital gains, achieved by selling a bond for more than it cost and (2) periodic interest payments. Like common stocks, bonds fluctuate in market value and, if sold before maturity, may produce a gain or a loss.

The primary reasons to invest in bonds are to add stability to a portfolio and receive dependable income. For stability, short-term, high-quality bonds work best. Prices don’t fluctuate as much because investors don’t have to wait as long to get their principal back. And high-quality bonds lessen the risk of not getting interest payments on time or principal back at maturity. For maximum stability and safety, many advisers recommend five-year (or shorter) U.S. Treasury securities held until maturity.

When held to maturity, high-quality bonds (the term refers to the issuer’s creditworthiness) are generally considered conservative investments. But bonds are not without risk. With interest rates at 40-year lows, any uptick in rates likely will lead to lower bond prices (bond prices move in the opposite direction of interest rates). Risk arises when a fixed-income investment is sold before maturity. However, it also can work to an investor’s advantage. If a client sells a fixed-income investment before its maturity date and interest rates have fallen since the original purchase, he or she may receive more than the original principal.

Selecting individual bonds. How do CPAs choose from myriad government or corporate bonds? Surprisingly, it’s not difficult. It’s possible to achieve consistent above-average performance in all types of markets with a passive portfolio-management strategy called the “laddered” or “staggered maturity” approach.

Laddering means spacing maturities, for example by investing 10% of the portfolio at a time so each segment matures annually for 10 years. To understand how laddering works, consider a client with $200,000 to invest in bonds. He or she invests equal dollar amounts at regular intervals along the yield curve. For example, the client could purchase ten bonds each with a $20,000 face value, one bond maturing annually for 10 consecutive years. When the first bond matures, the proceeds are reinvested in a new 10-year bond and so on.

Depending on the circumstances, ladders may be of different durations—of longer or shorter maturities. The average maturity of the portfolio described above is six years. More important, it spans approximately two business cycles. As time passes and the first bond matures, the client can invest in another 10-year bond and continue this cycle as long as he or she wants to hold domestic fixed income bonds. This approach means the investor is never concentrated in one maturity.

Using a bond fund. These can be even trickier than bonds themselves because—contrary to what the name implies—they really aren’t fixed-income investments. Even when a mutual fund’s portfolio is composed entirely of bonds, the fund itself has neither a fixed yield nor a contractual obligation to give investors back their principal at some later maturity date—the two key characteristics of individual bonds.

In addition, because fund managers constantly trade their positions, the risk-return profile of a bond fund is continually changing: Unlike an individual bond, whose risk level declines the longer an investor holds it, a fund can increase or decrease its risk exposure at the manager’s whim. In this way a bond fund is closer in character to stocks or stock funds than to individual bonds.

Does that mean fixed-income investors should avoid bond funds? Not necessarily. Bond funds may be appropriate for clients who know exactly why they are investing and what they expect to get. That’s why before a client invests in a fund it makes sense for his or her CPA to ask these questions:

How much do you want to invest? If the client has less than $100,000, and seeks tax-free income, his or her best choice is probably a municipal bond fund. A diversified portfolio of individual municipal bonds requires at least $100,000. (Most are sold in lots of $25,000.) Bond funds require a much lower minimum investment: Top-quality municipal bond funds at Vanguard, for example, require only $3,000; American Century’s Benham funds $2,500 to $5,000, depending on the fund; and Scudder $2,500.

What kinds of bonds? If the answer is corporate bonds, the best option is probably a bond fund. Corporate bonds usually require a large stake and have other drawbacks for the average investor: high transaction costs, no shelter from taxes and the risk the issuer will call the best bonds, ending the income stream. Government agency mortgage bonds are also difficult to buy; many investors have learned the hard way that, while mortgage funds may offer somewhat higher yields than Treasuries, the extra income can come at a cost down the road with an increased risk of default and mortgage prepayments as rates fall.

What price convenience? Some income-oriented investors have been enticed into funds merely for the sake of convenience because many bond funds pay out income monthly, rather than annually or semiannually, making cash management easier. In the long run, however, for most investors the regular cash flow is worth neither the added risk of bond funds nor the costs.

Exchange-traded funds (ETFs). Clients also can now invest in fixed-income iShares. This new generation of ETFs is a bond portfolio that investors can buy and sell throughout the trading day like shares of stock. Barclays Global Investors partnered with Lehman Brothers and Goldman Sachs to introduce four new ETFs, all traded on the American Stock Exchange. Like traditional open-ended mutual funds, these bond-based ETFs enable investors to purchase a basket of bonds with one simple transaction. Unlike bond funds, however, bond ETFs may be traded throughout the day at market price. In addition, whereas mutual funds are required to disclose their holdings semiannually, iShares holdings are available daily.


I n the late 1990s investors went too far with the belief that only stocks could provide a retirement nest egg. That illusion prompted them to fill their 401(k)s with 100% stocks. That strategy was never justified because of exactly what we’ve seen over the past few years. Things can go wrong. That’s why clients’ portfolios need to be diversified. Period. With the need for diversification and asset allocation finally clear, clients who didn’t want to hear about modern portfolio theory (MPT)—much less practice it during the bull market—are now listening.

Harry Markowitz and Merton Miller developed MPT in 1952 and William Sharpe expanded on it later; the three won the 1990 Nobel Prize for Economics for their contribution to investment methodology. Now 50 years after its birth, we enter the age of MPT.

Market snapshot. At the time of this writing, stocks remain mired in the third year of a bear market. As of November 2002 all of the major equity market indices are in negative territory. The current investment environment remains difficult, with factors extraneous to the market and the economy playing a larger role in influencing investor psychology than at any point in the past two decades.

Investors have been severely shaken by each revelation of corporate greed. Ideally, these disclosures should compel institutional shareholders to be more active in setting minimum standards for corporate governance, encouraging boards to hold some meetings independent of management and putting reasonable limits on unreasonable executive compensation. Expect to see changes.

It’s not clear if consumer spending—usually the springboard in an economic rebound—can remain at current levels. A number of important spending drivers—including mortgage refinancings—appear close to being exhausted. A few other potentially negative factors for the U.S. equity markets are worth mentioning. A by-product of high U.S. equity valuations, the weak economy and the corporate governance crisis is that foreign investors have begun to ease the pace of their overseas investment here. And, as a result of poor U.S. equity returns over the past three years, pension fund managers may decide to shift some of their historically high weightings in stocks toward fixed income.

In short the U.S. equity markets face significant challenges. Nevertheless, just as moments of market euphoria are generally bad times to deploy capital (investors were beating down the doors to invest in technology in early 2000), moments of extreme pessimism are generally good times to invest. As the level of pessimism rises, we may be on the verge of one of those opportunities. It is in such times that clients need CPA investment advisers the most. CPAs in turn, can use the bear market to increase their market share by persuading potential clients that this is not the time to go it alone.


I ndividually managed, or “separate,” accounts are the new must-haves for high-net-worth individuals. Cerulli Associates, a Boston research firm, estimates managed accounts are a $795 billion marketplace that has grown 32% annually over the past five years; more than 70% of it is invested by the big five wirehouses—Salomon Smith Barney, Merrill Lynch, Morgan Stanley, UBS PaineWeber and Prudential. The Money Management Institute—a Washington, D.C., research organization—reports that total assets in managed accounts are projected to grow to almost $3 trillion by 2011.

With a managed account, the client owns each of the securities, stocks and bonds purchased on his or her behalf. Because the investor owns the securities directly, the actions of other investors (purchases and sales) have no impact on the client. This makes effective tax management and the ability to undertake planning strategies among the biggest advantages of separate accounts. There also is a trend today toward diversification of money managers. This means CPAs might recommend the client use a different manager for each specific asset allocation niche such as large cap growth stocks, foreign stocks and bonds.

The value of the client’s portfolio is a key influence in determining whether CPAs should recommend a separate account manager. Some advisers use a rule of $1 million as the cutoff for helping clients use separate account managers; yet for others the cutoff is much lower. There are many reasons for investors to use outside investment managers including these: The client asks for individual stocks and bonds to carry out the asset allocation, but the adviser doesn’t handle individual securities; the adviser refers all implementation to others; and the client requests a separate money manager. Assuming the CPA can find a manager willing to handle the amount the client wants to invest, lower account minimums may apply.

PHYLLIS J. BERNSTEIN, CPA/PFS, is president of Phyllis Bernstein Consulting in New York City. She previously served as director of the AICPA personal financial planning division. Her e-mail address is Phyllis@pbconsults.com .

Get Real!

Managing the expectations clients have for their investments is crucial if CPAs are to have successful adviser-client relationships. This is particularly challenging in a time of uncertain financial markets. How to help clients have realistic attitudes about their investments is the focus of a new book, Managing Client Expectations, coauthored by Robert Doyle, CPA/ PFS of Tampa, Florida, and Phyllis Bernstein, CPA/PFS of New York City. The following provides a look at the guidance included in the book.

Many accounting firms have found the market for financial advisory services elusive. At one time, CPAs heralded financial planning or investment advising as the bright spot in their firms’ futures. They enthusiastically attended seminars, purchased software, drew up business plans and waited for clients to call. Many of those CPAs’ firms have had second thoughts and, today, dismiss the business as a passing fad.

CPAs may find themselves asking, Can financial advising be professionally rewarding and profitable? Indeed it can! It can revitalize a CPA practice. There are practical and proven ways to add financial advisory services to a CPA practice.

What do clients really want? Many times they seek a financial planner to solve a (perceived) problem in their financial lives. Historically, the problem often was tax-related, but today issues arise concerning the education of children, retirement, estate planning or risk management. Clients’ real needs may differ from their perceived ones. The CPA’s most difficult job is to help clients differentiate between the two.

Effective problem solving requires the adviser to guide a client in defining his or her goals and objectives. But a husband and wife might have vastly different views on what those should be. This difference may create considerable stress on the couple’s relationship if the adviser does not handle it properly. Often the most important role the CPA can play as financial adviser is to help the client develop realistic goals and to articulate them clearly. Once goals are on the table, the CPA and the client can implement strategies to achieve them.

One of the most critical tasks in the financial planning process is helping clients prioritize their needs. This requires interpersonal skills, as well as good listening and interviewing techniques. Questionnaires are available (the book includes a sample) that require the client to choose from among several alternatives, providing the CPA with insight into his or her needs and wants.

The CPA then discusses the choices and has the client and the client’s spouse or partner compare which are most important. One exercise that often is eye-opening is to ask the clients to write three long-range and three short-range goals and rank some other common financial goals. Again, the CPA should share the sometimes surprising results with each partner.

Hearing the client is vital—and difficult—for many advisers. To diagnose problems the adviser must be a good listener. It is a mistake to start by telling a client what his or her goals should be. Instead, the CPA should ask questions, write down the client’s answers word for word and, then, repeat those answers aloud. This helps the client know what the adviser heard and allows him or her time to correct any misunderstandings.

Managing Client Expectations is available from the AICPA order department at 1-800-777-7077. Ask for product number 056512 (member price $47; nonmember price $58.75).

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