A Dozen Dynamics of Investment Planning

Earlier this year, as part of the AICPA’s PFP Section’s CPA Financial Planning Thought Leadership series, I moderated the webcast, “Investment Planning.” Panelists included Joanne Hagopian, CPA, CGMA; Scott Sprinkle, CPA/PFS, CGMA, CFP®; and Thomas Trainor, CPA, CA, CFA®, CFP®, CLU®, who shared their perspectives on some of the most pressing issues and opportunities in investment planning.

Here are the ideas that emerged from the discussion – something I like to refer to as a “dozen dynamics” of investment planning:

The Framework for Client Communication. First, discuss the client’s assets and income requirements, risk factors, and any personal restraints – all factors that drive how investment assets are allocated. A client’s portfolio also includes equity and fixed income, and alternative investments such as real estate and commodities, and passion investments, including antiques, art and wine. Another important part of the capital allocation decision is the amount of debt or borrowing a client should have in his or her own personal capital structure.

Specific Communication. How you communicate with your clients is huge. Too often, we get the cart before the horse; instead of listening to our clients understanding their goals, we’re too often trying to solve the problem. You have all the technical skills, of course, but it’s the softer skills that build relationships and keep your clients with you for years.

Client Asset and Income Requirements. The cornerstone of proper investment planning starts with having a detailed understanding of short- and long-term cash flow needs, a simple process of cash flow budgeting. Once you understand the needs, you can look into the client’s capital and income requirements:

  • Lifestyle: Incorporates all the client’s future spending, and then further divides that into essentials, including food, property taxes and other basic necessities in life, as well as luxury items such as additional travel and personal purchases.
  • Dynastic: This is the amount of income and assets the client wishes to provide their family with, while alive and as part of their estate. In essence, it’s the dynasty they wish to create. Think of this as also including asset allocation that the client may wish to set aside if they have elderly parents who may need to future care or a special need’s child who requires continuous support throughout his or her life.
  • Philanthropic: Charities the clients wish to support, while alive and in their estate.

Assessing the 3 Areas. Clients expect you to know the quantitative information, but what they really expect is for you to get them to meet their goals. Help them differentiate their needs from their wants (required and contingent spending), separate their returns from their goals and educate them about the risks they might need to take to get there. Make the conversation about time horizon and objectives, and then look at the plan that’s going to get them there. Be proactive and always take that opportunity to revisit everything after any life change, such as marriage, divorce or a death in the family.

Be “the” Choice by Helping Your Clients Understand Real Returns. Because the tax side is becoming more and more intertwined as the tax laws change, CPAs have a huge advantage in the investment world. Most investment advisors are driven on gross returns, instead of what’s really important, such as what their clients will have at the end of the day in their real returns after taxes, fees and inflation. CPA financial planners understand the tax impact of asset placement and exactly what their return is gong to be. Use this information to help educate and differentiate yourself with your clients.

Multi-Year and Multi-Generation Tax Planning. We must smooth income for our clients by planning for the future. With multi-year instances, look at income streams and opportunities for each particular client. For example, look at trust distributions and see if you have a beneficiary who is not able to handle access to the distribution, in which case you might have to accept the tax and hold the distribution.

As for multi-generations, planning goes beyond just dealing with clients and their children; it often involves looking at the parents’ financial situation, too. Don’t leave this conversation on the sidelines. The more value you provide, the more difference you can make because clients will see the significant savings you can provide for their entire family.

Impact of Market Conditions. With the ever-changing market and its volatility, you must educate and communicate with your clients up front and have a prudent strategy for how you are going to manage their assets. While longer-term rates will eventually rise, don’t sit on the sidelines; take adequate precautions on duration risk. Staying within the yield curve, while also getting some reasonable rates of return and managing credit quality to work through fixed income strategies, is challenging but important in this environment.

Risk Evaluation. There are two areas of concern here: financial capacity for risk and emotional tolerance for risk. While financial capacity for risk looks at a client’s asset and income requirements, emotional tolerance for risk can be managed successfully over time through client education and requires your professional judgment. Clients may be running out of assets, and taking risks will be the only way to keep them moving forward toward their goals.

Private Business/Alternative Investments. Know your clients, their limitations and opportunities, and act accordingly. Hedge funds and Private Equity investments are typically for the very wealthy clients. With the mass affluent, thoroughly educate yourself on liquid alternatives, which will provide your clients with exposure to the asset class, more liquidity, and often get similar returns. That illiquidity has to be balanced out, and for a lot of individuals, they just don’t have the ability, with a 20-year time horizon, to give up some liquidity. 

The Added Benefit of Private Business. CPAs can play a significant role by helping dramatically enhance the value of the investment. You can help clients take businesses that are essentially practices and turn them into stand-alone companies, increasing the valuation by leaps and bounds. Moreover, you can reduce their operating risks by ensuring that the company and its management is properly structured.

Human Capital Advice. You can advise your clients or keeping very substantial reserves in place—in the event they lose their job or to compensate for substantial losses in their income. A high-risk job means that you’ll want to make sure that your client keeps a substantial amount of fixed income to compensate for decreased periods of income. However, if your clients have a very stable source of income, they can be more aggressive with their portfolios and maintain higher equity allocations because you don’t need the income from the portfolio to sustain their lifestyle.

You must also consider human factors, such as morbidity and mortality, when determining a complete assessment of human income. As the CPA financial planner, you don’t have to be an expert in insurance, but you must make the necessary inquiries because you can’t evaluate human capital and totality without evaluating how clients mitigate the risks associated with human factors.

Retirement Planning Strategies. When your clients retire, they will generally spend more money in the first 5-10 years—and you must educate them on that reality. Plan on heavier spending at the beginning to protect against market volatility, and keep in mind that a big drawdown in a year in which assets are dropping will have a negative impact on your client over the long term. It’s vital to build in flexibility and account for these real life matters and not get too analytical.
AICPA PFP Section’s Thought Leadership Series
Access the free webcast recordings and presentation materials from the AICPA PFP Section’s Thought Leadership series featuring forward thinking from CPA financial planners advising their clients in tax, estate, retirement, risk management and investments. Stay tuned for upcoming dates for future webcasts.

About the Author

Lyle Benson, CPA/PFS, CFP®, is president and founder of L.K. Benson & Company, a CPA/Financial Planning firm based in Baltimore, Maryland. The firm specializes in personal financial planning, tax and investment advisory services for high income individuals and families, as well as corporate executives and entrepreneurial, closely held business owners across the country. Lyle is chair of the AICPA’s PFP Executive Committee. Contact him at lyle@lkbenson.com.