by Cynthia Harrington
Investors have had plenty of confidence busters in the last few years. Precipitous declines in the stock market and accounting scandals have rocked their world. Potentially, the biggest negative for CPA advisors is the alleged complicity of Big Five firm Andersen in the ongoing Enron fiasco.
But, strangely enough, the reverse seems to be true. Nick Woodall, JD, CFP, of Dallas-based 1st Global, confirmed that, so far, there has been little fallout. Woodall speaks regularly with advisors from all over the country in his position as executive vice president of independent advisors for the company. "This isn’t affecting our reps," he said. "The image of Arthur Andersen is one of big corporations and big accounting firms. Investors have unique relationships with their local CPAs. It’s personal and untainted by the activities of national audit firms."
"Besides, most investors think that Enron was an aberration," Woodall said. "It was flat-out fraud and a misrepresentation of the numbers. They trust that it is not going to spread out to many companies."
While headlines predicted a severe drop-off in investor confidence, those already working with an advisor seem to have renewed confidence in their choice to seek professional advice - especially with regard to diversification. "I’m hearing advisors say that their clients have gained a real perspective on diversification," said Woodall.
And, employees are reconsidering their holdings in their employers’ stock. Corporate executives with stock options and workers with 401(k) retirement assets have become much more attentive to their advisors’ recommendations.
"Quite frankly, the best thing for the general public is to see the pain experienced by employees that invested all their eggs in one basket - and that basket falls," Woodall said.
Pat Hamel’s practice serves corporate executives in the greater New York City region. "Clients now realize we’re in a different world," said Hamel, CPA, of Hamel Associates Inc., in Livingston, N.J. "Because of the headlines Enron has gotten over the last month or so, corporate executives are as ready as [at] any time in my career to listen to the fact [that] they should diversify."
Hamel said that he has a regular speech for his clients with significant holdings in an employer’s stock. He illustrates their challenge with three examples of blue-chip companies that experienced significant declines. IBM tanked in the 1970s and has since recovered its previous luster. Citigroup nearly went under in the 1980s when it was still Citibank. Most recently, Coca-Cola hit the skids. In 1998, Coke sold for $80 per share, then dropped to $43. "I say to my clients, ÔYour company could be another Enron or it could be one of the other three’," said Hamel. "They all deny it will be another Enron but understand from these examples the reason why they shouldn’t have all their eggs in one basket."
Hamel reported that blue-chippers such as IBM, Citigroup and Coca-Cola provided the stark realization that things will not always be rosy, and also, that good companies do recover from downturns. A top executive from Johnson & Johnson recently brought up the issue of diversification.
"Here’s a great company, going gangbusters right now, with a great business model," said Hamel. "But this executive was still nervous about having 80 percent of his net worth tied up in one position. Until now, I would have been the one trying to convince the client of the need to diversify."
Hamel doesn’t expect to add Enron to his illustration of blue chip companies on the skids. "The difference between these companies and Enron is that IBM, Citigroup and Coca-Cola all had real fundamental businesses," he said. "We may never really know what went on at Enron, but it looks like it was no more than a Ponzi scheme."
Workers are paying close attention to their retirement savings in 401(k)s, too.
Woodall said that he hears frequently from 1st Global reps that clients are seeking assistance in allocating their savings. "Reps have been preaching the need
to diversify for years," said Woodall. "Now clients are coming in asking for help and saying they finally understand what their advisor had been telling them."
Granting advice on a client’s 401(k) can be even more challenging than helping corporate executives to diversify out of an employer’s stock. There are increased fiduciary responsibilities, and the investment choices are limited. "Major corporations have a dilemma," said Dennis R. Kroner, CPA/ PFS, Pitt, Ryan, & Linnear in Chicago. "They try as best they can to give employees a full menu of investment choices, but the administration is so expensive and burdensome. They end up offering maybe 10 to 12 funds out of a universe of over 10,000."
And the allocation decision is made more difficult by the inclusion of company stock. There’s subtle pressure to invest with the company. Often, the encouragement is backed by a financial incentive when the company makes additional contributions when the employee buys their stock. "Lots of people give in to this temptation and put too much in employer stock," said Kroner. "And many just don’t perform that well."
In addition to questions about investing in an employer’s stock, many are concerned about another potential fallout from the Enron debacle. Regulators and accounting rulemakers are concerned that investors will no longer trust the system of financial reporting.
While that may be true for some investors, it is not a problem for the clients of professionals like Kroner and Hamel. "Financial reporting has been a moving target as far back as I can remember," said Kroner. "In 1933, a horrendous scandal involving false reporting from a drug company promoted all kinds of new laws that rule how we now conduct audits.
"Besides, clients don’t look to us to solve the world’s problems with accounting methods," he said. "We’re always going to have accounting issues because the economy continues to evolve and present unheard of situations."
Said Woodall, "In the long run, this [Enron] debacle is going to be a very good thing for investors. Not in the short run, of course."
