Clients are coming to their CPAs with concerns about their shrinking retirement savings as the recession deepens.
A panel of three CPAs who hold the Personal Financial Specialist credential talked about the impact of the financial crisis on their clients at a press conference at the American Institute of CPAs' office. One of the main concerns has been the fallout from Bernard Madoff’s $50 billion Ponzi scheme.
“The worst part is how this has affected our profession as financial advisors,” said Beth Gamel (pictured), executive vice president of Pillar Financial Advisors in Boston. “The Madoff scandal has painted us with a broad brush. Nobody trusts us. The Madoff fraud was the coup de grace that made folks say, ‘I’ve had enough. I don’t trust you folks.’”
Worries about layoffs are adding to retirement fears. “Many of our clients are reassessing their retirement plans,” said Lyle Benson, president of L.K. Benson & Co., in Baltimore. “Planning for job loss is important in this environment.” Some clients are beginning to question whether their children can afford to go to expensive Ivy League colleges and private schools, and are taking a fresh look at the public schools in their area. Many are also taking advantage of lower interest rates to refinance their mortgages.
Michael Goodman, president of Wealthstream Advisors in New York, compared the current financial crisis to economic downturns in the past. He pointed out that in the Great Depression, hundreds of banks failed and there was no federal deposit insurance available. Now about 25 have failed, and the FDIC guarantees up to $250,000 in deposits, at least through the end of the year. Some worried investors are pulling all of their money out of their stock portfolios and going into bonds and cash accounts. But Goodman warns that they may lose out once the market recovers. “The danger is people not staying the course and not being part of these recoveries,” he said. “When there is a recovery, you need to be part of it.”
Taxpayers can accumulate their realized losses, Goodman noted, and carry them forward. Losses can be offset in future years against ordinary income and any gains made when selling a home or business. Gamel recommends that clients set aside between 18 and 24 months’ worth of income in case of a job loss. Clients who are more pessimistic about the economy should set aside three years’ worth.
In lockstep with their clients, many financial advisors are taking a hit as clients’ assets fall, since many base their fees on a percentage of their clients’ assets under management. Others, however, bill by the hour or are on retainer. Some clients were initially upset with their advisors as they saw the value of their portfolios decline, but as reports of the worldwide financial crisis spread last fall, others came to realize that their CPA wasn’t the one to blame. “When your ship is in a storm, the last thing you want to do is fire the captain,” said Goodman.
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