Wealth managers are poised to gain clients in the recovery

Growth opportunities for CPA firm-based wealth management services may be stronger than ever today as clients (and prospects) begin emerging from their psychological bunkers following the financial meltdown.

That, at least, is the hopeful assessment of several key players in the field, who also point to the prospect of significant changes in federal income and estate tax law as factors that will favor CPA-run firms as clients seek advice and services from appropriately trained professionals, in contrast to garden-variety investment brokers.

"A lot of people have gotten fed up with the wire house brokers and banks," said Jeffrey J. Call, CPA/PFS, who manages the Personal Financial Services Department of Bennett Thrasher in Atlanta. "In some ways, they were the ones that were pushing some of the products that got us in trouble. Clients are looking for independent advisors that have a fiduciary duty to their clients," he added.

Randy Matz, McGladrey Wealth Management's national managing director, said, "A lot of people are thinking [about their brokers], 'You seem like a really great guy, but it really didn't work. You lost me a lot of money.'"

Matz believes that the registered investment advisor model - i.e., the fiduciary and fee compensation-based regulatory and financial structure favored by most CPAs - "is becoming much more in vogue" with investors. Or perhaps it will.


But how have clients of these CPA wealth managers fared during the crucible of 2008 and early 2009 financially - and psychologically? And what have their advisors taken away from the harrowing experience?

In general, the clients of cbiz Wealth Management who had been either aggressive and conservative prior to the crash have held up the best, explained Brett D'Arcy, the firm's chief investment officer. "The conservative people have been very happy," he said, because they didn't sustain heavy losses, thanks to relatively low allocations to equities. And clients with the heaviest equity allocations, he said, "think of themselves as long-term investors and believe the market will come back."

"It's that group in the middle that thought they should have been moderately aggressive, and now want to be less aggressive," D'Arcy said, who were the most troubled during the crash and perhaps represent the biggest challenge if their prospects for achieving their investment goals were undermined by an overly conservative approach.

But the clients of the wealth management firms that emphasized, at the front end of the relationship, the need for periodic rebalancing of portfolios to maintain the agreed-upon asset allocation model, appear to have fared the best. "One of our managing tenets is rebalancing," explained Matz. "We have probably done a better job for our clients through the downturn because that's part of our discipline."


But during the period of the most precipitous market decline, a firm's rebalancing discipline must itself be balanced against the level of distress experienced by clients, acknowledged D'Arcy. "It was a very stressful time," he recalled. While cbiz Wealth Management's advisors discouraged clients from "making changes in the depths of the decline," they also recognize that "people need to be able to sleep at night."

Discouraging clients from selling out at the bottom of the market required a lot of client hand-holding, D'Arcy said. "From about October until April, we didn't do any business development or operations reviews. It was all client service. We threw the regular meeting cycle out the widow."

Many cbiz clients may have benefited from the firm's belief that even the most aggressive investors should maintain at least a 20 percent fixed-income allocation. "Our clients have come through very well," D'Arcy asserted. "They were down between 7 percent and 27 percent. We had a very good process that held up well."

Still, nobody is suggesting that the crash hasn't left a lasting impact. While post-mortems are perhaps premature, it appears that the most enduring fallout for firms and their clients is a renewed focus on understanding risk tolerance. "After last year," D'Arcy said, "people are far more aware" of risk and their ability to deal with it.

At cbiz, he said that advisors are now asking clients, "'How do you feel about what you just experienced?' If they can honestly tell you how they felt, that's going to give you a better indication of their true risk tolerance."

McGladrey Wealth Management's clients also are being probed a lot today about their risk tolerance, according to Matz. He said that the firm's financial planning process has long applied insights from the emerging social science of behavioral finance, which seeks to explain and predict the emotional basis for personal financial choices. But today, asking clients how they'd feel about witnessing a plunge in the value of their portfolio does not sound as theoretical to them as it did before the crash. "We'll ask, 'If this happens again in the future, we know you're not going to want'" to rebalance the portfolio by investing in more stocks, "'but we are going to want you to do it."'

That conversation ultimately can help minimize client anxiety and overcome the natural desire to minimize one's exposure to an asset class that's in decline, Matz said.

Minimizing clients' anxiety is one thing, but have advisors drawn any conclusions about investment strategies that can change investment results during periods of volatility? Most seem to be sticking with their traditional pre-crash investment strategies. But Bennett Thrasher's Call said that the market meltdown has led his firm's advisors to use "some vehicles we haven't used as much in the past."


Specifically, he pointed to so-called market-neutral funds and hedged funds designed to generate a positive - if not spectacular - return in both up and down markets, through holding both long and short positions on some securities. These approaches, once available primarily through hedge funds, now are deployed by several mutual fund organizations, Call said.

What hasn't changed at Bennett Thasher and the other firms is the emphasis on financial planning and asset allocation strategy development at the front end of the client relationship. "We have always spent a lot of time making sure we have the right asset allocation," said Call.

Those client discussions include an effort to ensure that they have realistic expectations of future investment returns. Some clients who weren't traumatized by the stock market's collapse were anticipating that it would quickly rebound to its former peak - an expectation Call has sought to dampen. He has also been deflating some clients' expectations of an uninterrupted and steady (if not rapid) climb back. "If a client is expecting 10 percent returns over the next five to 10 years, we have to tell them, 'That's fairly unlikely. We think it's going to be a fairly challenging environment.'"


Call and others are also expecting - and are beginning to prep clients for - a challenging environment with regard to income, capital gains and estate taxes. "Pretty much everyone is assuming that rates will have to go up," he said.

"Everyone" generally also includes clients. And that perception naturally plays to the favor of CPA wealth management firms that handle tax planning in addition to investments, noted Peter W. Flour­noy, CPA/PFS, the chief financial officer and director of tax and planning services for Beacon Wealth Consulting, in Rowayton, Conn.

"People are nervous about the hangover from the economy, their asset levels are down and they hear about Congress planning to raise income taxes," he said.

That, he said, all adds up not only to client receptivity to sitting down with him, but an urgent need for them to do so before year-end. (Some larger CPA-based wealth management firms, including McGladrey's, are institutionally separated from the tax side of the firm.)

The kinds of discussions Flournoy is gearing up for include the possible need for high-bracket clients to accelerate receipt of income in 2009 in anticipation of higher rates next year. He sees a high probability that the maximum federal income tax bracket will revert to 39.6 percent, and the current maximum 15 percent rate on long-term capital gains "is definitely going up." (Whether clients have any gains available to take now is another matter, of course.)

"On the other hand," he added, "capital loss carry-forwards would be more valuable if capital gains rates go up."

The anticipated phase-out of certain tax deductions for top-bracket taxpayers may suggest the need to accelerate deductions this year, he said. "The only caveat to that is you may come up against the Alternative Minimum Tax, unless you have enormous amounts of ordinary income."

Recognizing clients' urgent need for tax planning in light of these issues, Flournoy is gearing up for a steady stream of client meetings as the year winds down.

On the estate tax front, he said that the future "is in such limbo now that it isn't funny." But Congress will need to act this year before the estate tax overhaul under the 2001 Economic Growth and Tax Relief Act expires.

"Current proposals run the gamut," said Flournoy.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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