Accounting Today - July 2011

A risk worth taking on
pfpnews

BY JOHN NAPOLITANO

The financial planner’s role in managing client risk

The client who serves on boards of direc tors, whether for profit or not.

We think of risks associated with the aud it and attest side of the business every time we place our signature on a financial state ment. We think of investment risk every time we meet with a client who is nervous about market losses while counting on those invest ments to provide income or security in future years. But when it comes to traditional risks, many of which can be protected against or avoided, we are only scratching the surface of what CPA financial planners could or should be doing.

The definition of risk management, ac cording to the American Institute of CPAs’ PFP Division, is the “process of identifying the source and extent of an individual’s risk of financial, physical and personal loss, and developing strategies to manage exposure

For CPAs, risk takes on many
meanings.

John P. Napolitano, CFP, CPA, PFS, is chairman and CEO of U.S. Wealth Management in Braintree, Mass.

to risk and minimize the probability and
amount of the potential loss.”
After understanding the definition of risk
management, we reach our first fork in the
road. That fork is whether you hold yourself
out as a personal financial planner to your
clients or not. If not, then the only risk man
agement role that a client may reasonably
expect from you is incidental relative to your
accounting and tax work.

I understand that some practitioners don’t
want to be financial planners, but I believe
that it is a horrible disservice when a CPA
notices, or should notice, potential risks in a
clients’ financial life and fails to mention any
thing. Examples of risks that are right under
your nose that should trigger some guidance
from you would include:
Clients who own rental property jointly
with a nonspouse owner;

The client that has jointly owned financial accounts with an elderly parent;

The client who conducts some business from their home; and,

A CLEAR ENGAGEMENT LETTER

If you do hold yourself out as a financial plan ning practitioner or a firm capable of deliver ing personal financial planning services to a client, you may have a fiduciary obligation to perform risk management services. We can debate all year over whether you owe your clients the standard of care that includes risk management, but that would be a waste of time. What I can tell you, from personal expe rience, is that when a client thinks that you are their financial planner, perhaps evidenced by some investment services that you’ve deliv ered or mere solicitations that they may have received from your firm, then you may well owe the fiduciary standard of care that would include risk management services.

The best way to protect against this risk would be with meaningful engagement let ters. Make it crystal clear what you are doing, and not doing. If your engagement letter is for general financial planning services, then I would argue that you clearly owe the fidu ciary standard of care that would call for com prehensive review of risk and the manage ment of those risks. If your intent is to avoid the risk management arena, then you should use limitedscope engagement letters for fin ancial planning matters and clearly note the scope limitation.

Under the assumption that you are pro viding planning services, and do want to do a great job with the risk management plan ning, there are clear steps and processes that should be followed. Upon completion of your planning engagement, clients should under stand their exposure to risks and whether or not they are adequately protected.

This risk assessment starts with a realistic
assessment of your knowledge and abilities
in each of the specific areas of risk for your
clients. These may include, but not be limited
to, the following types of risks:
Life;

Disability;

Health;

Longterm care;

See riSk on 27
MORE DELAY RETIREMENT

NEW YORK — The recession has put even greater pressure on workers to stay on the job, according to a new report from the Conference Board, which found several trends unique to the latest recession.

The health industry experienced the largest decline in retirement rates. In 2009-2010, only 1. 55 percent of full-time workers aged 55-64 retired within 12 months, compared with almost 4 percent in 2004-2007. The construction industry also experienced a large decline in retirement rates. This was likely the result of a long slump in the industry, which resulted in many laid-off workers staying in the labor force to make up for lost income.

There was essentially no retirement delay among government workers. That is expected, since they are more likely to receive defined benefits, making them more insulated from the decline in financial asset values in their pensions.

Mature workers in high-paying occupations were much more likely to delay retirement than those in low-paying ones. Those in higher-paying jobs tend to have higher financial expectations for their retirement years. In addition, high-paying occupations tend to have limited physical requirements, making it easier to continue working. Among lower-paid workers, there is often an increased physical demand, and unemployment rates tend to be much higher. As a result, even if those workers wanted to continue working, finding replacement jobs is often extremely difficult.

Delayed retirement has affected the demographic distribution within the United States. Part of the decline in net migration to states like Florida and Arizona is likely due to the trend of delayed retirement, with fewer individuals leaving the labor force and moving to retirement destinations.

Those who suffered from a significant decline in home or financial asset values, lost a job, or experienced a compensation cut during the recession were much more likely to delay retirement. Workers in states where home prices suffered especially large slumps, such as California, Michigan, Florida and Arizona, were also more likely to delay retirement.