MANAGING FINANCIAL PLANNING RISKS.

• Author: DODSWORTH, JOHN A.

RIDING THE WAVES THROUGH CALIFORNIA'S ECONOMIC SWELLS ANDTROUGHS

All through the '90s and into the new millennium, California CPAs have been riding the wave of financial gain as they transition away from traditional tax and audit services and into the world of personal financial planning and investment advisory services. Why? It may have been the forces enumerated in the AICPA Vision Process, a chance for economic success, or simply a desire to try something new.

As long as the economy continues to grow and clients are fairly happy, the professional liability risks associated with investment advice and PFP tend to be manageable. But if the economy recedes and the stock market gets bearish in a way that causes clients to suffer substantial losses--watch out. Your wave may come crashing to the shore as your clients start looking for someone to make them "whole" again. That someone could well be the professional who is held to a higher standard than all the other financial advisers--the CPA.

California law adds an extra dimension: CPAs' ability to accept commissions. The commissions law went into effect Jan. 1, 1999. You can find the provisions that detail the circumstances under which a CPA can accept a commission in California Business and Professions Code Sec. 5061. The strong economy and relative youth of the law make it too early to determine its consequences.

CONTROLLING LOSSES

Although the commissions law may still be a babe in arms, PFP services have been around long enough for risk management experts to identify several time-tested techniques for controlling losses. To better understand how some of those techniques are applied, consider the following:

Dennis Geary, a 65-year-old actor with an increasingly successful career, generates a six-figure income. He has a reputation as a talented but demanding professional with high expectations and a temper that explodes when things go awry.

Geary has little interest in (or understanding of) financial concepts. His CPA, Patrick Bigelow, has prepared Geary's tax returns for years and has provided advice about business deductions, loans, SEP IRAs, and various other financial items, as well as personal financial planning services. Although Geary was too busy to sit down with Bigelow and draft an investment plan, he was receptive to Bigelow's recommendation to a significant portfolio shift from fixed income to equity, and a referral to an investment adviser.

Geary enlisted the adviser and ended up with several portfolios, including a group of high tech stocks earning about 25-30 percent a year. The other, more diversified portfolios chugged along at 10 percent, 15 percent and 20 percent. Geary was so fond of his high techs that he had the 10-percent-return portfolio converted into more high tech stocks. Bigelow was surprised that Geary wanted to get even more aggressive, especially at 65, but the CPA figured he was informed of the risks.

When the stock market's big downturn of April 2000 came along, it wiped out $1 million of Geary's high tech values. A series of increasingly malicious computer viruses created further downturns during the remainder of 2000.

Higher short-term interest rates and real estate prices in California...