Investors Gain Confidence from CPA Financial Planners

The significant market fluctuations during the third quarter of 2015 brought to mind the wild days that led to the ‘Great Recession.’ However, CPA financial planners said that a majority of their clients (84 percent) stayed the course during the recent drop in stock prices, with only 16 percent contacting their planners to get out of the market. The AICPA PFP Trends Survey found that age, market education, and time spent as a client all had a substantial impact upon confidence during the recent market fluctuation. The survey, which included responses from 398 CPA financial planners, was conducted from September 2-22, 2015.

The survey asked CPA financial planners to rate their clients’ confidence during the recent fluctuation on a scale of 1-5, (with 1 being the most fearful, 3 being neutral and 5 being the most confident). Established clients of CPA financial planners (3.6) were the most confident, followed closely by clients under 40 (3.5), and clients educated about markets (3.4).

Conversely, those most fearful during the market turmoil were those who had newly retired (2.3) and clients approaching retirement age (2.4). Additional indicators of being more fearful were clients who had little knowledge or interest in the markets (2.4) and clients who were newer to the CPA financial planner’s practice (2.5).

“Market fluctuations generate headlines in the news and have the potential to cause fearful, knee-jerk reactions in investors,” said Jean Luc Bourdon, CPA/PFS, member of the AICPA’s PFP Executive Committee. “By regularly communicating with their clients, CPA financial planners help them stay focused on the big picture during both upswings and downturns. Developing clear written investment plans tailored to the client’s risk tolerance helps manage the emotions of the situation and prevents making decisions in a panic.”

Market fluctuations may cause more fear among those who have recently retired, because they have yet to establish a lengthy spending pattern. In addition to providing a steady hand during times of market volatility, CPA financial planners work with clients to develop clear plans on spending in retirement. One of the key contributing factors to a successful plan in retirement is to establish realistic expectations about life expectancy and the amount of money needed.

The survey found that more than half of clients planning for retirement under-estimate either their own life expectancy (52 percent) or their joint life expectancy as a couple (57 percent). In addition, CPA financial planners said 54 percent of their clients underestimated the total funds needed to retire, with 57 percent lowballing their potential expenses in retirement.

“Taking a realistic look at your own life expectancy can be an extremely emotional thing for a person to do at any age,” said Karen Goodfriend, CPA/PFS. “However, sitting down with a CPA financial planner and working out reasonable projections for the duration of retirement is the best way for retirees to develop a viable plan to draw down their assets while maintaining a comfortable lifestyle and accomplishing their family support and charitable giving goals.”

While even the best plans need to be periodically reviewed and revised accordingly – particularly if unexpected life events take place — clients’ own behavior plays a big role in the success of the plan. In fact, the survey found that 76 percent of planners said their client’s general over-spending contributed to changing their retirement plan, with 29 percent naming it their number one reason.

Health care costs, including medical expenses and medical insurance, was the second most cited factor (72 percent), with 24 percent saying it was the number one reason for changing their retirement plan. The other leading responses were poor initial estimates of retirement income or spending (68 percent), financial assistance for family members (52 percent), and additional travel (49 percent).

And when faced with the need to change their spending – regardless of cause – CPA financial planners said nearly half of their retired clients (46 percent) would proactively reduce spending, with 28 percent electing to first focus on making changes in their income flows. However, one-in-four (26 percent) felt their clients would not be proactive and would only make adjustments when forced by circumstances.

CPA financial planners whose clients are faced with the need make spending changes to address cash flow issues, stated their they would first turn to reducing gifting plans (56 percent), reducing discretionary spending (54 percent) or reducing travel (52 percent). Almost half (46 percent) would consider making lifestyle changes by either reducing their standard of living or downsizing their residence. However, three-in-ten (29 percent) said that their clients would not be likely to make proactive spending changes until circumstances forced them to.

CPA financial planners who hold the AICPA’s CPA/PFS credential use some of the following strategies with their clients:

For staying on track with spending plans in retirement:

Helping clients understand how important the estimates for life expectancy and spending levels in retirement are. The more work that goes into creating realistic projections up front, the less likely clients are to need to make drastic changes later on.
Not assuming the general CPI inflation rate applies to all clients; their specific types of expenditures can produce a very different personal inflation rate and impact their retirement projections.

For dealing with a market downturn:

Remind clients that performance should be judged over market cycles of 3-5 years, not quarterly returns;
Explain to them the negative consequences they would have experienced if they got out of the market during previous downturns;
Help them understand the market forces that have caused the recent volatility;
Establish a written investment plan that calls for a disciplined investment approach;
Have these conversations when markets are up. Later, when markets are down, clients can be reminded that this was not unexpected and they can shift their focus to what can be done to benefit in the future from the current downturn.