Financial News

For those of us that have been watching the decimation of much of the banking and finance industry, it has become clear that finance-related firms’ compensation arrangements and ethical standards are being called into question through a blanket labeling of all finance industry professionals with some permutation of the word “crook.” The rapacious practices of real crooks, like Bernard Madoff et al., and the over-compensation of the officers of bailed-out financial institutions have clearly left a bad taste in the mouths of the public. This negative perception of the finance industry as a whole has in large part rubbed off on all individual professionals in the financial services, whether such gross agglomeration for the purposes of labeling is warranted or not.

The world’s most recent financial crisis has provided a unique proving ground in which investment planning and investment management firms have tested their mettle on many levels. As the complexities of the crisis continue to emerge, pearls of portfolio management and investment planning wisdom have begun to surface. We will explore ten of these that have so far made themselves apparent. Many of the ideas we will mention here are familiar to veteran advisors, while others may be completely new. On the firm level, 4Thought has utilized the vast majority of these concepts already in the past. However, the severity of the crisis that investors have experienced thus far has highlighted the importance of these practices and reconfirmed the views we previously held. Other ideas illustrated here represent shifts from our past approaches.

Many clients who have been witness to major drops in their investment portfolios over the last year have come to the realization that they are far less risk tolerant than they had originally believed. For these clients, as well as those whose life circumstances may have changed as a result of the financial market crisis, it may become appropriate to reallocate portfolios on a much more conservative basis – using an ultra-conservative methodology.

The investing public generally makes very little distinction between investment planning and investment plan implementation. In most cases investors will simply skip the former altogether, moving directly to the investment of assets with whomever they believe is the best money manager, mutual fund, stock, bond, or other vehicle available. They will later find out that this has been a dire mistake. Many investors are coming to this unpleasant realization as we speak. The contemporary markets have not been kind to investors in general, and have relentlessly beaten down the assets of those who have not done the proper investment planning.

Towards the end of the year, CPA firms are generally looking for opportunities to maximize the tax deductions available to their business owner clientele. For a business owner client whose operation has the right characteristics, there is a substantial opportunity for tax deduction (up to $1.2 Million annually) that has gone unutilized until relatively recently (around 2002). This opportunity is provided by IRS tax code under IRC 831(b), and is known as the domestic captive insurance company.

During periods of extreme market volatility, the 4Thought Investment Committee recommends that advisors perform the following steps with regards to existing client accounts and relationships.

No action is necessary on the part of CPA partners. We strongly recommend this plan for our internal advisors and partnered firm advisors in order to retain clientele and properly service them through financial market crises: