As a successful accountant, you are no stranger to risk. Whether working with individuals or business owners, you help your clients navigate a wide variety of economic, regulatory, political and personal factors to make the best possible financial decisions. And those factors are constantly changing. 

In daily life, risk is the probability of something bad happening based on the actions you take. Take investment risk. For investors, risk is the likelihood that their actual return will differ from their expected return. To understand what is happening in a portfolio, investors must understand risk. It’s a fundamental premise of investing that the more risk you are able to tolerate, the greater your potential return can be. For instance, growth stocks experience far more ups and downs than U.S. Treasury bills and hence are much riskier. 

You may not be advising your clients directly on their investments, but you owe it to them to make sure they are in touch with their risk tolerance and that they’re working with an advisor who takes that risk tolerance and their financial goals into account when constructing their portfolio.

Some investors are risk averse. Others embrace risk wholeheartedly. Most are somewhere in between. Whatever your client’s risk tolerance, the potential return on their investments should be commensurate with the amount of risk they’re willing to accept. That means understanding all the various sources of risk, managing them prudently, and using that knowledge to make better financial decisions even when the market is volatile and emotions are running high. As General George Patton famously said, “Take calculated risks. That is quite different from being rash.”

Managing risk

Managing risk is highly complex. Fortunately, there is powerful software that can assess thousands of different risk factors pertaining to securities and investments. When your client’s financial advisor connects these factors to their individual goals and helps drive risk-appropriate solutions, they can accomplish three important things: 

1. Understand which accounts and specific holdings are driving your client’s overall risk, using sophisticated risk analytics.
2. Illustrate, hypothetically, how different market events might impact your client’s current holdings and overall financial future.
3. Explore strategies to shift and mitigate some of the embedded risks your client is facing.

If your client’s financial advisor is not able to provide this type of analysis, it might be worth making a change. Doesn’t it make sense to learn about the portfolio risks your clients are exposed to before something catastrophic happens that can derail their client’s retirement cash flow and financial future? It’s essential to consider risk, not just within your client’s portfolio, but across their entire financial picture.

By understanding the specific drivers of portfolio risk, you can help your clients and their financial advisors work together to model potential changes.

We can’t control the markets. But we can help clients understand risk, manage it and use it to drive appropriate financial decisions.

Many of our new clients believe they have a diversified portfolio because they hold mutual funds from different fund families. Usually, they’re not as diversified as they think. After conducting our mutual fund overlap analysis, we often find that many of their funds hold the same stocks, leading to unintended overexposure to specific companies or sectors. This overlap reduces the diversification benefits of the portfolio, as multiple funds essentially replicate similar risks. By identifying and reducing these redundancies, we can create a more diversified, balanced allocation that further minimizes risk and aligns with the client’s goal of stable returns.

Real-world example

A client told us they were well diversified because they owned a variety of mutual funds and exchange traded funds from several major fund families. After seeing our overlap report of their holdings, however, they were taken aback. Like many investors, they had a great deal of stock overlap in their mutual funds and ETF portfolios because those different funds held many of the same stocks. This increased their concentration risk and reduced the benefits of diversification.

This overlap can expose investors to heightened market volatility and to potential underperformance if the overlapping stocks decline. For taxable accounts, mutual funds present an additional risk due to potential capital gains exposure. That’s because fund managers may distribute gains from sales of long-held assets, resulting in unexpected tax liabilities. To reduce these risks, investors and their advisors should (a) analyze fund holdings for overlap, (b) diversify across investment styles and asset classes, and (c) prioritize tax-efficient ETFs or index funds. Regular portfolio monitoring and rebalancing can help address these challenges and maintain a well-diversified, tax-aware investment strategy.

What’s on the horizon for accounting? The Top 100 Most Influential People offer their predictions for the near future, responding to our question: “What do you think will be the biggest change in accounting in the next 10 years?”

The vast majority of this year’s influencers expect artificial intelligence and its transformational impact on technology, operations, the workforce and much more to be the most significant change catalyst. But other prognostications include new business models, new methods of recruiting and training professionals, and shifting trends in transactional activity and funding sources for the profession.

(To see the full responses of all the candidates for the Top 100, click here. And to see who the Top 100 voted the most influential, see here.)

Lyft Inc. accused the city of San Francisco in a lawsuit of overcharging it $100 million for taxes over five years by unfairly characterizing the compensation earned by drivers who use its app as company revenue.

The company said its hometown calculated its taxes from 2019 to 2023 based on the total amount of money that passengers paid for rides. But Lyft said that isn’t how its business model works. 

“Lyft considers drivers as its customers,” the company said in the complaint filed in state court. “Accordingly, Lyft recognizes revenue from rideshare as being comprised of fees paid to Lyft by drivers, not charges paid by riders to drivers. Lyft does not treat drivers as employees for any purpose.”

The tax dispute points to a broader, yearslong controversy around how Lyft, Uber Technologies Inc. and other so-called gig economy firms rely on contractors and avoid having to provide employment benefits. The companies have collectively spent hundreds of millions of dollars to settle claims in the U.S. and abroad that they have misclassified workers without reaching a permanent global resolution. In California, drivers were deemed independent contractors under a 2020 initiative that the companies funded and voters approved in 2020.

Lyft said San Francisco’s formula for assessing payroll, gross receipts and homelessness taxes has violated the company’s constitutional rights by forcing it to pay far more than its fair share.

The city’s methodology is “distortive and will grossly overstate Lyft’s gross receipts attributable to Lyft’s business activities in the city,” the company’s lawyers wrote. They noted that the U.S. Securities and Exchange Commission doesn’t consider driver compensation as part of Lyft’s revenue, nor is it recognized as gross income for federal and state income tax purposes. 

The company is seeking refunds for the amounts it says it overpaid, including interest, penalties and fees.

“Lyft doesn’t take operating in San Francisco for granted and we love serving both riders and drivers in our hometown city,” the company said in a statement. “But, we believe the city is incorrect with how it calculated our gross receipts tax for the years 2019-2023.”

Representatives of the San Francisco City Attorney’s office didn’t respond to a request for comment.

It’s not the first lawsuit faulting tax authorities for misconstruing the ride-hailing business model. Uber is challenging Georgia tax authorities over about $9 million in sales tax the company says should have been collected from drivers. The company’s arguments got a wary reception from a state appeals court panel this month.

General Motors Co. last year accused San Francisco in a lawsuit of unfairly taxing it $108 million over seven years, despite the automaker having very low sales and almost no personnel in the city. The company said the city used the presence of its Cruise self-driving unit to tie its tax bill to a portion of GM’s global revenue. The case settled for undisclosed terms in February.

The case is Lyft Inc. v. City and County of San Francisco, CGC24620845, California Superior Court (San Francisco).