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The Hidden Dangers of Investing in a Low-Interest Rate Environment by Todd Moll, CFP, CFA

Posted on May 05, 2015 by Richard Berkowitz, JD, CPA

For the first time in seven years, the Federal Reserve lifted its pledge of “patience” in raising interest rates. While maintaining a cautious outlook for the future, the Fed’s March 2015 announcement is good news for borrowers looking to take advantage of historically low rates. For investors chasing high-yields, however, the news may not be so positive. In fact, due to a prolonged period of low interest rates, many investors who fled the “safety” of conservative fixed-income vehicles, such as bonds, may be surprised to find that their moves into other products, including other bonds, annuities and dividend-paying stocks, may be less risky than they originally thought.


The traditional approach to investing as one aged relied on increasing the use of bonds to provide liquidity, preservation from market swings and a more reliable future income. While the Fed’s program of low interest rates and quantitative easing has indeed helped to turn around the economy, these actions, combined with longer life spans, have put a considerable dent in retirees’ savings. As a result, many retirees were faced with the prospect of outliving their savings and the inability to cover the rising costs of health care later in life. Investors sold bonds for less than they paid and moved into new vehicles in search of higher yields. However, these moves bring with them risks that many retirees may not be prepared to face, especially with the prospect of rising interest rates.


Interest Rate Risk. Changes in interest rates have the potential to negatively affect the value of an investment. Generally, as interest rates rise, bond values fall, often leading to a loss of investment principle. While the Fed may raise interest rates 1 percent, the price of bonds could decline more than 6 percent, depending on its maturity date and a variety of other factors. As a result, investors who anchored the bulk of their portfolios with the “safety” of bonds could face a heightened risk of declines in their portfolio values, especially if they sell those investments before their maturity dates. Conversely, investors who hold their bonds to maturity limit their exposure to interest rate risk.


Duration Risk. Duration is the number of years required before an investor can recover the true cost of an investment. By taking into consideration a number of factors, including present value and future interest payments, duration helps to measure an investment’s sensitivity to interest rates. Typically, the longer an investor holds an investment, the more the price will fluctuate with changes in rates. When investors sell bonds before their maturity dates, they are more exposed to price volatility and less likely to receive the face value, especially in a rising interest rate environment.

Credit Risk. Bonds come with the risk of credit quality being downgraded by rating agencies, including Moody’s, Fitch and Standard & Poor. Similarly, stocks and bonds carry the risk that the issuer will go out of business or default and fail to make principal payments. Generally, the lower the rating and higher the yield, the higher the credit risk.


Liquidity Risk. With the possibility of an interest rate hike, there is a concern that too many investors will attempt to sell investments at the same time or that there will not be a market of buyers to whom investors may sell the securities at a reasonable price. For example, consider auction rate securities that were aggressively marketed as high-return cash-equivalent investments in the late 1990s and early 21st century. However, in 2008, at the height of the financial crisis, liquidity dried up and market makers turned their backs on investors who sought to sell the securities back to investment banks.   Thanks to class action lawsuits, some investors were fortunate to sell their holdings back to the banks at par, while others continue to have challenges liquidating the investments to this day.


Similarly troubling for investors is the lack of market makers in the high-yield, fixed income market. When interest rates rise, there may not be anyone willing to buy bond investments when investors seek to sell.


Other Risks. Depending on an individual’s investment horizon, seemingly conservative investments, such as low-volatility and dividend-paying stocks, may not provide the stability retirees and near-retirees need to maintain a steady income during their golden years.   While the U.S. equity markets have been up for five years, a series of factors, both stateside and internationally, can cause a steep drop that can eat into one’s principal savings. Along the same lines, individuals who hold large amounts of their life savings in cash incur equally significant opportunity costs. To be sure, holding a certain amount of cash is an important part of any investor’s portfolio. It provides provide flexibility, liquidity and a buffer against lean times. However, too much cash-on-hand means that hard-earned money does not have an opportunity to grow.


There is no one magic solution to mitigate one’s investment risks, especially in an evolving market. Investors must assess their risk tolerance, gain a clear understanding of the risks associated with a particular investment and accept the fact that there are no absolutes in investing. A strategy that yields high returns today may not bear the same results in the future. Similarly, no investment is without risk. Investors must take a leap of faith and accept some level of risk if they expect to grow their wealth. However, risk tolerance and the ability to absorb risk will vary widely from one individual to another, depending on each’s unique circumstances. By taking their strategies off autopilot and conducting regular reviews of their existing investment portfolios, investors may remain diversified through changing market cycles and match the appropriate investment with their specific goals and tolerance for risk.


About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants. He can be reached at (954) 712-8888 or via email at


Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Members FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. Any opinions are those of PWA and not necessarily those of RJFS or Raymond James.


This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Dividends are not guaranteed and must be authorized by the company’s board of directors. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Some Taxpayers Exempt from Passive Foreign Investment Companies (PFIC) Reporting by James W. Spencer, CPA

Posted on January 15, 2015 by James Spencer

The IRS recently eliminated reporting requirements for certain U.S. persons who hold stock in Passive Foreign Investment Companies (PFICs) that is marked-to-market (MTM) under Internal Revenue Code 1296.

According to the IRS, a PFIC is any foreign investment vehicle for which either 75 percent or more of its gross income is passive or more than 50 percent of its average assets held during a tax year produce passive income, such as dividends, interest and certain royalties. U.S. persons owning stock in a PFIC, or who are indirect shareholders of the PFIC, must file Form 8621, Information Return by a Shareholder of Passive Foreign Investment Company or Qualified Electing Fund and may be subject to tax on excess distributions at the highest marginal rate plus an interest charge on underpayments.

Under the new guidelines, U.S. persons may avoid these reporting requirements and related tax and interest charges when they make annual elections to treat gains or losses on PFIC shares as mark-to-market under a 1296 regime or when they make election to treat the PFIC as a Qualified Electing Fund (QEF). Shareholders making the mark-to-market election may include in their gross income, and report as ordinary income, the excess of the fair market value of their shares on the last day of the tax year over the adjusted basis of the shares on the tax year’s first day.  However, limiting this reporting exception is the inability of taxpayers to benefit during years in which excess distribution rules apply and when the PFIC stock is not marked-to-market, as is the case when the stock is held for investment or as a hedge, as well as the inability to take advantage of favorable long-term capital gains tax rates.  Shareholders making the QEF election can take advantage of favorable long-term capital gains tax rates, but the PFIC must be willing to provide information necessary to report accurately QEF income, something many PFICs are unwilling or unable to do.

These provisions are applicable for taxable years ending after December 31, 2013.  To comply with PFIC rules and avoid significant tax exposure, U.S. persons holding even one share of interest, either directly or indirectly, in partnerships, corporations, trusts and estates, mutual funds or hedge funds that owns PFIC stock, should seek the counsel of professional accountants to guide them through the process.

About the Author: James W. Spencer, CPA, is a director in Berkowitz Pollack Brant’s Tax Services practice.  He can be reached in the Miami CPA firm’s offices at 305-379-7000 or via email at



Five Strategies for Responding to IRS Audits by Edward Cooper

Posted on August 07, 2014 by Edward Cooper

When taxpayers receive notice from the Internal Revenue Service (IRS) advising them that the agency has selected them for an audit, reactions can range from slight anxiety to pure terror. Before diving headfirst into panic mode, taxpayers should consider that an IRS examination is not an investigation into alleged criminal activity. More often, it is merely a request for additional information to ensure taxpayers resolve outstanding issues with their tax obligations. However, failing to cooperate in an IRS audit can result in serious consequences.

Recently, an appeals court ruled against a taxpayer who failed to respond to an IRS audit requesting proof of basis for an unreported $15 million in stock sales. As a result of his failure to act, the taxpayer ultimately owed taxes on the entire $15 million in proceeds.

1. Do not ignore requests from the IRS. Ignorance is not bliss when dealing with IRS audits. Throwing away IRS notices and hiding out will only raise more red flags and escalate the situation.

2. Do respond promptly to requests for information. Taxpayers should contact their financial advisors and tax preparers to help research and compile documentation to support their claims.

3. Do not destroy records. Shredding records of evidence once an investigation has begun is a crime. Moreover, taxpayers should recognize that the IRS has the power to access files from other reporting agencies, interview third parties, subpoena financial statements and even hire private investigators to support its case.

4. Do not lie. Taxpayers have a right to remain silent, but lying to federal agents is perjury, a criminal offense.

5. Be proactive and cooperative. Taxpayers should contact their tax preparers and attorneys to understand IRS requests and all of the options available to them. Together, they may develop a strategy that includes being accommodating to IRS requests and willfully turning over records in order to mitigate risks of penalties and criminal charges.

About the Author: Edward N. Cooper, CPA, is a tax director in Berkowitz Pollack Brant’s Tax Services practice. He can be reached in the firm’s Miami CPA office at (305) 379-7000 or

Are You Prepared to Quantify Business Interruption Losses Following A Disaster? by Daniel S. Hughes

Posted on July 17, 2014 by Daniel Hughes

The 2014 hurricane season has begun and South Florida businesses should take precautionary measures to put themselves in the best position possible in case a storm passes through our state. History has proven the crippling effect storms can inflict on businesses’ ongoing operations and the impact it can have also on the operations of business partners, including suppliers, distributors and customers.

While property insurance covers physical damage to a business following a disaster, business-interruption insurance is intended to cover the loss in income a business suffers arising from its inability to continue normal operations in the aftermath of a covered peril. Determining those economic losses is not a simple calculation. Policy considerations, such as limits, deductibles, exclusions and other endorsements; the adequacy of underlying records; market competitiveness; and the business owners’ attempts to mitigate its losses will affect the final loss quantification. However, business owners who properly maintain, manage and store their accounting and operational data will be better equipped to successfully substantiate and quantify business interruption losses when danger ensues.

Substantiating Claims

Attempting to predict the damages a future natural or man-made disaster can cause is often a futile effort. Similarly, attempting to recoup losses in the aftermath of a disaster is ineffective without documentation of past performance and forecasts of future results. For this reason, businesses should take steps to ensure their records are up-to-date year-round, rather than waiting for the threat of a storm to make last-minute updates. Incomplete, imprecise or simply wrong information could hinder a business’ ability to recover damages or defend its claim.

Records of Past, Present and Future Performance

When a storm threatens, a business should gather documents that demonstrate its past performance, including three to five years of financial statements, tax returns, sales volumes, historical budgets / forecasts, general and subsidiary ledgers and other accounting journals for parent companies and their subsidiaries. These records can be key to substantiating a business’s track record and demonstrating to an insurance company the income it would have generated had the covered peril not occurred.

In addition, a business should preserve documents that detail its current operations, which may include its up-to-date books and records, financial statements, sales or order logs (including unfilled or pending sales / orders) and detailed records of inventory. Equally important is the business’s fixed-asset schedule, which itemizes the equipment the business owns, the dates of purchase, the dates the business put the equipment to use and the rate of depreciation on those assets. Fixed assets typically are insured for replacement-cost value, or the costs the business would incur to purchase an identical or similar piece of equipment without consideration for any depreciation that may exist. However, when the insured does not carry replacement-cost protection, the insurance company will pay the actual cash value of the assets and take into consideration the depreciation of those assets in the insurance recovery.

With regard to inventory, businesses that pay for selling price endorsements of finished inventory may value those products for insurance purposes at their selling prices, rather than their replacement costs. The resulting calculation of loss will include potential profits on the sales of those products in addition to their replacement value.

Lastly, it behooves businesses to substantiate loss claims with contemporaneous forecasts of future performance, which may include annual or monthly budgets, forecasts or projections as well as pending orders or cancelled orders that resulted from the covered peril.

Safe Keeping

With fewer documents demonstrating past, present and future performance on hand, businesses will have a harder time recouping losses following a disaster. To help reduce the likeliness of this occurrence, businesses should take steps to keep their records safe and secure. This may include the simple, low-tech task of storing papers and photographs of tangible assets in fire-proof, indestructible safes or sending them to a storage facility for safe keeping. Alternatively, businesses may avail themselves to one of the many cloud backup and storage service providers that ensure quick and easy retrieval of records.

Preparing for an unpredictable or unavoidable disaster takes forethought and planning to ensure a desirable recovery of insurable business losses, whether they be hard assets or economic variables.

The Forensic Accounting and Business Insurance Claims practices of Berkowitz Pollack Brant has more than three decades of experience helping Florida businesses prepare for and maximize financial recovery from insured perils.

About the Author: Daniel S. Hughes, CPA/CFF, is a director in Berkowitz Pollack Brant’s Forensics and Business Valuation Services practice. For more information, call (305) 379-7000 or e-mail

New Revenue Recognition Standards Released

Posted on July 07, 2014 by Richard Berkowitz, JD, CPA

All businesses that enter into contracts with customers to sell goods and services will need to start preparing now for new revenue recognition standards that will take effect beginning in 2016 for public companies, and 2017 for privately held entities. This includes companies in the real estate, construction, software, telecommunication, manufacturing and distribution industries


The long-awaited new standards, ASU 2014-09 issued by the Financial Accounting Standards Board, and IFRS 15 issued by the International Accounting Standards Board, address the existing disparities and inconsistencies in how and when businesses recognize and report revenue. Under the new standards all businesses would recognize revenue using the same principles-based five-step model. Ultimately, users of a business’s financial statements, including vendors, customers, banks and investors, will have a better, universal yardstick with which to measure the business’s financial performance in the future.


Despite the advance notice on implementing the new standards, businesses should take the time now to assess their current contract procedures and take the necessary steps to implement systems and policies that will enable them to transition smoothly to the new revenue recognition model in the not so distant future.


The Tax, Audit and Consulting practices of Berkowitz Pollack Brant have experience working with business clients in a range of industries to develop strategies that meet complex reporting and disclosure requirements. For more information, call 305-379-7000 or e-mail

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