Client-friendly investment rules.


"Client Friendly" Investment Rules

As a former chairman of the American Institute of CPAs investment committee, I read with interest "Understanding Risk in Mutual Fund Selection" (JofA, July97). The article discussed statistical evaluation of a mutual fund managers investment style and results as measured by volatility (standard deviation and Beta) and value added (R2 and Alpha).

I agree that this basic background should be a part of the CPA/personal financial planners professional knowledge base. However, it is not the key to providing clients with meaningful and relevant investment planning recommendations. Investment styles do not necessarily correlate with performance. My simple "client friendly" rules are as follows:

  • Assist the client in deciding on investment goals, including time horizons for future cash needs.

  • Design a diversified mutual fund portfolio, with long-term sector weighting—do not try to be a market timer.

Below is an example of sector weighting:

   U.S. 40%
   International 30%
Bond and money market funds 30%

Within the broad sector categories, further decisions should be made on fund strategies, such as large cap, small cap, growth and income and index funds.

Select funds with consistently good performance (year by year and point to point) versus their peers and the applicable market averages. The funds selected should be managed by mutual fund companies characterized by stability (retaining talent) and conformity with investment style (keeping their fund characteristics predictable and consistent).

A CPA can be of real assistance to clients by helping them design a financial plan in which a diversified portfolio of mutual funds can play a major role. Selection of fund management and specific funds should follow the basic strategy outlined above.

John L. Fox, CPA
New York City

Letters to the Editor
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Liability Insurance Blues

As you may recall, during the professional liability insurance crisis of the mid-1980s, the AICPA Plan (then through Rollins Burdick Hunter) came up with the idea of AmerInst. This was a coinsurance concept to be funded somewhat like a mutual insurance company. All current policy holders of the AICPA Plan were asked to make capital contributions to AmerInst based on the number of the professionals in the firm.

The literature we received informing us of the AmerInst project in effect said that if we did not make the capital contributions, our coverage under the AICPA Plan might be jeopardized. With no real alternatives at the time, we bit the bullet and joined; we did not want to put ourselves in the position of weakening our insurance coverage.

This was quite a pill for our small, local firm to swallow. In a five-year period, our AICPA Plan premiums went from less than $1,000 to more than $26,000 with a 50% reduction in coverage and a 400% increase in the deductible. So we dropped coverage with the AICPA Plan and went elsewhere.

After we made the switch, we asked the AICPA Plan for a refund of our capital contribution. We were told there was no open market and the best we could do was to find CPAs who were part of the AICPA Plan and sell our shares directly to them. We tried doing that for one year without success. Its 10 years or so later and we still have this worthless stock certificate.

I think it would be helpful if the Institute would explain to everyone what is going on with AmerInst. Will we ever see any of our capital contribution returned or should we just throw away our stock certificate as a worthless investment and an expensive lesson? As it turned out, our coverage with the AICPA Plan would not have suffered any had we not purchased an interest in AmerInst.

Michael C. Haas, CPA
Morton Alan Haas & Co.
Glendale, California

The AICPA responds:

During the insurance crisis in the mid-1980s, coverage available under the AICPA Professional Liability Insurance Plan (PLIP) was reduced from $20 million to $250,000. The PLIP committee proposed that the AICPA establish a captive insurance company. When the committee sought approval from the AICPA board of directors, the board questioned whether there was a market for such a venture and whether the AICPA should be in the business of operating an insurance company. AmerInst was then established independent of the AICPA; former committee members served on its first board of directors. The prospectus, which was mailed by Merrill Lynch to all insureds in the AICPA Plan, indicated AmerInst was to be a reinsurer of the insurance company underwriting the AICPA Plan but that, in the event of a total collapse of the commercial market, AmerInst planned to become a direct writer of insurance to its shareholders only. That collapse never occurred, and AmerInst has at all times been a reinsurer to the AICPA Plans underwriter. No statements were made requiring Plan participants to make capital contributions to AmerInst and many did not. Plan participants who did not contribute were able to continue their coverage in the AICPA Plan.

Norman Batchelder, president and chairman of the AmerInst board of directors, said AmerInst recently established a stockholder buy-sell trading system. (You can learn more about this by contacting the chairman of AmerInsts public relations committee: Bruce W. Breitweiser; Dunbar, Breitweiser & Co.; 202 North Center Street, Suite 3W; Bloomington, Illinois 61701; phone: 309-827-0348, fax: 309-827-7858.) Batchelder also said that during the past three years AmerInst has paid an annual dividend of 10% on invested capital. If you are not receiving these funds, I would recommend calling Breitweiser at the number above.

Editor's Note:
Effective January 1, 2005 , inquiries regarding AmerInst should be directed to Ron Katch (Katch, Tyson & Company, 191 Waukegan Road, Suite # 103, NORTHFIELD, IL 60093/ 847-446-3700/ ) or John Schiffman (Schiffman & Company PC, PO Box 5520, HANOVER, NH 03755-5520/ 603-643-5566/ ).

Jay Rothberg
vice-president—member satisfaction

Journal Helps Sole Practitioner

The June issue of the Journal was, in my opinion, a great issue. In particular, I liked the following articles because they were very useful to me:

  • "Are You Ready for New Assurance Services?"

  • "Buyers Guide: Sizing Up Office Suites."

  • "How to Find It on the Net."

I also like your "Smart Stops on the Web" box and the Online Accountant column.

I am going to start a sole proprietorship practice in the next few months as a financial planner/CPA. This issue was the most useful I have seen in decades of reading the Journal. Keep up the good work!

Tracy B. Stewart, CPA
College Station, Texas

Where to find January’s flipbook issue

Starting this month, all Association magazines — the Journal of Accountancy, The Tax Adviser, and FM magazine (coming in February) — are completely digital. Read more about the change and get tips on how to access the new flipbook digital issues.


Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.