Prudent Investment Practices

CPAs who provide investment advice to their clients will be held to a fiduciary’s civil standard of conduct. Thus, it is prudent to know and understand best practices for fiduciaries.

Organize your practice to provide competent, objective advice to the client’s satisfaction, starting with a complete understanding and awareness of the duties of a fiduciary adviser (including loyalty, due care and full disclosure).

Know laws applicable to giving investment advice, especially the Investment Advisers Act of 1940, and whether you are required to register with the SEC and/or your state. If you determine you are not required to register, document this decision with supporting arguments.

Avoid self-dealing —any activity that enriches you to the detriment of your client—other than the fully disclosed fee you are charging, of course. It is advisable that your written agreement disclose that a lower fee for the same services may be available elsewhere.

Make sure the roles and responsibilities of all parties are clearly documented in a written investment policy statement. Put in writing all agreements and contracts relating to the provision of investment advice—including any existing or potential conflicts of interest.

Document in the investment policy statement the client’s time horizon and risk tolerance, the expected long-term return of the portfolio and the asset classes that are consistent with the client’s needs and risk parameters.

Take time to know, evaluate and educate your client. This doesn’t happen quickly, and although a few clients may get impatient, most will appreciate the time and attention. You might meet several times with clients over several weeks or longer before deciding how to invest their money. If they are anxious to get invested right away, ask them to set aside a full day.

Be sure that you document why your implementation choices are prudent, ensure that investment vehicles chosen are appropriate for the portfolio size, and follow a due-diligence process in selecting the investment managers, funds or securities, and the custodian.

If you are holding out to be a provider of investment advice, the old sales model is history. You can’t just make a sale and move on to the next customer. If you are an adviser, don’t call your clients “customers.” That is a brokerage industry term. They are your clients now. Be wary of charging a one-time fee. Your responsibility continues until you and your client agree that you are no longer responsible.

Periodically (generally at least once a quarter) evaluate and report on investment performance. Typically, these evaluations involve a comparison of performance against benchmarks agreed to in the client’s investment policy statement.

Periodically review qualitative and organizational changes of investment managers and mutual funds. Also review your firm’s and/or investment managers’ and funds’ policies for best execution, “soft dollars” and proxy voting, and document that these have been addressed and deemed acceptable. Document that all fees are appropriate and reasonable.

Finally, put a process in place to periodically review your firm’s effectiveness in meeting these responsibilities.

The above points are based on Prudent Practices for Investment Advisors . It and a companion volume, Prudent Practices for Investment Stewards , are published by Fiduciary360, with review and comment by the AICPA’s Personal Financial Planning Executive Committee and its Fiduciary Task Force (see also “Improve the Quality of Investment Advice,” JofA, Jan. 04, page 37).

— Clark M. Blackman II, CPA/PFS, CFA, CFP, is president and founder of Alpha Wealth Strategies LLC in Kingwood, Texas, and a member of the AICPA Fiduciary Task Force. His e-mail address is Clark@AlphaWealthStrategies.com. For more on Fi360 and the Prudent Practices series, see www.fi360.com.