Seven deadly habits: CPAs serving as fiduciaries must avoid common investment pitfalls.

• Author: Anderson, Tim
• Position: Estate Planning

Many CPAs have clients who serve as fiduciaries, and recently we, as CPAs, have started serving as fiduciaries ourselves. Given the growing reliance on CPAs--as financial complexity and personal liability increases--that trend is likely to continue.

But the path to fiduciary success is fraught with challenges and those serving in this role for the first time may find themselves overwhelmed.

So, how can we increase the performance and lessen the liability of this role? Simply by avoiding the bad habits that so often plague investors.

The following is an overview of seven bad habits to avoid when serving as a successful fiduciary:

No. 1: Failure to understand financial/regulatory environment

Flooded daily with financial news and information, it's difficult to believe we don't have sufficient information to make informed decisions about money. Yet, it is getting harder to sift the wheat from the chaff and grab the information we need.

Properly prepared fiduciaries must be intelligent consumers of news and trends, and must ask challenging questions, especially when reviewing vendor marketing materials:

* What are historical factors we must know to better evaluate vendor sales pitches?

* Under what rules will we make and document our decisions?

* How do we ask the right questions to fulfill our duty to oversee those investing our money?

Getting good answers does not guarantee future returns, but can help frame probabilities as to what returns are likely--or unlikely. One way to evaluate a vendor is to ask if that vendor understands these questions and why they must be asked. The financial--and regulatory--environment helps explain why those questions must be asked.

First, a fiduciary must understand the risk/reward tradeoffs when weighing likely portfolio returns and evaluating recommendations for asset allocation. And second, depending on the investor, different rules apply, such as those imposed by ERISA; Uniform Management of Institutional Funds Act; and Uniform Prudent Investor Act. The latter is the most broadly applicable to the individual investor.

No. 2: Failure to focus on liabilities

For most investors, assets are accumulated to generate income, either for today or tomorrow, or both. Pension funds see benefit payments as a liability, and endowments see them as formal spending policies, though with greater flexibility. Individuals and families need to focus on the cash flow generating capacity of the assets.

So, why is this important?

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