CPA financial planners frequently are asked to review proposals from investment managers. While these assignments can be challenging, the following strategies can help guide individuals toward the right path.


Regardless of investment style, most investment management proposals contain a percentage fee based on assets under management (AUM). There are, however, many variations on such arrangements. Some are for a fixed percentage of the entire AUM, while others have a bifurcated schedule based upon asset classes, such as one rate for equities, another for bonds, and a third for alternative investments. In addition, some proposals include asset custodianship and trading costs, while others use a third-party independent custodian and pass the trading costs on to the investor, and still others embed costs in transactions. Some permit the receipt of commissions and fees from the vendors of investment products, while others credit them to the customer. Some include an oversight management fee and fees for services, while others either do not offer noninvestment services or include them as part of the overall service.

Fee schedules can be based on an individual’s total investments, regardless of whether they are in multiple accounts, or they can be based on the size of each separate account. Some proposals include numerous meetings; these can be either face-to-face, online, or by phone. Some provide monthly or quarterly updated analyses. In addition, cancellation or termination clauses can vary.

Many proposals include sample portfolios, annual costs, and historic performance. These should be reviewed as well, especially for applicability. Often, proposals from existing managers present illustrated portfolios and asset allocations that are inconsistent with what the managers are presently doing. Managers should be asked to explain any disparities.

Because of the wide range of services, it is important to review proposals thoroughly and determine the exact nature of what will be done, as well as the approximate cost. The CPA financial planner should be familiar with the types of services available and what the client is paying for and getting. There are many variations on investment management, and there is no “right way”—they are all different, as are many of the services.

Due Diligence

Due diligence is easy if the investment manager is already handling some of the individual’s funds—just review the actual performance. For new managers, advise the individual to obtain Form ADV, which most regulated investment advisors are required to file with the SEC and state securities agencies. These forms provide information about fee structure, ownership, clients, employees, business practices, and disciplinary actions against the firm or its employees. The manager’s attitude toward the proposed Department of Labor fiduciary rules may also be illuminating.

Assets to Be Managed

Many proposals contain a range of investment values and percentage fees that decline as AUM increases. An analysis should include three factors. First, the fee schedule applied to the AUM represents the payment for services. This should be evaluated in terms of benefit conveyed to the individual and alternative services. For example, if the proposal is to manage a short-term fixed income portfolio, can the individual be better served by shopping around for certificates of deposit or fixed annuities?

The second issue is the source of the funds to be managed. Usually individuals have multiple accounts, and some will need to be liquidated. This involves initial costs and can result in the recognition of substantial income in stocks that have been held for long periods. This liquidation must be considered and the individual made aware of these costs, especially the taxes. Furthermore, individuals are sometimes not fully aware that engaging a new manager to handle a portion of their funds may cause the termination of a comfortable and effective long-term relationship elsewhere. This should be pointed out.

Thirdly, engaging a new or additional manager involves an assumption that the new manager will perform better than the current one. Each account’s performance should be evaluated; this can be done easily with an analysis of the previous five years’ performance by asset category as compared to an appropriate index. As a matter of form, each manager should routinely provide this analysis at least annually. Cash flow should also be considered when evaluating the analyses.

Initial Planning

Investment managers are usually engaged for only a portion of an individual’s portfolio. Before a manager is engaged, it is necessary to set up a protocol for the relationship and a definition of its goals. This can be done with an investment policy statement (IPS), where the manager and individual work together to define the long-term investment goals. It is essential to consider all of the individual’s assets, not just those proposed for management.

The IPS (or other planning document) should set forth a suggested asset allocation plan containing the major investment categories and a subplan for each category. For example, a plan calling for 60% of allocation to equities should be further broken down into large, middle, or small cap stocks, considering whether there will be domestic, foreign, or emerging market issues and value or growth in each category. This is easier said than done, but if such issues cannot be clearly explained in the formative stages of the relationship, how will the individual ever understand what will be done with her money? Portfolio rebalancing parameters and timing should also be decided upon.

Family Wealth Planning

When considering the overall asset allocation, the first loyalty should be to the individual, but in many instances (especially with older clients) some consideration should be given to potential heirs. Therefore, some initial estate planning should be done to determine possible beneficiaries and ensure that the investment plan does not lock them into a drastically unfavorable position without conferring significant benefits to the client.

Income tax and asset planning should also be done. For example, instead of putting tax-free bonds in an individual portfolio and stock funds in a retirement account, let the retirement account own (higher yielding) taxable bonds and put the stock funds in the individual portfolio.

Execution of the Plan

Every investment managing organization, as well as each individual manager within such a company, has a different style. It is important to understand how this will translate into investor value. Furthermore, there are usually different methods for managing equities and bonds, along with almost every other asset category.

One method is to have individually managed portfolios with individual stocks or bonds. Another is to group like-minded accounts, aggregate the purchases, and allocate them to each separate account, usually on a percentage basis. Still another is to buy index or mutual funds rather than individual issues. This entails additional fees within the funds, further increasing costs and reducing yield. Some investment managers farm out the management to other managers who are specialists in certain categories; the authors have seen some accounts subcontracted to over a dozen sub-managers, with some far outperforming norms and others grossly underperforming. Other accounts have assets retained in cash for long periods, waiting for the “right” opportunity. These arrangements usually carry fees for the AUM, even though the funds are virtually parked. Some of these added fees can be as much as three times the investment managers’ regular fees. Finally, some managers suggest variable or other types of annuities that might have upfront fees but also remove these amounts from the AUM pool, eliminating annual fees and reducing overall costs.

There is nothing right or wrong about any of these methods; they are just different. The authors, however, believe it is important in all instances to understand how investments are acquired, how decisions are made, and whether there are added costs.


In most situations, fees paid to an investment manager are treated as a miscellaneous itemized deduction, limited to the extent that it exceeds 2% of adjusted gross income (AGI). One way of reducing AGI for individuals taking the required minimum distribution (RMD) from an IRA is to have the IRA distribute all or a portion of the RMD to a charity as a qualified charitable distribution.

CPA financial planner fees are separate from the investment managers’ fees and are usually paid before the manager is engaged. CPA financial planners can also provide a second opinion on existing portfolios and ongoing review and oversight. Fees can be fixed, based on time, or based on total assets. The fees can also include tax preparation, tax and estate planning, and the initial IPS.

Know and Communicate Your Value

The involvement of a CPA financial planner adds a strong element of independence to an investment strategy. Since the CPA does not seek to manage the investments, the review is done with a full focus on the individual’s needs. A CPA’s fees are generally not material to the overall wealth being entrusted to an investment manager. Individuals who pass on engaging a CPA financial planner do so not because of the cost, but because the CPA fails to clearly articulate the value of the service.

Sidney Kess, JD, LLM, CPA is of counsel to Kostelanetz & Fink. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Board.
Edward Mendlowitz, CPA/PFS, ABV is partner at WithumSmith+Brown, PC. He is also the author of a twice-weekly blog posted at