Fiduciary Responsibility and Opportunity
 

Editor:
Marc J. Minker, CPA/PFS
Managing Director, Private Client & Family Office Services
Mahoney Cohen & Company
New York, NY

Authors:
Walter M. Primoff, CPA/PFS
Managing Director
National Network of Accountants
New York, NY

Robert L. Gray, CPA, Ph.D.
Consultant
Accountants Resource
New York, NY

For further information about this column, contact Mr. Minker at mminker@mahoneycohen.com, or Mr. Primoff at wprimoff@nnaplan.com.

Fiduciary responsibility is a special and important concept for CPAs in tax and financial planning practices, one that is twofold: fiduciary obligations to clients, which go well beyond acting as an executor or trustee, and the significant and profitable role that CPAs can play in helping clients who serve as estate executors or trustees, to fulfill their fiduciary duties.

Fiduciary Duty Defined

Fiduciary duty is imposed on a person who accepts being placed in a position of great trust by another individual or entity and, as a result, is required to fulfill important legal responsibilities in exercising that trust. While the concept of fiduciary duty is commonly associated with executors and trustees, it is much broader.

An entire body of law, treatises and related journal articles define this topic. Fiduciary duty may be imposed by statute or by the courts. It may be created (sometimes unintentionally) by a person holding out and acting in a manner that causes another individual to place special trust in that person. Often (as with CPAs or attorneys), persons held to a fiduciary standard have professional or other special expertise that a client lacks. A fiduciary is often entrusted with another’s assets or is providing trusted advice in relation to those assets.

In describing the responsibility and trust elements that a person with fiduciary duty owes to another individual, judicial decisions contain such terms and phrases as: due care, loyalty, fidelity, good faith, candor, diligence, full disclosure of conflicts, professional skill and best efforts. Fiduciaries are required to perform professional or other services with all of the expertise, loyalty and due care that they possess.

Dan L. Goldwasser, a prominent attorney and one of the foremost experts in CPA legal matters, explains that the principal duties of a fiduciary are:

• A duty of loyalty to a client or other parties for whom an individual or institution is acting as a fiduciary, requiring fiduciaries to: (1) always act in the best interests of their clients or such other parties and (2) subordinate their interests to those of their clients or such other parties.

• A duty to try to avoid conflicts of interests with the client or other parties for whom they are serving as a fiduciary and to advise them of any such conflicts.

• A duty to maintain the confidences of the client or other parties for whom they are serving in a fiduciary capacity.

• A duty of disclosure, requiring the fiduciary to advise the client or such other parties of any information that comes to his or her attention, which affects the client’s interests. This would be true even if the fiduciary learns of that information in another confidential relationship. This duty underscores the need to minimize conflicts of interests.

• A duty to exercise due (professional) care in carrying out fiduciary responsibilities.

The failure to meet these responsibilities properly can subject CPAs or others held to a fiduciary standard to a lawsuit for breach of fiduciary duty.

Fiduciary Duty and CPAs

CPAs in public practice are generally held by the courts to be fiduciaries, when they are acting in their frequent capacity as clients’ trusted advisers. Both tax advisory services (as distinguished from pure tax return preparation) and financial planning are generally seen as trusted adviser services. Investment advisers are separately considered to be fiduciaries, as are attorneys. A retirement plan administrator under ERISA is an example of a statutory fiduciary. Volunteers on association governing bodies, such as the AICPA or state CPA societies, have a fiduciary responsibility to association members.

Observation: CPAs who are investment advisers will often be seen as having a fiduciary duty related to both of these roles. Attest services are not fiduciary services, because a CPA’s loyalty is to the profession’s ethical and professional standards related to the attest engagement, rather than to the client. However, many nonattest advisory services performed for attest clients can lead to fiduciary relationships. It is difficult to draw a bright line in this area.

Courts do not generally hold CPAs performing nonattest financial statement services to a fiduciary standard (though sometimes they may). Conversely, the courts are likely (but not invariably) to hold that a CPA offering business or financial advice does have a fiduciary relationship with the client. The greater the disparity in the knowledge of the subject matter between the client and the CPA, the greater the chance that the courts will find that a fiduciary relationship exists.

The scope of CPAs’ fiduciary relationship remains an unchartered area, especially for those who serve their clients in multiple capacities. Thus, it is possible that a CPA may be deemed a fiduciary with respect to a client to whom he or she is offering trusted business, tax or investment advice, but would not likely be held a fiduciary with respect to financial statement services that he or she is also providing. Where to draw the line remains a gray area.

CPAs can sometimes control whether they will be fiduciaries, in relation to specific client engagements. Other times, they can do little or nothing to prevent being deemed a fiduciary. However, the steps that CPAs should take to avoid fiduciary responsibility, such as limiting clients’ reliance on certain services, may also impair the strength of trusted CPA-client relationships. Because this trust element is one of the major value-added characteristics that can set CPAs apart from competitors, CPA choices in this area should be carefully considered (for an excellent article on minimizing fiduciary duty, see Goldwasser, “Avoiding Fiduciary Liability,” CPA Journal, July 2002, available at www.cpaj.com).

Estate and Trust Investments

While the broad fiduciary duties of care and loyalty are conceptually well understood, until recently there has been little specific guidance on the fiduciary process that should be followed when managing or outsourcing the management of investment assets.

Fiduciary duty in relation to investments can arise for both CPAs and their clients who serve as executors or trustees. It can also arise for CPAs serving as investment advisers. To provide the necessary guidance, the Foundation for Fiduciary Studies, working with the AICPA, developed a practice standard titled, Prudent Investment Practices. A companion book, which covers the standard in greater detail, is The New Fiduciary Standard: The 27 Prudent Investment Practices for Financial Advisers, Trustees, and Plan Sponsors, by Tim Hatton, published in cooperation with the Foundation for Fiduciary Studies (Bloomberg Press, 2005) (both are available as a discounted set at www.ordering1.us/bloombergbooks/product.php?pid=232). The Foundation’s work has received substantial favorable publicity, and the nature of the AICPA’s role in it may require CPAs to justify major departures from this fiduciary standard.

Fiduciary Support Services for Clients

Many CPA firm clients who become executors or trustees have little understanding of either their fiduciary roles, or the process and related actions required to fulfill their fiduciary responsibilities. Attorneys are needed to prepare and execute the necessary legal filings, but CPAs often have more experience and ability to help clients manage the process of being a fiduciary.

This process can involve such issues as:

• Estate and fiduciary income tax planning and return preparation.

• Reviewing trusts, wills and related documents before they become irrevocable.

• Performing initial due diligence on investment advisers, insurance agents, attorneys, appraisers and others who may be required to help client fiduciaries meet their responsibilities.

• Developing or overseeing asset valuations.

• Monitoring life insurance and other trust assets.

• Preparing fiduciary accountings.

• Meeting with beneficiaries.

• Monitoring estate or trust investments and the activities of investment advisers, in accordance with the fiduciary investment standards discussed above.

• Litigation support, involving contested valuations and other areas related to CPAs’ expertise, where fiduciaries are involved with contested estates or trusts.

Observation: Before agreeing to provide fiduciary support services, it is important for CPAs to have a clear understanding as to who will pay for them. In some jurisdictions, the probate courts closely monitor estate and trust expenses, and may disallow or substantially reduce payments to CPAs and other parties from the trust or estate, if they are not specifically provided for in the governing instruments or expressly permitted by law. Instead, the court may expect such expenses to be paid by fiduciaries themselves, from their executor or trustee commissions. However, provisions in a will or trust can be drafted to specifically permit the fiduciary to retain the necessary professionals and pay their reasonable fees out of estate or trust assets. It is wise for CPAs to regularly educate clients on the benefits of having them review any instrument that names a client as a trustee or executor, before it is finalized. CPAs often improve such documents by making recommendations on taxation and the operation of the trust or estate. For example, they can recommend that an executor or trustee be expressly permitted to pay CPAs and other professionals retained to assist him or her, from estate or trust assets.

Once clarifying this payment issue, CPAs providing fiduciary support services generally find them to be a very rewarding extension of traditional CPA tax services, both in terms of profitability and strengthening client relationships.