FAQ’s for CPA’s

Expanding your financial services is no small task. PAA understands that, so to help make finding answers to your questions a little easier, we’ve organized our FAQ’s into six main categories.

Simply use the links below to find answers to the most common questions that we receive.

Financial Services

What is meant by “financial services”?

The term “financial services” typically includes investment advisory services and the sale of investment and insurance products. Investment advisory services generally include fee-based financial planning, fee-based portfolio management, and asset allocation programs (including mutual fund wrap fees and third party money managers). The products sold in connection with financial services typically include commission-based brokerage products (securities and mutual funds) and insurance products (life, health, disability income, annuities, and long-term care).

Why should CPA firms consider expanding into financial services?

Financial services can help you maintain growth, remain competitive, increase retention of your top clients, and generate new revenues. As small firms in the CPA profession have become more vulnerable to larger organizations and franchises, they need more effective ways to compete. One way to fight back against a financial firm that is serving clients in your market, and expanding into your bread-and-butter areas, is to expand your services onto their turf.

Also, because many clients seem to like the idea of obtaining tax planning and preparation, bookkeeping services, and financial services under one roof, you may need to expand to stay abreast of clients’ changing needs.

If your firm has one or more partners who are considering retiring in the future, financial services can generate steady revenue growth that will help to build the resale value of the firm. It also can add to partners’ equity value by making existing clients more loyal.

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Working with Current Clients

Will I lose my clients’ trust if I start offering financial services?

It is the way in which CPAs offer financial services, not the fact that they do, that will determine whether they continue to earn their client’s trust. The client’s trust was earned by providing fair and objective information and services with regard to accounting practices. There is no reason that the CPA cannot also provide fair and objective information with regard to financial products and services. The fact that a commission is being paid doesn’t inherently create a conflict. The CPA faces conflicts each and every day in providing traditional accounting services. For example, the CPA might lose a substantial retainer fee if he/she raises a flag on questionable accounting irregularities.

How will my clients react to me making financial services available and engaging in commission-based activities?

Chances are your clients are already seeking your advice on investment or financial service issues. When you have referred them elsewhere, the level of service may have been inferior to the service your CPA firm normally provides, and you have no control. By bringing these services under your control, you can guide your client through the recommendation and decision-making process, then assist in the implementation of long-term planning including the selection of products and services. Clients often appreciate the convenience and professionalism that you will be able to provide.

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What should I say to my clients who think that if I (or my CPA colleagues) are insurance- or securities-licensed, we become “product pushers” and lose our objectivity?

Tell them that you should be licensed to perform analysis in these areas and be paid for it. Also, tell them that you need a license to obtain full regulatory and liability protection for yourself and your firm, and that regulations and professional ethics require you to disclose any revenue you receive from product sales in which you may share. Such revenue can be a convenient and efficient way for clients to pay you for valuable expertise in reviewing their insurance coverage or investment portfolios and then recommending additions or changes.

Will my CPA practice and services suffer if I recommend investments and then the stock market crashes?

We have found that CPAs generally tend to be cautious and counsel their clients to assume only as much market risk as they can afford and need. The chances are good that your clients will do at least as well under your care in a down market as they would by listening to others, including friends, relatives, and coworkers with hot tips and half truths. Most non-variable insurance products and fixed annuities can offer clients a sanctuary from market volatility, along with tax advantages. We also can help you evaluate investment and asset management approaches designed for cautious investors and preservation of capital.

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What if I offer analytical and planning services to help my clients review their insurance options? Why do I need an insurance license to offer (and be paid for) this type of advice?

According to author Neil Alexander, CFP, it is not a good idea for CPAs to offer insurance analysis or advice services without proper licenses and full disclosure of compensation to clients. Here is part of what he wrote in The Journal of Accountancy (9/02):

“When accountants review insurance transactions originated by others, the question of who pays their fees may come up. In California, for example, anyone who receives a fee from a client for insurance-policy-review services must have a life policy analyst license. If the fee comes from the insurance company, then the CPA is an insurance agent (and must be licensed as such) with proper disclosures to the client. CPAs cannot bill for reviewing insurance transactions on a client’s behalf without appropriate licenses. And free advice is often worth what the client pays for it.

Why would my clients want to access financial services through me? What value do I bring that would make this a marketable service?

There are several advantages for both business and individual clients in having their accounting firm provide comprehensive financial services and products.

Receiving financial services and products from a trusted professional
Research shows that clients trust their CPA far more than they do traditional financial service providers. This is due in part to the fact that the CPA has not had a vested interest in the purchase of a product or service.

For this reason it is extremely important that the CPA take the proper amount of time to position the expansion of the business very carefully with their clients. CPAs must be able to demonstrate that neither their independence nor their objectivity is being compromised by the receipt of commissions or fees. Many of their clients lack the time, expertise, or both to manage their own financial matters completely.  These clients are very receptive to having their CPA assist them in this area.

Many clients will be favorably disposed to consolidating their financial and personal information with just one professional rather than divulging it to multiple professionals for a variety of purposes. The CPA possesses the most confidential and sensitive financial information about the client. Clients benefit by the further consolidation of their information, allowing the CPA the overall perspective of how and when the information is to be used to accomplish the client’s goals.

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My CPA Firm

Is it possible for CPAs to share in investment advisory fees without becoming a Registered Investment Adviser (RIA) subject to audit by the SEC?

Yes. Many states allow Investment Adviser Representatives (IARs) to affiliate with RIAs, solicit business, provide service to clients, and share in advisory fees. To become IARs in most states, CPAs are required to pass the Series 65 or Series 66 exam, but not the more rigorous Series 7 or Series 6 exams. (Note: California is the major exception that does require IARs to pass a Series 7 or Series 6 exam.) In some states, CPAs who wish to offer fee-only financial planning are required to become RIAs.

Will my existing E&O professional liability protection cover my activities in financial services?

It depends on the terms of each specific policy, keeping in mind that higher-risk activities often require extra insurance premiums for coverage. Existing coverage may include the lowest risk activities at no additional premiums. They include providing general advice relating to investment strategies, evaluating and recommending non-variable insurance and annuity products, and generic planning and advice within a CPA relationship. Medium-risk activities may involve modest additional premiums. They include managing investment portfolios for a fee, providing fee-based financial planning, and participating in securities transactions for a commission. The highest risk activities may require additional or separate coverage at considerable premium increases. They include trading client assets with discretion, recommending high-risk investments, or acting as a custodian or fiduciary for clients. PAA can provide guidance on suitable combinations of financial services activities and appropriate E&O coverages.

Must CPAs set up a separate entity, such as an LLC, to offer insurance services? Isn’t this entity an obstacle to “getting started” in the simplest way possible?

The separate entity is not essential. But according to several CPAs with expertise in this area, a separate entity offers more flexibility than including insurance or securities business within the CPA firm itself. For example, the separate entity can hire its own employees and create a revenue-sharing relationship with an insurance firm. The activities of any such employees or affiliated professionals who are not CPAs would not be subject to the CPA’s Code of Ethics. Setting up the entity usually is not an obstacle. It represents a commitment made by the principal or partners of the CPA firm to support the endeavor and perhaps provide modest start-up funding.

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Revenue and Contracts

What level of revenue can a CPA firm earn in financial services and how long will it take to get there?

A rule of thumb is that it generally takes about 3-5 years to tap a CPA firm’s full revenue-generating potential in financial services. The quickest type of revenue to generate often is commissions from non-variable insurance and annuity sales. The slowest (but steadiest) revenue stream can be provided from investment advisory fees. Generally, it can take five years or more for CPA firms to capture enough assets under management to generate significant profits from asset-based advisory fees. The AICPA estimates that an average CPA controls about $100 million of assets for every $1 million in annual billings. If a CPA firm can capture half of their clients’ total assets, and earn a fee of 0.50% annually on those assets, the firm’s annual billings could increase by 25%. Add in potential revenue streams from insurance, annuity and investment products and the revenue increase can, in some cases, approach 50% over time.

How can I participate in revenues from product sales, and disclose these revenues to clients, in the most effective and ethical way?

The answer has two parts. First, continue to demonstrate toward your clients the same objectivity, integrity, and careful consideration of their needs as always. Secondly, explain to clients that you can do the best job helping them obtain quality financial services, advice, products, and services when you stay involved in the case and monitor recommendations and results. You understand their needs as well as (or better than) any vendors they may choose in financial services. You have already established a relationship built on trust. Assuming clients want to work on specific financial or investment issues with you, your services should be superior to those other vendors can offer. However, you will always respect your clients’ preferences or existing financial services relationships, and where they are working well for the client, you will never engage in pressure or interference. At PAA, we also think an important part of the answer is to bend over backwards in explaining exactly what you offer (and don’t offer) in financial services, and always be open and honest about how you are compensated.

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In a joint venture alliance, who “owns and controls” the client relationship? What if one venture participant decides to leave at some point in the future?

Normally, client relationships belong to the venture itself. If the venture is modified or dissolves in the future, then the participants can pre-arrange the terms under which one buys out the other, or else the venture is sold or transferred to a third-party. You should be aware that insurance companies and securities broker-dealers are subject to rules and regulations that may require them to continue communicating with their policyholders or clients after the agent or registered representative has ended ties with the firm. However, none of these rules will affect your ability to continue to serve your clients or offer them traditional CPA services and most types of financial services, if you wish.

What is the best reason to form a strategic alliance, as opposed to forming our own wholly-owned financial services subsidiary?

The answer is, for the same reason tourists often hire guides to lead them through unknown foreign countries. A strategic alliance increases your confidence that financial services will be introduced to your clients in the right way, with the help of people who understand the nuances of investment strategies, insurance underwriting, retirement plan administration, SEC and FINRA compliance, and portfolio risk management. There is a great deal to learn about insurance, investment, and advisory services—and you can learn it faster and with fewer mistakes and less cost when you have experienced guides. Also, you can gear up your financial services faster and with less commitment of capital and staff resources when you form a strategic alliance.

Who will the clients belong to when financial services are offered to our accounting firm clients?

The clients of the accounting firm will remain the clients of the firm. Occasionally the broker-dealer will need to communicate directly with clients who have purchased products and services in accordance with legal and compliance policy. If a CPA ends their relationship with a product or service provider, the provider will continue to communicate with those clients in order to meet compliance and legal contractual requirements.

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Compliance and Ethics

What are the major ethical rules of the CPA profession that cover my obligations to clients if I expand into financial services and receive compensation for these services?

In 1993 and 1994, the Executive Committee of the AICPA’s Personal Financial Planning Division issued three advisory statements that serve as official guidance to CPAs involved in personal financial planning. Collectively, they are called the “statements on responsibility.” Statement No. 1 defined engagement objectives and how recommendations should be formed and communicated. Statement No. 2 described how CPAs should work with non-CPA advisers, including requirements to inform clients in writing of the specific role each adviser will play. Statement No. 3 specified that CPAs should create a written implementation agreement with each client. Collectively, these statements strongly discourage CPAs from “handing off” clients to other advisers and then receiving compensation. The CPA’s responsibility under these guidelines continues through the planning process and beyond.

Rule 302 of the AICPA Code of Professional Conduct covers contingent fees, and Rule 503 covers commissions and referral fees, prohibiting such fees when the CPA also performs attest services for the same client.

If I audit a corporation, am I also prevented from offering services to the executives, board members, shareholders, or retirement plans of that entity?

The AICPA’s Professional Ethics division has proposed a liberal interpretation of defining who the client is, for purposes of determining when the CPA can provide commission-based services consistent with Rule 503. Specifically, the AICPA proposal states that the client for purposes of interpreting Rule 503 is the legal entity for whom the attest service is provided. For instance, if a CPA audits a company, he/she can still provide commission-based services to the officers, board members, shareholders, and retirement plans for the company, provided he/he does not provide a direct attest service to those individuals or plans.

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Within the context of ethical regulations on independence, is a CPA completely prevented from offering financial services to audit clients if I receive fees from portfolio management activities?

With respect to fee-based portfolio management, The AICPA Professional Ethics division has proposed an even more permissive view. CPAs may offer fee-based portfolio management to even attest clients provided the fees are:

  • Based on a percentage of the client’s investment portfolio at the start of the period or adjusted only for additions or withdrawals
  • Not based on portfolio performance, and not revised more frequently than quarterly
Why is it generally NOT a good idea to form a simple relationship with a financial services firm under which I am paid a referral fee for each client whom I refer?

Per-client referral fee arrangements fall into a risky “gray area” of the AICPA’s Code of Conduct. They may violate insurance laws of many states that prohibit commission-sharing with non-licensed people, and they also are subject to CPA ethics rules that require client disclosure of compensation. The line between referrals and commissions, as drawn by lawmakers and regulators, isn’t always clear. In any case, small per-case referral fees usually do not produce enough revenue for CPAs to warrant their effort and risk in financial services expansion.

If I start offering financial services, won’t that jeopardize the referrals I receive from other financial services professionals who offer the same services?

The answer to this question boils down to communication and positioning. The CPA must take the initiative in this matter and communicate with those other professionals early and clearly. If the CPA allows the other professionals to learn of the new offerings through the “grapevine,” or when a mutual client wants to transfer their business to the CPA, the referring financial services professional relationship may be at risk.

The CPA should also take time to explain to the other professionals that there are clients who will not be candidates for the type of services the CPA plans to offer. When these clients are identified, the CPA will continue to refer the business to them.

The CPA should also communicate that it is not their intention to disrupt current relationships that are working well. If, however, the client suggests that a change should be made, then the CPA will act on the client’s wishes.

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Why is it sometimes a good idea to begin a strategic alliance by having a principal of the CPA firm obtain a non-variable insurance license and share in revenues generated by insurance and annuity cases?

Analysis, recommendation and sales of non-variable life insurance and annuities can be a logical first step for CPAs into financial services. It offers attractive earnings potential along with an ability to target specific services and solutions to your top clients, including small business owners. It can be a very good first step for CPA firms that advise clients on employee benefits, succession planning, or estate planning. Some CPA firms have had great success matching specific insurance-based services with their client profiles and clients’ needs. With the help of a strategic partner, the CPA firm can rapidly increase its experience, knowledge, and confidence from non-variable insurance and annuities into asset management and securities.

Some CPA firms have indicated that they do not wish to become licensed to sell securities due to “selling away” issues. What are they?

CPAs who become securities-licensed generally affiliate with one broker-dealer to maintain a clear chain of regulatory responsibility from the SEC to the FINRA and then to the broker-dealer, its branches, and the representative. “Selling away” is a practice prohibited by the FINRA in most cases. It means registered representatives are not allowed to offer investment-related services or products not specifically reviewed and approved by the broker-dealer. Broadly interpreted, the FINRA has defined it to encompass virtually any “compensated relationship” relating to investments. For example, any of the following common CPA services (not approved by the broker-dealer) may be defined as “selling away”:

  • Reviewing real estate and other private deals that clients regularly bring to CPAs for analysis
  • Receiving stock in exchange for CPA services to help create a new company or project that will seek outside investors
  • Inviting clients into real estate and other business deals of other successful clients
  • Having custody of clients’ funds, including: signing checks and paying bills for the client; acting in a business management capacity for clients; or serving as an executor or trustee

If you have concerns that “selling away” issues may affect your ability to offer clients existing CPA services, PAA can help you address and resolve those concerns.

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How many CPAs must be licensed for the firm to participate in non-variable insurance and annuity commissions?

State requirements and legal opinions vary, so CPAs should consult their own counsel for specific answers. Here are the opinions of two experts:

“Unlike securities commissions, which can only be paid to individual licensed securities representatives, life insurance commissions can be paid to properly structured separate entities of CPA firms. It is generally permissible for the entity’s owners to charge it for reasonable shared overhead costs and in some cases, it is permitted to remit net profits to the entity’s owners. However, this entire area is fraught with traps and gray areas, which are best evaluated through the advice of a qualified attorney.”

Walter M. Primoff, CPA, and Robert L. Gray, CPA
CPA Guide to Structure and Regulation of a Financial Planning Practice

“According to Steve Insel, professional practices partner at the Los Angeles law firm of Jeffer, Mangels, Butler & Marmarow, ‘the best way for CPA firms to operate an insurance practice is to create a separate limited liability company owned by the partners or by the firm.’ The insurance LLC carries a state insurance department license and employs at least one person with an insurance license, enabling the entity to receive commissions on insurance transactions. Unless every owner is licensed, Insel says, ‘the LLC’s owners must participate in profits divided pro rata, according to their fixed ownership percentage.’”

From “How to Organize Your Insurance Practice” by Neil Alexander
from the Journal of Accountancy, 12/01

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