Competing interests in financial planning

Accounting

There are still some accounting professionals who feel that the wealth management business represents a conflict of interest that they’d rather not deal with.

There are two types of conflicts of interest that need to be addressed when incorporating a financial planning division into your CPA practice. The first type is ethical and regulatory conflicts. I’d categorize the second potential conflict of interest as practice management conflicts.

The first is the stereotype that delivery of financial planning services itself is a conflict of interest. The process of financial planning can be time-based and not too different from any other accounting or consulting engagement. Most accounting firms use checklists and guides to complete their complicated A&A engagements. Similar guides are published for financial planning to offer guidance and guidelines for delivering quality control with the financial planning process. Engagements can then be delivered with consistent processes, be comprehensive and be supervised for each client engagement. The process itself can also be priced similar to traditional accounting firm engagements: hourly or flat fees. This isn’t a conflict, so move on.

Where conflicts may appear to arise is when the CPA is involved with some of the implementation of services that may occur after the delivery of financial advice. These conflicts may occur with respect to estate planning, asset management, insurance purchases, etc. Delivering the advice for a fee that a client needs to get professional investment help, hire an attorney to draft documents, or buy life insurance itself isn’t a conflict. It’s the later sale and the corresponding compensation that causes the conflict — and I agree that this is a conflict. It is a conflict if you sell the services or products yourself and it is a conflict if you refer it to another professional where revenue sharing may be present. And with respect to revenue sharing — stay tuned: It is a hot topic among Securities and Exchange
Commission examiners this year, and probably forever.

The way to address this conflict, to the extent that you want to perform the implementation services, is through disclosure. Clear, conspicuous disclosure of the conflict, including the nature, frequency and amount of any compensation received by you or your firm is appropriate and necessary.

 
Insurance and beyond

A conflict of interest, however, is not solely identified by a sharing of revenue or a direct commission or referral fee received by the PFP practitioner. A conflict of interest can develop if you refer every single client to the same professional in exchange for some soft-dollar arrangement or a quid pro quo relationship. The CPA-financial planner must exercise diligence with respect to outside firms and be sure that their recommendation to another professional is appropriate and as good a recommendation as could be made. This doesn’t mean that you need to give out three names, but it does mean that you should vet out your subject-matter expert to be sure that your client can continue receiving competent and objective advice.

For example, if your life insurance professional is a career agent with a large, reputable company, you need to be sure that your clients are getting fair representation to all products available to them, not just those offered by the proprietary life insurance company agent. I understand that the agent is able to use other companies (if needed), but in my fiduciary world that is not enough. I know that proprietary agents frequently lead with their proprietary company and only go elsewhere if they can’t get what they need from their proprietary company. They do not routinely show you or the client the several companies that they have researched to arrive at the conclusion that insurance company X is the best option for your client.

Even further pain can come if there is a problem with the agent or the product down the road. A regulator may easily conclude that your financial planning responsibility is to oversee the implementation phase as a part of your standard of care. That would mean that you should review the alternatives, understand and agree with the final decision and then inspect what was actually issued to see how it compares to what was illustrated. I would also suggest examining an in-force illustration for permanent life policies on a regular basis.

If you’d like to be sure that your proprietary life insurance professional is giving your clients’ insurance agents the right advice, ask a few questions. First, and maybe even before you start the relationship, ask them if they can show you a breakdown of commissions for the past three years from each company they represent. Can you show me your analysis of other company products with respect to my client? Do you have documentation on why company X was the best choice?

Insurance isn’t the only area where a conflict may arise with an outside firm. In the investment world, many accountants are attracted to the largest brand names in the asset management business. In general, I would say that these firms are typically competent and able to do the investment job, but not much else. Did you compare the large firm’s suite of services to a high-quality independent planner?

You may be surprised at the areas of practice that are limited when dealing with a large national firm. Is the person who your client interacts with able to have any influence on the services or the portfolio management or are they just a relationship manager who phases out every few years or so? This conflict is less egregious than when dealing with insurance products with large commissions and surrender fees. However, if you’re maintaining an ongoing financial planning relationship with the client, your duties would include the supervision of the asset manager, benchmarking them to their peer groups, and having an awareness of your alternatives.

In short order, an introduction to any one firm to assist with the financial planning process, whether it is planning or implementation, isn’t itself a bad thing. Be fully aware, however, that if you are engaged as your client’s personal financial planner, you would ultimately be the “buck stops here” person for the other professionals that are on the client’s team.

Conflict of interest concept art
conflict of interest or confrontation, change concept, opposition

Song_about_summer – stock.adobe.

 
No shortcuts

Practice management conflicts also exist within CPA financial planning practices. The first could be about the quality of engagements. Many accountants are conditioned to move fast, hoping to keep the hours down so that the net realization rate is maximized. Simply said, you cannot shortcut the process of financial planning.

If you chose to work for a fixed or flat fee, your staff must invest the time to perform a thorough analysis and what is needed to produce the best result. These engagements are not best delivered under time pressure with your efforts constrained within the time budget that you’ve established for this project. Over time, your engagements will become more efficient and profitable like other flat-fee services, but it may require more scale and experience to get there.

Another practice management conflict, while not a legal or regulatory conflict, is how to deal with the clients who already have a team of advisors, maybe even some of whom were referred in by you. This may fall under the category of a moral dilemma rather than a conflict of interest, but I know that this issue keeps CPAs awake at night. You can choose to not disrupt those relationships or see how you may fit into the picture by learning what is and what is not being done by the incumbent financial planning provider.

First, your obligation is to your client. To that end, all your clients may be prospects for some part of your PFP offering. However, to honor your moral obligation to outside professionals with whom you have a long-term relationship, perhaps these folks may not become your PFP clients until you notice deficiencies, or the client wants to leave the prior advisor.

That said, once you get good at financial planning services, you’ll quickly spot gaps in a client’s financial life just by paying attention when doing tax work. To the extent that you see gaps in the plan, such as improper titling of an account, old estate documents or other matters that are easily identified, you need to decide if these are isolated issues or a systemic flaw in the service model of your former referral partner. Remember, most planners give lip service to the details of financial planning and are satisfied if they have recurring asset management revenue or commissions. In this case, I don’t think that you are breaching your moral agreement if you offered PFP services to that client where you’ve observed a need.

In this case, you aren’t advising that the client leave the person that you’ve referred in the past, you are simply picking up to fill in the gaps that have been ignored or created in the course of your client’s relationship with outside advisors.

As you may already know, I am an advocate of putting a CPA firm’s PFP services out there as a core part of their offering. Many fear this moment primarily from the reaction that they may receive from outside centers of influence who have referred clients to the firm. Unfortunately, this is another harsh reality that you simply must get over. The best way to handle it is to have face-to-face meetings with the affected professionals to let them know what direction your firm is headed. At that time, you may also let them know that it is not your intent to disrupt their existing relationships with your firm’s clients but to supplement the gaps that may exist. The outcomes from this conversation will vary. Some will be upset; some will understand and see if there is a way to collaborate into the future.

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