Sell Financial Products Wisely: Manage Your Risk in This New Niche

Article excerpt

EXECUTIVE SUMMARY

* Many CPA firms now provide insurance and investment services to their clients in addition to core services. This can be an attractive avenue to growth that increases client retention and firm revenues, but it carries certain reputational, legal and economic risks.

* To limit liability the firm should offer planning and/or investment products through a separate, genuinely independent legal entity. An LLC, for example, can keep liability for product activities separate from the firm's core business and partners' personal assets, and it offers some tax benefits.

* Firms must adhere to the rules and regulations imposed by additional governing bodies, including state laws, securities laws, GAO regulations and PCAOB regulations. Regulatory oversight and licensing are complicated, involving specialized education, testing and recurring compliance obligations.

* Ideally, planning services and products should complement the firm's core business. For example, life, disability and longterm-care insurance and annuities are planning products for preserving wealth or income (core). Health, auto and home owners' insurance are designed to protect clients against unanticipated losses (noncore). Investment products to accumulate wealth are noncore.

* Brokers generally receive sales commissions for insurance products. Those commissions may be less than half of what the insurance or investment company pays to move its products. The CPA firm's affiliate entity should negotiate brokerage fees based on the complete compensation the service provider gets from insurance and investment companies. Service and transaction contracts for insurance and investment products should include the CPA firm affiliate to protect future business.

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Providing insurance products and other investment advisory services to clients is an attractive avenue to growth for many CPA firms. The key to minimizing risk and maximizing client satisfaction and the firm's financial returns is thoughtful, informed preparation. Don't let a rush to expand into new practice areas lead you to overlook important implementation decisions. What you learn on the following pages can help you avoid reputational, legal and economic exposure.

PRINCIPAL PRINCIPLES

CPA firms that specialize in personal financial planning say two important reasons to sell investment products, including insurance, are being able to tailor planning implementation to individual clients' needs and, of course, revenue growth. Clients like being able to conveniently obtain advisory services, products and administration in one place, and they stay with firms that provide easy access to them. The firm benefits because financial planning products can potentially provide large fees.

But one risk to CPA firms is that the rules governing how they may accept compensation for insurance and investment advisory products are not yet fully tested. Practitioners are bound by professional ethics in their client dealings and must exercise utmost propriety and caution in interpreting all relevant ethics rules. Failure to comply can result in censure or decertification. To avoid potential conflict of interest some firms take the step of creating affiliate business entities through which to offer clients financial planning products (see "Growing PFP Services," page 54).

Payment involves two general requirements. First, a firm may not accept commissions from audit or attest clients. Second, if a firm does accept commissions from a nonrestricted client, the client must acknowledge in writing his or her understanding of the fee policy before any services are rendered (see exhibit, page 52, and "Risk Management Checklist," page 53).

EXHIBIT

Sample Disclosure Statement

Receipt of Commissions Acknowledgement

Our firm has referred you to [service provider] for
product consulting (and/or sales). …