Magazine article The CPA Journal

Risk Management and High-Net-Worth Clients

Magazine article The CPA Journal

Risk Management and High-Net-Worth Clients

Article excerpt

One of the largest and fastest growing areas of opportunity within the CPA profession today is working with high-net-worth clients (HNWC), either individuals or companies. The role a CPA now plays in a wealthy client's affairs has become far more dynamic and complex than ever before. It has broadened to encompass all facets of a client's assets-financial, retirement, investment, and estate tax planning-services previously undertaken only by a few specialists.

The CPA's focus has widened to embrace a larger market in need of expert assistance in overall asset management. Demographics indicate the United States is at the forefront of the most extensive wealth accumulation and transfer in the history of the world. This is happening as the Eisenhower generation transfers wealth to the baby boomer generation, and aging baby boomers establish financial plans to deal with their retirement and subsequent transfer of assets to the next generation. The recent significant increase in mutual fund investments is just one indicator of this $10 trillion phenomenon. As a result of this wealth accumulation, CPAs used to seeing the majority of their clients once a year can expect to encounter more opportunities for further involvement in their clients' affairs. Those who currently do only tax work may be called upon to handle estate planning engagements, and those who don't consider themselves financial planners will likely find themselves with clients looking for advice on financial matters. Due to public perceptions and commonly held expectations of CPAs, those who do not wish to take on work beyond tax preparation for an HNWC need to clearly communicate just that in an engagement letter. For the CPA who provides no advice to an HNWC risks being accused of having given bad advice.

Big Revenues, Big Claims

With greater risk comes greater revenues, and the financial rewards of being more intricately involved in a client's fina cial and tax planning strategies have propelled many a CPA beyond just the preparation of a client's tax returns. While providing services for the HNWC is an excellent source of practice development, CPAs must be aware of the risks they take on when entering the arena of personal asset management.

Work for HNWC seems to lend itself to a sliding scale of risk, and, often, the lines separating the various services are blurred. At one end of the scale, there is the process of sitting down with the client to discuss income and objectives for saving for retirement or increasing wealth. Further down the continuum, there is the dispensing of investment advice and often the execution of financial investment transactions, both higher risk investment management functions. Next lies the service of advising clients on what kinds and how much insurance to purchase for asset protection. Lastly, as CPAs are usually involved in the tax aspects of a financial plan, their services often cross over into, or integrate with, some degree of tax plan ring, including estate tax planning and trustee work, which can be highly volatile.

Since 1995 about 1 claim in 12 against accountants has contained an asset management or estate planning element. The average size of such claims exceeds $150,000. There has been a slow but steady growth in these claim areas over the past 10 years. The most common malpractice allegations involve late filings of Form 706, faulty IRC section 2056 marital deduction clauses, valuation issues (e.g., is the valuation "supportable?"), and generation skipping transfer tax issues.

Financial planning claims are often characterized by large investment losses coupled with allegations of negligent advice and conflicts of interest as a result of coinvesting or "self-dealing."

Analyzing Potential Risk

Work for HNWC can be classified into two broad types of activities. The first is the planning function itself-work a CPA does with a client to sketch out the broad parameters of a plan. …

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