There are many firms that haven’t yet established a personal financial planning department, citing various reasons for lack of progress in this area. Some are focused on other niche specialties, some are too busy and can’t staff their traditional business properly, and some feel that the wealth management business represents a conflict of interest that they’d rather not deal with.
There are two types of conflicts: ethical and regulatory conflicts, and practice management conflicts.
The first is the stereotype that financial planning itself is a conflict of interest. The process of financial planning shouldn’t be too different from any other accounting engagement. Competent PFP firms use guides, similar to those used in audits, to offer some quality control to be sure that the financial planning process is consistent, comprehensive and supervised from client to client. The process itself can also be priced similar to traditional accounting firm engagements — hourly or flat fees. This isn’t a conflict, so get over it.
Where conflict may appear to rise is when the CPA is involved with some of the implementation services required after the delivery of financial advice. These conflicts may occur with respect to estate planning, asset management, insurance purchases, etc. The giving of advice 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.
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 sufficient.
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 your subject matter expert to be sure that your client can continue to get independent 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 almost always 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 choice 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 PFP 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 in-force illustrations for permanent life policies on a regular basis, no less than every other year.
If you’d like to be sure that your proprietary life insurance professional is giving your clients the right advice, ask a few questions.
First, and maybe even before you start the relationship, ask them if they can you show you a breakdown of commissions each year for the past three from each company they represent. Can you show me your analysis of other company products with respect to my client? Do you have a 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 generally very competent and able to do the job. But did you compare them to their peers? Do you really know if the large-bank private client group uses their investment management processes alone or do they also use sub-advisors for specialty areas? Is the person who your client interacts with able to have any influence, or are they just a relationship manager who phases out every few years or so? In my opinion, this conflict is less egregious than when dealing with insurance products with large commissions and surrender fees. Nevertheless, 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 awareness of your alternatives.
In short, 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 another professional who deviates from the advice or simply doesn’t do a good job under your watch.
Internal conflicts
Practice management conflicts also exist within CPA PFP practices. The first could be about the quality of engagements. Many CPAs are conditioned to move fast, hoping to keep the hours down so that the net realization rate is maximized. Simply said, you cannot short-cut the process. If you chose to work for a fixed, flat fee, your staff must do what is needed to produce the best result and not to keep their 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 is how to deal with the clients who already have a team of advisors, some of whom may even have been 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.
First, your obligation is to your client. To that end, all of your clients may be prospects for your PFP offering. However, to honor your moral obligation to outside professionals with whom you’ve enjoyed a long-term relationship, perhaps these folks may not become your PFP clients until they want to move from the prior.
That said, once you get good at PFP 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 a gap 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 systemic flaws 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 a face-to-face with the affected professionals to let them know that your referrals may slow going forward. 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. The outcomes from this conversation will vary. Some will be upset, some will understand and say they wondered when you’d step in, and some may be bold enough to understand the distinction between your offerings and figure out how to collaborate into the future.
