Sell financial products wisely: manage your risk in this new niche.EXECUTIVE SUMMARY * Many CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. firms now provide insurance and investment services to their clients in addition to core services The introduction to this article provides insufficient context for those unfamiliar with the subject matter. Please help [ improve the introduction] to meet Wikipedia's layout standards. You can discuss the issue on the talk page. . 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 (Logical Link Control) See "LANs" under data link protocol. LLC - Logical Link Control , 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 adhere to verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful 2. the rules and regulations imposed by additional governing bodies Noun 1. governing body - the persons (or committees or departments etc.) who make up a body for the purpose of administering something; "he claims that the present administration is corrupt"; "the governance of an association is responsible to its members"; "he , including state laws, securities laws, GAO regulations and PCAOB PCAOB Public Company Accounting Oversight Board 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. ********** Providing insurance products and other investment advisory services advisory services advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal 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 Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against 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 professional ethics, n the rules governing the conduct, transactions, and relationships within a profession and among its publics. professional ethics liability, n 1. in their client dealings and must exercise utmost propriety and caution in interpreting all relevant ethics rules. Failure to comply can result in censure A formal, public reprimand for an infraction or violation. From time to time deliberative bodies are forced to take action against members whose actions or behavior runs counter to the group's acceptable standards for individual behavior. In the U.S. 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 PFP - Plastic Flat Package Services," page 54). Payment involves two general requirements. First, a firm may not accept commissions from audit or attest To solemnly declare verbally or in writing that a particular document or testimony about an event is a true and accurate representation of the facts; to bear witness to. To formally certify by a signature that the signer has been present at the execution of a particular writing so as 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). Our firm shares commissions and fees through its affiliation with the service provider. Neither the firm nor its employees are responsible for or participate in the service provider's recommendations. Please sign below to indicate your understanding of the fee policy. Feel free to ask [service provider] for additional details or solutions. Thank you for your business. Client signature-- Date-- Firms also must adhere to the rules and regulations imposed by other 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. While those requirements reinforce many that are covered by CPA professional ethics, they must be satisfied independently. CLOSE BUT SEPARATE Financial planning products can include life insurance, derivative transactions, variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. and private equity investments, among others. The scope of products a firm chooses to offer can be all-inclusive or limited to a select type of product. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke" put differently , a firm may choose to offer life insurance, but not stocks. The final offering is known as a product platform. To limit liability, a CPA firm can offer a product platform through a separate legal business entity that employs appropriately licensed sales representatives. Closely integrating the new entity with the CPA firm gives the two a unified appearance that's reassuring to clients. The proximity of the two businesses also permits cost-effective sharing of resources and makes new expenses in salaries, marketing and overhead easier to manage. It is, however, essential to strictly observe all corporate formalities to ensure the new entity's genuine independence. The form of business entity is a very important decision. An LLC can segregate seg·re·gate v. seg·re·gat·ed, seg·re·gat·ing, seg·re·gates v.tr. 1. To separate or isolate from others or from a main body or group. See Synonyms at isolate. 2. liability for product activities from the firm's core business and partners' personal assets, and it offers some tax benefits, but options vary by state. Choosing the best form for an affiliate financial products business ultimately depends upon a range of factors and the jurisdictions in which operations take place. The decision can be complex and legal counsel is advised. LICENSE TO SELL Licensing is a critical part of offering financial products. A firm and its sales agents in the affiliate entity must conduct client-based activities in a licensed format. The person soliciting sales must always be licensed as must anyone who receives commissions. If the new entity is paid commissions by a third party, the entity itself must be licensed. In most cases, state insurance laws allow a licensed corporation to receive commissions and subsequently distribute profits upstream to unlicensed shareholders. SEC regulations are stricter; anyone receiving securities-based compensation must be registered. Licensing requirements vary by product or service; generally speaking, the four categories are * Life and health. Licensing is based on a state insurance department exam. * Property and casualty. Licensing is based on a state insurance department exam. * Securities. Licensing is based on the SEC exam; candidate must be sponsored by a broker-dealer. * Registered investment adviser. Licensing is based on examination by either state or federal securities regulators. BUILD A COMPLEMENTARY PORTFOLIO Most CPA firms don't consider financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. their core business strategy, yet many want to provide every product their clients request. It's a good idea to resist that impulse and limit investment products and services to only those that complement core offerings. Overdiversifying can dilute the value of core services, and products that aren't a good fit may create significant risk. These are common product categories. * Planning products. They are designed to preserve wealth or income and include life, disability and long-term-care insurance and annuities. Recommended products complement core offerings such as estate, business or financial planning. * Service products. These products are designed to protect clients against unanticipated losses. They include health, auto and homeowners' insurance, for example. Such product recommendations do not result from a firm's core offering. * Investment products. These are designed to accumulate wealth. This category is transactional--based on market trades--and as such the most removed from a firm's core services. Before making a decision to offer a product, carefully consider the type and amount of service you will have to provide with it. Failure to service a product can lead to client dissatisfaction--a direct conflict with the firm's goals. SELLING WELL To do the actual selling, a firm can in-source, outsource or use a combination of the two. If selling is insourced, the CPA firm's employees (trained and licensed as noted) recommend products the affiliate entity provides. This option can provide a high level of control, equity and compensation, but it does have higher fixed expenses, opportunity costs Opportunity costs The difference in the actual performance of a particular investment and some other desired investment adjusted for fixed costs and execution costs. It often refers to the most valuable alternative that is given up. and risk exposure than outsourcing. In outsourcing, the firm hires independent contractors A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job. such as stock brokers and insurance agents to sell products, and they pay the firm a portion of the revenue. This option reduces the firm's exposure to liability, has no or low fixed expense and provides diverse product expertise In a merger, those professionals may even become the affiliate entity Some firms develop a hybrid method. Certain products lines are insourced and others outsourced. The lines can be divided based on portfolio. For example, a firm could insource planning products that complement core offerings and outsource service and investment products as a way to limit liability exposure and ongoing service obligations. To sell well the firm needs Expertise. The success of a product platform depends in large part on a CPA firm's apparent and actual depth of knowledge (expertise). Besides obtaining the education, experience and licenses discussed earlier, CPAs can get a Personal Financial Specialist (PFS PFS, n post facilitation stretch; therapeutic approach utilized during proprioceptive neuromuscular facilitation in which the patient begins the stretch midway between the fully relaxed and fully stretched position and uses maximum level of effort to ) credential. It is unique to the profession, and in most states it meets Registered Investment Advisor Registered Investment Advisor (RIA) is a designation obtainable in the United States by an individual who has registered with the U.S. Securities and Exchange Commission or state regulatory agency (where the primary business is situated or multiple States in some cases) in (RIA (Rich Internet Application) A Web-based application that approaches the speed and elegance of a local application. An RIA may refer to a browser-based application that uses AJAX or another enhanced coding technique. ) requirements. Information about the PFS designation is available from the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). (see the resources box on page 55). Objectivity. Professional ethics require a CPA to objectively serve the client's best interests at all times. Other authorities such as NASD NASD See: National Association of Securities Dealers NASD See National Association of Securities Dealers (NASD). have standards to similarly ensure that investment products are suitable for the clients who buy them. Firms should develop operating procedures to manage their own and their affiliate entities' sales activities to ensure that all transactions serve the client's best interests. For example, * Limit compensation. When compensation for a product is too high, salespeople will feel pressure to try for sales that aren't wholly in the client's best interest. Limiting the selling party's salary or commission to the lowest rate for the product class helps lessen the risk. * Separate the planning from the product. Some sophisticated planning concepts have been designed for generating sales more than for fulfilling clients' true needs. Your priority is, of course, to ensure that every product your firm recommends legitimately fits the client's financial plan. * Examine several product options for each engagement. Document a recommendation to verify that it has been based on examining several suitable products and choosing the option with the best features for the client. * Review and monitor recommendations. Periodically check to determine the types of products sold, the planning concepts underlying the sales and the percentage of sales by the product provider. Concentrated positions can indicate bias, creating an objectivity exposure RESEARCH THE REVENUE STRUCTURE Another conspicuously complex aspect of providing financial products and services is compensation. When CPA firms sell insurance and investment products through a separate legal entity (broker), that entity contracts with agents or general agents (service providers) of insurance and investment companies to access products. As compensation for selling insurance products, brokers generally receive sales commissions. In fact, those commissions are only one chunk of what the insurance or investment company pays to move its products. In some cases commissions may be less than half the available compensation. To get the best payment terms for its affiliate entity the firm should negotiate fees from an informed position. Make sure you learn all the types of compensation the service provider gets from insurance and investment companies (see "Compensation Glossary," below). Define and document compensation terms in both service and transaction contracts (see "Contract Essentials," page 54). Whenever possible, make sure the name of the firm or affiliate financial-products entity appears on applications and contracts. Arrange to have the insurance or investment company pay the firm's share directly to the firm rather than to a general agent or other intermediary. Doing this documents the firm's right to continuing compensation (in other words "vests" it), reduces payment delays and serves to secure the client's ongoing business in the event the relationship with the broker of record ever terminates. WATCH THOSE MOVING PARTS Moving parts are the components of a device that undergo continuous or frequent motion, most commonly rotation. "Parts" only include the mechanical components which does not include fuel, or any other gas or liquid. Many firms have made the strategic decision to sell insurance and investment products to their clients. Offering financial products and services provides a range of competitive and economic opportunities for CPA firms, but with those opportunities come risks. Entering the market too quickly can lead to a failure to carefully assess and limit those risks. To keep from undermining long-term objectives, your firm or its affiliate should follow the advice it gives clients--account for and audit each element of insurance and investment offerings. It's a process with many "moving parts." You need to pay attention to all of them. Regulatory Requirements Regulatory requirements are part of the process of drug discovery and drug development. Regulatory requirements describe what is necessary for a new drug to be approved for marketing in any particular country. An estimated 15,000 AICPA members are NASD-licensed to sell investment products and nearly 11,000 are licensed to sell insurance products. Source: AICPA, www.aicpa.org. Quick-Start Guide to Selling Insurance and Investments * Interview clients about their needs. * Build a three-year business plan with financial projections. * Consult with errors and omissions errors and omissions n. short-hand for malpractice insurance which gives physicians, attorneys, architects, accountants and other professionals coverage for claims by patients and clients for alleged professional errors and omissions which amount to negligence. insurers regarding coverage requirements. * Solicit bids for sales and distribution rights. * Form a separate business entity and obtain required licensing. * Develop standard operating procedures standard operating procedure Medtalk A technique, method or therapy performed 'by the book,' using a standard protocol meeting internally or externally defined criteria; a formal, written procedure that describes how specific lab operations are to be performed. (SOPs). * Train employees in the process. * Announce new product offering to clients. * Monitor activities for compliance with ethics rules and other applicable laws. Risk Management Checklist [check] [] Did you obtain the client's written acceptance of commission payments before making a recommendation? This consent is required whenever the firm receives commissions, even it uses an independent broker to write an engagement transaction. [] Did you follow a due-diligence process for product offerings? A firm should offer only products from reputable sources. While a firm may be able to use an independent expert as a quality control process for product, the firm must monitor its product portfolio. [] Did you perform due-diligence for sales suitability? Sales activities are subject to ethics requirements whenever a firm receives commissions, even if the firm uses an independent broker. Carefully monitor the suitability of the products sold and the associated sales activities. [] Do you have at least two licensed members with tenure? This will ensure continuity in the event one of them becomes unavailable for any reason, including death, disability or retirement. A gap in licensing could void a product sale or affect commissions. [] Did you obtain your errors and omissions insurance providers approval? Confirm that activities relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc financial products are covered and describe the extent of exclusions, if any. [] Do you have distributions and sales contracts Sales Contract Contract between a seller and buyer for the sale of goods, services, or both. in place? Define the rights and responsibilities of the firm and its providers in written agreements. (See "Contract Essentials," page 54.) [] Do you regularly assess activities? A firm should periodically review its product platform and sales activities to ensure they remain consistent with the firm's standards and ethical requirements. Contract Essentials * Nonsolicitation. Prohibit agents and service providers from soliciting firm clients, employees and related parties. * Vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: . All compensation should be 100% vested (paid to the firm). * Sales practices. The agent or service provider should comply with all regulatory requirements and adhere to additional firm standards. * Terminations. Require that the agent or service provider facilitate the transfer of client assets to a new agent upon termination. * E&O. Require agents or service providers to carry and provide proof of an errors and omissions insurance policy. AICPA RESOURCES Publications * AICPA Professional Standards, Code of Professional Conduct. * "Caveats to Selling Financial Services," JofA, Jan. 05, page 29. * Investment Fiduciary Responsibility: Understanding the CPA's Role (webcast archived on CD-ROM CD-ROM: see compact disc. CD-ROM in full compact disc read-only memory Type of computer storage medium that is read optically (e.g., by a laser). , # 780011 HSJA HSJA HoofBeats Show Jumping Association ). * Management of an Accounting Practice Handbook (# 090407JA); e-MAP, electronic version (# MAP-XXJA). * The New Fiduciary Standard: The 27 Prudent Investment Practices for Financial Advisers, Trustees, and Plan Sponsors (# 017242JA). For more information or to order, go to www.cpa2biz biz n. Informal Business. biz Noun Informal business Noun 1. .com or call 888-777-7077. Web sites * PCPS PCPS Primary Care and Population Sciences PCPS Partners for Child Passenger Safety PCPS Pleasant Corners Public School (Canada) PCPS Plymouth Counselling and Psychotherapy Service (UK) Firm Practice Center, www.aicpa.org/pcps. * Personal Financial Planning Center, www.aicpa.org/pfp. * Personal Financial Specialist (PFS) Information, http://pfp.aicpa.org/ Memberships/Personal+Financial+ Specialist.htm. OTHER RESOURCES Fiduciary handbooks * Prudent Practices for Investment Stewards (U.S. edition). * Prudent Practices for Investment Managers (worldwide edition). * Prudent Practices for Investment Advisors Investment Advisor 1. A person making investment recommendations in return for a flat fee or percentage of assets managed, known as a commission. 2. For mutual fund companies, it is the individual who has the day-to-day responsibility of investing and monitoring the cash and (U.S. edition), and Prudent Practices for Investment Stewards and Investment Advisors (worldwide edition). To order, visit www.fiduciarystore.com. Compensation Glossary As brokers. CPA firms receive a direct share of the sales commissions the insurance and investment companies pay to agents and third-party service providers. Firms also can negotiate to obtain a share of the standardized fees the insurance and investment companies pay general agents or service providers. Bonuses. Many insurance and investment companies pay agents bonuses for reaching certain production levels. Those bonuses will not be shared with CPA firms unless it is specified in contract negotiations. Distribution allowances. Insurance and investment companies also pay distribution allowances to the processing entity--often the general agent with whom the CPA firm has a contract. The allowances can represent an additional 50% of the annual premium; if negotiated some of this may be shared with high-volume brokers. Renewals. Many insurance and investment products pay income to agents on a recurring basis, often annually. Unless specified, broker firms may not receive any part of the renewal fees even though renewals are a result of the continued client-CPA/broker relationship. Sales compensation. Life insurers pay two forms of sales compensation: a commission that usually ranges from 50% to 70% of first-year premiums, and an expense allowance that generally is from 30% to 60% of commissions. Investment transactions may be based on a gross number, while the broker's percentage of premiums depends on production levels. Soft dollars. Insurance and investment companies also pay agents for expenses unconnected to a specific transaction or product. These payments offset marketing costs, software licenses In computing, software that is copyrighted and licensed under a software license is done under a variety of licensing schemes. For end-users there are proprietary licenses and there are free software licenses, and there are proprietary Within these schemes are further classifications. or other costs of doing business. RELATED ARTICLE: Growing PFP services. CASE STUDY CPA firm Janover Rubinroit, LLC (www.jrllc.com), with offices in Garden City, N.Y., and New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , in business since 1938, has grown into an 80-person family of affiliates via careful mergers that have brought together new markets and services. In the PFP arena, the group now encompasses JRF JRF Joseph Rowntree Foundation (UK social policy research and development charity) JRF Jewish Reconstructionist Federation JRF Journal of Religion and Film JRF Jordan River Foundation JRF Jackie Robinson Foundation Asset Advisors, LLC, which provides full-service planning and advisory services; JRS JRS Jesuit Refugee Service JRS Journal of Roman Studies JRS Japan Radiological Society JRS Journal of Refractive Surgery JRS Joint Reporting Structure JRS Job Referral Service JRS Joint Reporting System JRS Joint Research Center JRS Jamaica Reservation Service Financial Services, LLC, which handles compliance and administrative functions; and JR Benefit Services, which provides life, health, disability and long-term care long-term care (LTC), n the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders. insurance. Janover managing partner Mark K. Goodman, CPA, and JRF partner Jay H. Freeberg, CPA, tailor investment planning to maximize returns and minimize the effects of income taxes and inflation as well as the risk and liabilities inherent in a securities portfolio. Their insurance planning advice is designed to help clients understand the correct amount and type to keep their net worth in place. Goodman and Freeberg's best practices for managing risk while implementing PFP growth have been to * Choose the best regulatory lawyers to advise on ownership structure. "The form of ownership is an issue for any type of business. In professional services (job) professional services - A department of a supplier providing consultancy and programming manpower for the supplier's products. the potential for malpractice is always an issue," says Goodman. * Have at least two partners familiar with every client's account. * Know the products and for whom they are best suited. "I'm aware of clients' insurance needs and tax brackets Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. ," says Goodman. "Knowing all the puzzle pieces helps us give clients better service." * Make sure partners have licenses appropriate to the functions they perform. Freeberg, an MBA MBA abbr. Master of Business Administration Noun 1. MBA - a master's degree in business Master in Business, Master in Business Administration and CFP 1. CFP - Constraint Functional Programming. 2. CFP - Communicating Functional Processes. 3. CFP - Call For Papers (for a conference). who sells investment products, holds Series 7, 24, 27, 63, 65 securities licenses, for example. Three staff people have insurance licenses and accompany Freeberg on sales calls. * Take your time developing a financial services niche. Besides education and licenses, it's important to get experience, Freeberg says: "Pay particular attention to a full up-and-down market cycle--three to five years--to learn how to perform well in a poor market." Anthony Sardis, JD, LLM LLM abbr. Latin Legum Magister (Master of Laws) LLM Master of Laws [Latin Legum Magister] Noun 1. , is president of Insurance and Investment Advisory Group, New Brunswick New Brunswick, province, Canada New Brunswick, province (2001 pop. 729,498), 28,345 sq mi (73,433 sq km), including 519 sq mi (1,345 sq km) of water surface, E Canada. , N.J., a consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a specializing in financial product distribution. His e-mail address See Internet address. e-mail address - electronic mail address is sardis@ iiag//c.com. Edward Mendlowitz, CPA/ABV/PFS, a partner in WithumSmith+Brown, is the author of several books and articles on tax, estate planning Estate Planning The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death. Notes: Contrary to popular belief, estate planning involves much more than preparing a will, and it is not only for the and CPA practice and a JofA Lawler Award winner. His e-mail is emendlowitz@withum.com. |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion