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Caveats to selling financial services.

Before you accept a fee or commission for providing financial services, think about it carefully. Your relationship with your client will change dramatically. This new, expanded relationship may provide additional revenues and help solidify client loyalty; on the other hand it will invoke new professional responsibility and may also contain new potential pitfalls.

The AICPA Code of Professional Conduct (ET section 102) is clear: "In the performance of any professional service a member shall maintain objectivity and integrity, shall be free of conflicts of interest and shall not knowingly misrepresent facts or subordinate his judgment to others." Whether the CPA's conduct is inappropriate is predicated on a "reasonable person standard."

CPAs who offer separately managed accounts (SMAs), customized bond portfolio services, mutual funds, insurance or other investment products and services will face new challenges. For one, their traditional referral sources may now perceive them as a competitor. For another, the personality of a client may match the CPA's practice as it relates to their traditional tax and accounting preparation services, but it may not be compatible as it relates to financial services. Conflicts of interest that did not exist in their previous relationship may now require reexamination.

Investment advisory relationships also are generally far more complicated than those related to providing traditional accounting services, and investment clients tend to call their investment advisers more frequently than straightforward accounting-services clients do. If investment objectives are not met, it may threaten both their investment advisory and accounting relationship. In the worst case, a potential malpractice suit, lawyers will review all correspondence and reports from the CPA to determine if there was even an implication that specific results would be obtained. Misleading claims violate professional standards and state and federal law.

CPAs should not assume that engaging an "institutional-quality asset management company" to manage the account mitigates their liability. When you accept a fee or commission, you also accept a commensurate amount of fiduciary accountability and legal liability. Most policies covering CPAs specifically exclude claims arising from engagements for which the CPA received commissions for the sale of investment and/or insurance products.

To accept commissions on the sale of investments you must be licensed with the National Association of Securities Dealers; to operate as a fee-based investment adviser you must be registered with the Securities and Exchange Commission. There also may be additional state requirements that must be met prior to selling investments or charging for investment advice. Licensing for insurance is handled separately by each state.

According to the Center for Fiduciary Studies, lawsuits and arbitration cases regarding the breach of fiduciary duty are increasing at a compound rate of 22% per year. The AICPA and the Foundation for Fiduciary Studies have jointly developed a handbook--Prudent Investment Practices: A Handbook for Investment Fiduciaries--designed to promote prudent investment practices. The book focuses on critical investment practices including asset allocation, investor risk/return profiles, investment policies, expected returns, the selection of prudent investment managers, documenting due diligence, proper management of investment expenses, procedures for avoiding conflicts of interest and prohibited transactions.

You will find that selling investment services requires quite a bit of work and diligence. It's up to you to determine if it's worth the effort.

BART H. SIEGEL, CPA, CFP, CFE, is an independent investment and tax specialist who provides litigation support, expert witness services and continuing education seminars. He can be reached at or at
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Author:Siegel, Bart H.
Publication:Journal of Accountancy
Date:Jan 1, 2005
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