Incorporating the Statement on Responsibilities in Personal Financial Planning into a Tax Practice

By Dirk Edwards, CPA/PFS, J.D., MBA

Editor: Kevin F. Roach, CPA/PFS

As financial planners diligently work in their tax practices, putting maximum effort into providing the best possible tax advice and compliance for their clients, they may get questions such as:

  • What should I be doing about college funding for my kids?
  • How will I ever be able to retire? How much should I be saving?
  • Should I have life insurance? How much? Where should the cash come from to pay the premiums? Who should own it? Should it be in a trust?
  • How do I balance our family charitable giving goals with my retirement objectives?
  • Beyond the potential tax cost of exercising my company stock options, how should I incorporate them into my long-term personal planning?

As a financial planner tries to determine how he or she can help clients address these questions, it may be helpful to know that the best and brightest minds in the CPA profession have already developed a framework to assist planners in developing processes for helping their clients with these personal financial planning questions.

This type of real-life practice guidance is the underlying goal of the Statement on Responsibilities (SOR) in Personal Financial Planning Practice issued by the AICPA’s PFP Executive Committee. As outlined in the preface, the goals of the SOR are to “provide guidance to the CPA financial planner and to ensure that the highest levels of integrity, professionalism, objectivity, and competence are applied to the delivery of the personal financial planning services so that a CPA financial planner can serve the best interests of the public, regardless of the form of his or her practice.”

As a practice aid, the SOR is written in a format to provide a conceptual framework, outlining the CPA’s primary professional responsibilities in providing personal financial planning services to clients. Because there is no single, specific practice model for the effective delivery of PFP services, the SOR does not delineate a “must do” list of steps for the CPA. Instead, it highlights various professional considerations in providing PFP services. These are not required practices but rather an understanding of what would be considered best practices. Since the PFP Executive Committee does not have standard-setting authority, this guidance is nonauthoritative. However, it is reflective of the cumulative expertise from decades of experience within the PFP Executive Committee and CPA community for use by CPA financial planners.

Background

Written to address the lack of formal professional materials summarizing best practices in the PFP area, the SORs were published between 1993 and 1996. These original SORs were issued after an extensive period of member and public discussion, formal exposure, and review. After approximately 15 years of use by the CPA community, the various SORs have been consolidated into a single document with the goal of assisting in their understanding and application in practice.

The SOR is not intended to apply to stand-alone services that are not part of a PFP process and that are already addressed in other professional literature (see ¶1). (All references are to paragraph numbers within the SOR.) For example, while outlining general guidance, the SOR would not apply to stand-alone services such as:

  • Compilation of personal financial statements;
  • Projection of future taxes;
  • Tax compliance, including, but not limited to, preparation of tax returns; or
  • Tax advice or consultations (for example, advising a client to retitle real estate in the spouse’s name in order to equalize a couple’s estate) (¶1).

However, when a member provides these types of services as part of a broader PFP services engagement, the SOR will be applicable.

As with all professional services, before undertaking a PFP engagement the CPA should assess his or her ability to perform the services with competency, objectivity, and integrity (¶3).

As outlined in the AICPA Code of Professional Conduct, Rule 201.01(A), Professional Competence, a member shall “undertake only those professional services that the member . . . can reasonably expect to be completed with professional competence.” As discussed in the SOR, a member who provides PFP services should possess a level of knowledge of financial planning principles and theory and a level of skill in the application of such principles that will enable him or her to identify, gather, and analyze data; consider and apply appropriate planning approaches and methods; and use professional judgment in developing the financial recommendation (¶4).

The CPA should also be aware of government regulations and other professional standards applicable to the engagement (¶14), such as the AICPA Code of Professional Conduct, Statements on Standards for Tax Services, Statement on Standards for Valuation Services, Statement on Standards for Consulting Services, Statement on Standards for Accounting and Review Services No. 6, the Investment Advisers Act of 1940, and Securities and Exchange Commission Interpretive Release IA-1092.

PFP Services

The SOR guidance is applicable whether the PFP services are provided on a stand-alone basis or as part of another engagement and whether provided on a comprehensive, segmented, or consultative basis. PFP services refer to the process of identifying individual or family goals, evaluating existing resources, and designing financial strategies that, when implemented, move the individual toward achieving these goals (¶10).

In addition to helping a client develop his or her financial plan, the CPA financial planner may also assist—when agreed—in separate engagements in implementation, monitoring, and periodic plan updates (¶11).

In planning the engagement, the planner should work with the client to determine objectives. The planner should discuss the scope and nature of the services to be performed as well as the compensation for the services (¶17). Generally, the adviser should document this understanding either in an engagement letter or in a file memo if there is an oral understanding with the client (¶21). This documentation would include engagement objectives; services to be provided; roles and responsibilities of the CPA, the client, and other service providers; timing of the engagement; scope limitations and other constraints; compensation arrangements; and responsibility, or lack thereof, for helping the client act upon planning decisions, monitoring the client’s progress toward achieving goals, and updating the plan and proposing new actions (¶23).

Developing a Financial Plan

In developing a financial plan, the planner must establish a reasonable basis for the PFP recommendations. This would involve collecting, analyzing, and integrating sufficient relevant information to develop a basis for recommendations (¶34) and would be grounded in an understanding of the client’s objectives and goals (¶39).

The planner should analyze the information (¶42), including evaluating the reasonableness of estimates and assumptions (¶43) and the appropriateness of assumptions used (¶44). Assumptions used in developing a plan should be consistent with each other (e.g., an assumed low rate of inflation with an assumed low rate of return for investments in fixed-income securities) (¶45).

Recommendations are derived from analyses of relevant information and the client’s goals (¶49). The client may impose a constraint that would affect the planner’s recommendation, such as a stipulation of an investment rate of return or the availability of Social Security benefits. When constraints are imposed, the planner should notify the client (¶50).

The planner should explore recommendations for achieving a goal in relation to recommendations regarding other goals (e.g., recommendations for wealth transfer planning may affect recommendations for retirement funding or investment planning) (¶51).

Presenting the Financial Plan

The financial planner should communicate plan recommendations in a way that helps the client understand strategies and implement financial planning decisions. The planner generally would present the recommendations in writing and would include a summary of goals, significant assumptions, recommendations, a description of any limitations on the work performed, a statement that projected results may not be achieved, and a copy of Circular 230 if recommendations contain tax advice (¶57). The planner should also help the client prioritize tasks that are essential to enabling the client to act on the planning decisions (¶60).

Working with Other Service Providers

In the financial planning engagement, other service providers may be needed. These may be:

  • Individuals the client has worked with in the past, in which case the CPA would have no due diligence obligation on the background or expertise of the service provider (¶97a);
  • A provider the client seeks out without the planner’s assistance, in which case the planner would have no due diligence obligation on the service provider’s background or expertise but might want to provide at least informal assistance (¶97b);
  • A provider that the client seeks out with the planner’s assistance, in which case the planner provides due diligence but does not make a referral recommendation—the planner generally would provide a summary of the review and evaluation procedures that were followed, ordinarily in writing (¶97c);
  • A provider that the planner recommends but from whom no benefit inures back to the planner—the planner generally would provide a summary of the review and evaluation procedures followed and the reason the provider was considered, ordinarily in writing (¶97d); or
  • A provider that the planner recommends when the planner, the planner’s firm, or a related party receives some cash or other payment or quid pro quo. In addition to providing a summary of the review and evaluation procedures that were followed and the reason the provider was considered, the planner should disclose any benefit that he or she receives. The planner should also disclose any known potential conflicts of interest. Ordinarily, all these disclosures should be in writing (¶97e).

When the client uses the advice of another service provider, the planner should understand that advice. If the planner concurs with the advice, it is not necessary to communicate this concurrence to the client (¶99). If the planner does not concur, he or she should communicate that to the client, ordinarily in writing (¶99).

If the planner uses another provider’s advice without evaluating the advice, the planner should communicate that to the client, ordinarily in writing (¶100).

In referring the client to other providers, the planner should be satisfied with those providers’ professional qualifications and reputation (¶104). Information the planner would consider includes:

  • His or her previous experience with the provider (¶104a);
  • The provider’s professional certification, license, or other recognition of competence (¶104b); and
  • The provider’s reputation (¶104c).

When the planner refers the client to another provider, he or she should communicate to the client the nature of the work the other provider is to perform and the extent to which the planner will evaluate that work. Ordinarily that communication would be in writing (¶105). For example:

As we discussed, you should consult an attorney to prepare updated will provisions. We have given you the names of several attorneys whose professional credentials and reputations are familiar to us. The selection of an attorney is your decision. Our referral does not constitute an endorsement of these attorneys, nor can we be responsible for any advice they may give you. [¶106]

When Would the SOR Apply in a Tax Practice?

For tax practitioners, in general terms, the SOR would provide guidance when client advice is related to:

  • Budgeting or cashflow planning;
  • Risk management or insurance planning;
  • Retirement planning;
  • Investment planning;
  • Estate, gift, or wealth transfer planning;
  • Elder planning;
  • Charitable giving; or
  • Education planning.

If planners are preparing a comprehensive financial plan or are involved in the sale of a product or investment, the SOR would apply. If planners are not involved in developing a comprehensive plan or the sale of a product, they should determine whether they are using professional judgment in determining investment returns. If not (as when the client provides the rate of return expectation for the planner’s use in developing a retirement model), the SOR would not apply. In addition, if a planner is using professional judgment in determining investment returns, but the investment advice is incidental to the overall client service or engagement, the SOR would not apply.

Of course, as general guidance to assist the planner in developing his or her practice framework for delivering personal financial planning services, the planner can always use the SOR best practice points and discussion.

EditorNotes

Kevin Roach is executive professor in Mays Business School at Texas A&M University in College Station, TX. Dirk Edwards is with Edwards Consulting LLC in Lake Oswego, OR, and is chair of the AICPA’s PFP Executive Committee Statement on Responsibilities in Personal Financial Planning Practice Task Force. For more information about this column, contact Mr. Edwards at dirk@edwardsconsultingllc.com.

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