A New Road Map for CPAs’ Professional Conduct When Providing PFP Services

Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP

With the growing importance of standards and the increased demand and growth in personal financial planning (PFP) services comes the need to formalize CPAs’ responsibilities. If AICPA members advise clients in estate, retirement, investment, and/or risk management planning, it is important that they understand the new Statement on Standards in Personal Financial Planning Services (the statement) that was issued in January and will be effective July 1, 2014. The statement provides a road map to help them practice competently and confidently when providing PFP services.

The Personal Financial Planning Executive Committee (PFP EC) is the AICPA’s senior committee designated to promulgate enforceable standards of PFP practice. The PFP EC issued the statement to provide guidance to members and a framework for delivering PFP services that is built on the cornerstone of the CPA profession—the public interest—and aligns with the AICPA Code of Professional Conduct (the code), which upholds the highest levels of integrity, professionalism, objectivity, and competence.

The CPA must address his or her relationship to the statement by asking several key questions:

• Am I holding out that I am performing PFP services?
• Am I in fact performing PFP services?
• If I am performing these services, must I care about the statement and what it requires?
• What exactly does the statement expect of me and my practice?

CPAs can start by asking themselves: Who are their clients? What is their client base? If their client base includes individuals and families, they inevitably will be asked questions such as:

• How can I manage my resources to care for my present needs, my children, and my retirement?
• 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? How much can I withdraw annually from my savings when I retire?
• Should I have life insurance? How much? Where should the cash come from to pay the premiums? Who should own the policy? Should it be held in a trust?
• Should I make lifetime gifts to my children and grandchildren? How do I coordinate this with my will? How do I share my estate?
• 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 financial planning?

These questions and many others like them arise from clients seeking a CPA’s assistance with PFP issues and services.

Are CPA Responses to the Clients’ Questions the Performance of PFP Services?

When members’ clients raise questions and issues such as those above, how do they respond?

PFP services are defined in the statement as “the process of identifying personal financial goals and resources, designing financial strategies, and making personalized recommendations that, when implemented, assist the client in achieving these goals.” This process may include implementation of recommendations or monitoring or updating the engagement.

Do members make personalized recommendations in one or more of a wide-ranging list of planning activities broadly grouped by the statement under the description of “personal financial planning services”? The activities include:

1. Cash flow planning;
2. Risk management and insurance planning;
3. Retirement planning;
4. Investment planning;
5. Estate, gift, and wealth-transfer planning;
6. Elder planning;
7. Charitable planning;
8. Education planning; and
9. Tax planning.

The statement defines “personalized recommendations” as “[f]inancial advice directing a client to take action based on the client’s personal financial information disclosed to the member.” If members make personalized recommendations in one or more of the activities listed above, the next inquiry is whether they represent to the public or to clients that they provide PFP services. They may refer to their services by such terms as “personal financial consulting,” “personal financial services,” “comprehensive personal advisory services,” “holistic financial advisory services,” “investment advisory services,” “trusted personal adviser,” “wealth management adviser,” “personal financial adviser,” “fee-only financial adviser,” or something similar. If they make such representations, they are performing PFP services, and the statement applies to them.

Members might not represent that they are providing PFP services but engage in activities that require them to register as an investment adviser under federal or state security laws. They are providing PFP services, and the statement applies to them.

They might not represent to the public or to clients that they are providing PFP services and do not engage in activities that would require registration as an investment adviser under federal or state security laws, but they might sell a product (such as a life insurance policy) as a result of a PFP engagement. They are providing PFP services, and the statement applies to them.

If members do not make personalized recommendations in one or more of the nine categories of activities listed above and do not represent to the public or to clients that they provide PFP services, do not engage in activities that would require federal or state registration as an investment adviser, and do not sell a product as the result of a PFP engagement, then they are not providing PFP services, and the statement does not apply to them. Nevertheless, the code does apply to the member’s activities.

If the above applicability test leads members to determine that they are not covered by the statement, then nothing should deter them from being aware of, understanding, and, to the extent appropriate, adhering to the statement’s requirements if they engage in any of the nine activities listed above, because it truly reflects appropriate PFP practice and serves to protect their clients and practice.

Why Should Members Care About the Statement and Its Requirements?

The statement is all about creating standards for the delivery of PFP services. As stated previously, it is designed to encompass the highest levels of integrity, professionalism, objectivity, and competence. It aligns the AICPA code and regulations of state boards of accountancy with the delivery of PFP services. The statement provides a clear road map for consistent performance of these services, which benefits and protects members’ clients and their practice.

The standards described in the statement provide order. They define the ways in which a professional seeks to express the values held most important for professional conduct. They are intended to answer the questions that every professional should ask: “What is this profession about?”; “How should I conduct myself in my relationships with clients?”; and “What are the best practices of my profession?”

The standards outlined in the statement introduce predictability. The statement defines the expectations of minimum required behavior in the CPA-client relationship. The standards can and should hold that relationship together. The statement describes a framework within which professional judgments and relationships can be conducted, providing a common lens through which proper professional conduct can be examined.

What Does the Statement Require?

One must read the entire statement including its application and other explanatory material to understand its objective and apply its requirements properly. It outlines the CPA’s responsibilities in performing PFP engagements. These are not new or onerous professional obligations. Members may believe that they already fully comply with most if not all of the issues raised by the statement in their everyday practice—but they need to be certain. The statement is not intended to be a prescriptive listing of mechanical actions but rather a supporting framework for the due diligence and professional expertise of the CPA in the PFP area. The exercise of proper professional judgment throughout the PFP engagement is central to the statement.

The statement lists a number of specific responsibilities and requirements that members must observe in PFP engagements. These include:

• Complying with all relevant ethical requirements;
• Having a knowledge of PFP principles and theory and a level of skill to identify client goals and objectives, gather and analyze relevant information, consider and apply appropriate planning approaches and methods, and use professional judgment in developing financial recommendations;
• Evaluating conflicts of interest, determining if the engagement can be performed objectively, disclosing known conflicts of interest, and terminating the engagement if it cannot be performed objectively;
• Complying with all applicable federal, state, and other laws and regulations; and
• Disclosing in writing all compensation to be received by the CPA and any affiliates for services rendered and products sold.

The statement provides guidelines for planning the PFP engagement. The member should document and communicate to the client the scope and nature of the services to be provided and the agreed-upon compensation. The documentation should describe:

• Engagement objectives;
• The scope of the services to be provided;
• Roles and responsibilities of the CPA, client, and other service providers;
• Timing of the engagement;
• Scope limitations or other constraints;
• Conflicts of interest; and
• The responsibility undertaken, if any, for helping the client implement planning decisions, for monitoring the client’s progress toward achieving goals, and for updating the plan and proposing new action.

The statement calls for the use of professional judgment in obtaining and analyzing relevant information necessary to develop recommendations to satisfy the engagement, including evaluating the reasonableness, appropriateness, and consistency of material assumptions. PFP recommendations should be derived from relevant information and the client’s goals and overall financial circumstances. Even when an engagement addresses a limited number of personal financial goals, the member should consider the client’s overall known financial circumstances and document analyses and procedures in developing a basis for recommendations.

The statement directs the member to communicate to the client:

• A summary of the client’s goals;
• Significant assumptions;
• Estimates;
• Recommendations;
• A description of limitations on the work performed; and
• Qualifications to the recommendations, if the effects of planning areas on the client’s overall financial picture were not considered.

The statement also addresses members’ responsibilities when undertaking an implementation, monitoring, or updating engagement. It addresses working with other service providers and using their advice. If members recommend, select, or acquire products, such as a life insurance policy, the statement describes required disclosures, including any compensation to be received.

Where to Find Guidance Explaining the Requirements

The AICPA will be presenting education programs via conferences and webcasts to explain the statement and its application. In addition, the AICPA released the Standards in Personal Financial Planning: Compliance Toolkit, to assist members in understanding and applying the statement. Included in this toolkit are sample engagement letters, checklists, frequently asked questions, and more. This will give time after tax season for becoming comfortable with meeting the statement’s requirements. The statement and practice tools are available at aicpa.org/sspfps.