An Overview of Tax Practice Issues That Arise Under Statement on Standards in Personal Financial Planning Services

This column discusses some of the issues that might arise for tax practitioners in light of Statement on Standards in Personal Financial Planning Services (SSPFPS No. 1, or the Standard). The Standard, which was promulgated by the AICPA Personal Financial Planning (PFP) Executive Committee, went into effect July 1, 2014. Since the PFP Executive Committee has standard-setting powers under the AICPA governing structure, this Standard applies to all AICPA members who meet the specific covered PFP service rules. The Standard provides authoritative guidance in the performance of PFP services, whether oral or written, and whether alone or as a part of another engagement.

The Standard provides direction to CPAs in the delivery of PFP services in meeting the general standard of competence under the AICPA Code of Professional Conduct (the AICPA Code). While the general standard has always required a CPA to be competent in the delivery of services, the Standard provides a specific road map for meeting that requirement.

Every member should become familiar with the Standard and appropriately apply it to his or her practice. This is especially true for tax practitioners, as tax planning could include a service that would bring the engagement within the Standard.

This column provides an overview of the Standard's major requirements, when they apply, a member's responsibilities under the Standard, competing considerations, and the resources available to help members effectively implement and apply the Standard. In addition, specific instances involving tax practice are discussed.

Personal financial planning is defined as the process of identifying personal financial goals and resources, designing financial strategies, and making personalized recommendations (whether written or oral) that, when implemented, assist the client in achieving his or her personal financial goals. PFP services may include implementation of recommendations or monitoring or updating the engagement as well as recommending that a client seek out a particular professional adviser regarding appropriate strategies to meet financial goals. PFP services typically encompass activities such as cash flow planning; risk management and insurance planning; retirement planning; investment planning; estate, gift, and wealth transfer planning; elder planning; charitable planning; education planning; and, especially important for tax practitioners, tax planning.

The Standard, which works in tandem with other AICPA and professional standards, including the Statements on Standards for Tax Services (SSTSs), the AICPA Code, Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and relevant ethical requirements, sets forth enforceable criteria for evaluating the quality of a member's PFP services. If, as part of a PFP engagement, a member performs an activity covered by another applicable standard, such as advising on income tax matters subject to the SSTSs, the specific activity is covered by the other applicable rules, but the entire engagement is subject to the Standard. Importantly, members also should determine whether the PFP services they provide rise to the level of services subject to the Investment Advisers Act of 1940.

It is important to note that non-AICPA members could be subject to the Standard if their state board of accountancy's governing rules adopt it for that state's licensees. State board rules may also govern out-of-state individuals exercising practice privileges in another state.

The Standard first applies when the member begins a process of identifying personal financial goals, designing financial strategies, and making personalized recommendations for implementation to assist a client in achieving his or her personal financial goals, regardless of whether the member presents a formal engagement letter or a written plan or similar document of recommendations to the client. Specifically, the Standard is triggered when any of the following activities occur:

1. A member represents to the public or clients that the member renders PFP services;
2. The member engages in activities that would require registration as an investment adviser under federal or state law; or
3. A product is sold as part of an engagement.

The Standard does not cover an engagement that does not result in personalized recommendations. An example would be a group educational presentation about the tax aspects of PFP issues that does not present personalized recommendations for the presentation participants.

Merely performing mechanical computations (such as a calculation of the tax savings from a contribution to a charitable remainder trust) would also not be a "personalized" service and thus the Standard would not cover the service.

When the CPA suggests a particular investment for a client, that is considered a personalized recommendation. However, if a tax planning client asks a CPA about savings options for college, and the CPA indicates an array of choices are available (e.g., 529 plans, savings accounts, purchasing units in a mutual fund, etc.), a personalized recommendation has not been made, and thus no PFP services have been provided.

If the client then refines the question and asks how much money would need to be invested to provide a specific amount at some future date, and the CPA prepares a series of future value calculations showing various investment return scenarios, but does not indicate a specific fund or account, the CPA still has not provided PFP services. If the client further refines the question and asks which specific stock would be the best investment to meet the particular goal, the CPA now is probably providing PFP services because the CPA is recommending a specific investment.

Since the Standard applies to all AICPA members who provide and represent to the public or clients that they provide PFP services, it is not limited to members who belong to the AICPA PFP Section or who hold the AICPA's Personal Financial Specialist (PFS) credential. Examples of representations that a member could make that would constitute holding himself or herself out as providing PFP services include:

• Advertisements (including Yellow Pages and online services);
• Oral representations to clients describing PFP services; and
• Descriptions in engagement letters of PFP services the member will perform.

Using a credential that indicates a certain expertise in PFP matters on letterhead or business cards is an indication that the member holds himself or herself out as providing PFP services. The Standard also applies when a member lacks special financial planning designations or credentials but nonetheless holds himself or herself out as providing PFP services. Note that a member's state securities laws may restrict the use of the term "financial planner." For instance, Washington state prohibits a person who is not registered as an investment adviser from holding himself or herself out as a "financial planner" or "investment counselor" (Wash. Rev. Code Section 21.2.040(4)).

The SEC regulates investment advisers. The Investment Advisers Act of 1940 defines an investment adviser as a person who gives specific investment advice for compensation. SEC Release IA-1092 states that the exclusion from registration as an investment adviser "is not available, for example, to a lawyer or accountant who holds himself out to the public as providing financial planning, pension consulting, or other financial advisory services." An unregistered investment adviser is not able to give specific investment advice, which is defined as including "a recommendation that a client allocate certain percentages of his assets to life insurance, high yielding bonds, and mutual funds or particular types of mutual funds such as growth stock funds or money market funds."

The PFP Section has produced a white paper providing guidance to members about when the Investment Advisers Act of 1940 applies. The white paper, The CPA's Guide to Investment Advisory Business Models, is available at aicpa.org/PFP/standards.

The Standard applies when a member sells a financial or investment product to a client as part of a PFP service. The sale of a product is deemed to occur when the member receives remuneration—either from the client or a third party, in cash or in kind, directly or indirectly—as a result of the client's investment decision (see "Frequently Asked Questions" related to the Standard, available at aicpa.org/PFP/standards). The Standard requires a member to disclose to a client compensation the member receives when he or she sells a product as part of a PFP engagement.

A member performing a PFP engagement must comply with the AICPA Code. The process must be consistent with requirements for competency, objectivity, integrity, disclosure of conflicts of interest, and privacy and confidentiality. The member is expected to have or obtain the level of skill necessary to identify the client's goals, gather and analyze relevant information, consider and apply appropriate planning methods, and use professional judgment in developing personalized financial recommendations.

The Standard outlines a supporting framework for providing PFP services. The Standard describes a process for planning the engagement; evaluating conflicts of interest; complying with federal, state, and other laws and regulations; and disclosing the compensation the member and the member's firm or affiliates will receive for services rendered or products sold.

In the context of actual client matters, potentially significant overlap can occur between tax and PFP services. The Standard itself in paragraph 3 notes that tax services are generally covered activities when defined PFP services are provided. Paragraph A3 reinforces the PFP services context by indicating that tax services are not covered if they are not provided as part of an engagement treated as a covered PFP engagement (i.e., PFP services provided in which the member represents to the public, is covered by the 1940 Act, or sells a product or financial service). Thus, paragraph A3 specifically excludes:

• Tax advice on income, estate, or gift tax matters;
• Valuation services;
• Business succession planning;
• Educational discussions and workshops; and
• Mechanical computations.

The FAQs provide further clarity regarding tax services:

• The CPA does not represent that he or she provides PFP services but does recommend investing in generic IRA or qualified plans—not under the Standard.
• The CPA provides tax advice information about potential deferred compensation strategies—not under the Standard; if current and future cash requirements for plans, or investment implications, are provided, and there is holding out, the Standard applies.
• The CPA, during a tax return interview, discusses retirement plans and converting from traditional to Roth IRAs but does not prepare computations or provide personalized recommendations—not under the Standard.
• The CPA meets with the client and attorney to discuss an estate plan and subsequently reviews documents to determine if the plan addresses the client's wishes—these are likely to be personalized recommendations, and if the CPA is holding himself or herself out as providing PFP services, the Standard applies. Note that the FAQs leave it to the CPA's professional judgment to determine whether these are in fact personalized recommendations.
• The CPA has a generalized discussion with a client about the advisability of life insurance in the client's estate plan and then recommends a specific insurance professional to provide additional guidance to the client—the CPA is providing PFP services by referring the client to a particular insurance professional to address the client's specific needs, and if the CPA is holding out, the Standard applies.

Although the Standard and FAQs have been in effect for nearly 18 months, the implications for tax practitioners have not been fully considered. In the coming year, the Tax Practice Responsibilities Committee will discuss how to proceed to provide greater clarity for tax practitioners concerning overlaps among the PFP Standard, the SSTSs, and other tax practice regulatory provisions.

The PFP Section aids members in their performance of competent and responsible PFP services through a series of tools, published FAQs, and other resources. Additionally, the AICPA has established the PFS credential program. Upon passing the credentialing exam, a CPA who holds the PFS credential is deemed to demonstrate specific experience, training, and knowledge of PFP subject matter. The PFP Section website lists resources available to both PFP Section members and the public at aicpa.org/PFP.

The resources include a PFP Services Compliance Toolkit, with checklists, engagement letter templates, white papers, FAQs, and the Standard, and archived seminars for learning opportunities. It also has Business Development Toolkits for CPA financial planners and PFS credential holders with marketing materials. Resources include an array of technology choices to run a PFP practice, including a program to assist practitioners in organizing the planning process.

Tax accountants frequently assist clients with financial decisions. The tax adviser needs to be aware of the legal limitations on the rendering of investment advice. If the tax professional begins a process that results in the provision of PFP services (i.e., personalized financial recommendations) and meets the threshold applicability rules, then the Standard must be followed, even if AICPA Code rules and other standards also apply. The key issue for tax practitioners is whether they are providing PFP services, as defined in the Standard. If they are not, the Standard does not apply. If the Standard does apply, it can be a valuable road map to providing PFP services.