This section summarizes structure and other considerations in implementing an investment services business.
Separate Entity for Providing Investment Services
Regardless of your business model, your CPA firm should create a separate entity for providing investment advisory, financial planning or securities brokerage services to clients to avoid the CPA firm itself from being required to register as an investment adviser or broker-dealer. A separate entity will enable the CPA firm to keep the books and records relating to its investment services separate from those relating to its accounting services. A separate entity can also provide liability protection.
The SEC has permitted accounting firms to register an affiliated entity to supervise the rendering of investment advice by the accounting firm’s personal financing planning and employee benefit plan consulting practices without the accounting firm itself registering under the Advisers Act. These “no action” positions were based on certain representations made by the accounting firms, including:
- The accounting firm is a general partner of the advisory affiliate and thus will be legally responsible for the investment advice provided by the accounting firm’s personnel.
- The accounting firm will not recommend investments in specific securities or industry sectors aside from tax and estate planning services.
- The advisory and personal financial planning services will be substantially similar to traditional accounting services.
- Neither the affiliated entity nor the accounting firm will have custody or possession of client funds or securities.
- Personnel who provide investment advice in connection with personal financial planning or consulting services will be deemed “advisory affiliates” and “associated persons” for purposes of Form ADV and the Advisers Act.
- Amounts billed for financial planning services will be separately stated from traditional accounting services.
- The accounting firm will keep all books and records required under the Advisers Act.
An “investment platform” is a broker-dealer firm that provides the brokerage, custody and support services to enable a registered investment adviser or independent registered representative to trade securities on behalf of clients. Examples of broker-dealer firms providing platform services include Charles Schwab, LPL Financial, Fidelity, TDAmeritrade, TradePMR and WallStreet*E. In exploring and evaluating investment platform services, consider:
- Experience and reputation—name, size and history of the brokerage firm, other CPA’s experience, platform business model options
- Products offered—individual securities, mutual funds and ETFs, asset allocation programs, fixed income, fixed and variable annuities, money managers (sub-advisers), banking services, retirement plan administration
- Technology—account management, model portfolios and rebalancing, performance reporting, quotes and research, client statements, automated fee deductions
- Trade quality and execution—clearing firm relationship
- Training and assistance
- Platform fees
Sale of Insurance Products
To sell insurance products, you must generally be licensed as an insurance agent in each state in which you sell insurance. The types of insurance products you might sell include life insurance (term, universal, variable and whole) and annuities (individual retirement, immediate, deferred and variable). Of the broad range of products you may sell as an insurance agent, annuities in particular may present securities issues.
Fixed annuities are generally treated as purely insurance products. Variable annuities are deemed to contain both insurance and securities features. Consequently, while state insurance licensing is sufficient if you sell fixed annuities, you will be subject to SEC (for investment advisers and investment adviser representatives) or FINRA (for broker-dealers and broker-dealer representatives) regulation, in addition to state insurance regulation, if you sell variable annuities.
Indexed annuities fall somewhere between fixed and variable annuities. The SEC recently promulgated a rule which brings certain indexed annuities under securities regulations. If the amounts payable by the insurer under an annuity contract are more likely than not to exceed the amounts guaranteed under the contract, then the federal securities laws will apply. In other words, if more often than not the purchaser of an annuity receives a guaranteed return like that of a fixed annuity, then the instrument is treated as insurance. If, more often than not, the purchaser receives a rate of return based on the value of a security, then the instrument is treated like a security.
Click here for information on state insurance licensing requirements.