Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP
Over the past 30 years CPAs have expanded the planning advice they provide to individuals and families regarding personal finances. As a natural extension of the CPA’s position as the trusted adviser whom individuals call upon for tax advice, personal financial planning (PFP) services have grown to encompass a broad array of services and expertise. To adapt to this rapidly evolving area of practice, the AICPA released this spring an exposure draft of the Proposed Statement on Standards in Personal Financial Planning Practice.
Between 1992 and 1996, the AICPA Personal Financial Planning Executive Committee (PFP EC) issued five Statements on Responsibilities in Personal Financial Planning Practice (SORs) to provide guidance to CPA financial planners and ensure that the highest standards of integrity, professionalism, and competence were being applied in the delivery of PFP services. These practice aids were originally published following a public exposure, with a revision, that included merging the five statements into one, the SOR, which was published in December 2010.
As a practice aid reflecting best practices, the SOR was intended to provide CPAs with a conceptual framework in their PFP work, versus a prescriptive listing of “must-do” steps or activities. This framework was designed to capture best practice in such PFP areas as:
- Cash flow planning and budgeting;
- Income tax planning;
- Risk management and insurance planning;
- Retirement planning;
- Investment planning; and
- Wealth transfer planning.
While it was issued as a practice aid, the SOR over time became the de facto standard for CPAs practicing in the PFP area. In addition, seven state boards of accountancy (Colorado, Florida, Indiana, Kentucky, Michigan, Washington, and Wyoming) adopted the provisions as the required standard, thereby raising the SOR to an authoritative level in those states.
With this background, in October 2012 the AICPA Council designated the PFP EC, a senior committee authorized to make statements without clearance with the Council or the AICPA board of directors in matters related to PFP, as the standards-setting body in PFP for Institute members. The Council’s action was based on the goals of establishing definitive standards (versus practice aids) for CPAs providing PFP services, to protect both them and the public and to recognize the growing importance of PFP services. In addition, the Council saw the need for clear, enforceable standards, given the environment of potential regulation of advisers in the wake of financial scandals. Having clear standards for CPAs was also seen as mitigating the risk that courts would hold CPAs to another organization’s standards, even if the CPA was not a member of that outside group or did not hold its credential.
This spring, following a two-year drafting process involving practitioners from across the AICPA, including representatives from both the Tax Division and the Private Companies Practice Section, the PFP EC issued an exposure draft for public comment on the Proposed Statement on Standards in Personal Financial Planning Practice. The proposed statement begins with its scope and nature, followed by application material to further describe and interpret it, and is accompanied by a list of frequently asked questions to provide greater clarity.
When Does the Statement Apply?
The proposed statement addresses the responsibilities of AICPA members when providing PFP services, which are defined as including:
- Cash flow planning;
- Risk management/insurance planning;
- Retirement planning;
- Investment planning;
- Estate/gift/wealth transfer planning;
- Elder planning;
- Charitable planning;
- Education planning; and
- Tax planning.
The statement would apply when the member provides one or more PFP services and either:
- Represents to the public or clients that he or she provides PFP services;
- Would be required to register as an investment adviser; or
- Sells a product as a result of the engagement.
It is not intended to apply to services, whether or not provided as part of a PFP engagement, that are already subject to other AICPA professional standards, such as:
- Tax services subject to the Statements on Standards for Tax Services;
- Compilation of personal financial statements subject to Statement on Standards for Accounting and Review Services No. 6, Reporting on Personal Financial Statements Included in Written Financial Plans; or
- Valuation services subject to the Statement on Standards for Valuation Services No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset.
When the statement does apply, it is intended to apply only to the PFP services provided and not to services, such as tax services, covered by other professional standards.
What Are the Member’s Responsibilities?
The proposed statement outlines the responsibility of the member in PFP engagements. This includes:
- Complying with all relevant ethical requirements;
- Having a knowledge of PFP principles and theory and a level of skill to competently identify client goals and objectives, gather and analyze data, 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, and disclosing known conflicts of interest;
- Complying with federal, state, and other laws and regulations; and
- Disclosing in writing all compensation to be received.
In planning the PFP engagement, the member should document and communicate to the client the scope and nature of the services to be provided, including:
- The engagement objectives;
- The scope of the services to be provided;
- The role and responsibilities of the member, the client, and any other service providers;
- The timing of the engagement;
- Scope limitations or other constraints;
- The responsibility, if any, for helping the client implement planning decisions;
- The responsibility, if any, for monitoring the client’s progress toward achieving goals;
- The responsibility, if any, for updating the plan and proposing new action.
The proposed statement calls for the use of professional judgment in obtaining and evaluating personal financial information necessary to develop recommendations, including evaluating the reasonableness, appropriateness, and consistency of material assumptions.
PFP recommendations should be based on relevant information, the client’s goals, and the client’s overall financial circumstances. Even when an engagement addresses a limited number of personal goals, the member should consider the client’s overall known financial circumstances. Analyses and procedures performed in developing a basis for recommendations should be documented.
The member should communicate to the client:
- A summary of the client’s goals;
- Significant assumptions;
- A description of any limitations on the work performed;
- Qualifications to the recommendations, if the effects of planning areas on the client’s overall financial situation were not considered; and
- Requirements of IRS Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), if recommendations contain tax advice.
The proposed statement also addresses the responsibilities of the member when undertaking an implementation, monitoring, or updating engagement. In addition, it addresses working with other service providers and using the advice of other service providers.
Practitioners will note that the proposed statement’s provisions are based on the CPA’s exercising professional judgment throughout a PFP services engagement. 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.
With the exposure period on the proposed standard running through Sept. 9, feedback and comments are invited to be submitted to the PFP EC. It is hoped that a final version of the standard, taking into account comments received during the exposure period, will be issued and available for use by members prior to the end of 2013. The exposure draft with supplemental materials is available online. Questions can be posed in advance of submitting comments by contacting PFP staff and the PFP EC at firstname.lastname@example.org.
FAQs on the Proposed Statement on Standards in Personal Financial Planning
Q: What services are encompassed within personal financial planning?
A: See the list here.
Q: When does the proposed statement apply to me?
A: The statement applies when an AICPA member provides personal financial planning services and represents to the public or clients that he or she provides personal financial planning services; engages in activities that would require registration as an investment adviser under federal or state law; or sells a product as a result of the engagement. See the list here.
Q: Are there exceptions to the statement’s applicability?
A: The statement does not apply to professional services, whether or not provided as part of a PFP engagement, subject to other professional standards. See the list here.
Q: Does the statement apply to a CPA who works for a non-CPA firm that engages in personal financial planning or family office work?
A: The statement applies to a member, not a firm or organization. Therefore, the application of the statement must be considered at an individual member level. It does not matter in what form or organization the member practices.
Q: How do I determine if I am engaging in activities that would require me to register as an investment adviser under federal or state law?
A: See The CPA’s Guide to Investment Advisory Business Models to determine when you are deemed to be providing investment advice.
Q: What constitutes representing to the public (or to a client) that I provide personal financial planning services?
A: This takes place when you take an action that a client or the public could reasonably rely on to conclude that you provide personal financial planning services. Examples include:
- Advertising that you provide personal financial planning services;
- Referring on your business card to personal financial planning services;
- Placing brochures or other client educational materials in your office describing personal financial planning services;
- Including a description of personal financial planning services in an engagement letter;
- Advertising in telephone Yellow Pages under personal financial planning categories;
- Orally representing to a client or prospective client that you personally provide financial planning services;
- Soliciting financial planning engagements in any marketing materials used by you; or
- Indicating you provide personal financial planning services in client proposals executed by you.
Theodore J. Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Dirk Edwards practices as the firm Edwards Consulting LLC in Lake Oswego, Ore. Mr. Edwards is a past chairman of the AICPA Personal Financial Planning Executive Committee and current chairman of the Responsibilities in PFP Practice Task Force. Mr. Sarenski is chairman of the AICPA Personal Financial Planning Executive Committee’s Elder Planning Task Force and is a member of the AICPA Advanced Personal Financial Planning Conference Committee and Financial Literacy Commission. For more information about this column, contact Mr. Edwards at email@example.com.