Sell Financial
Products Wisely
Manage your risk
in this new niche.
by Anthony Sardis
and Edward Mendlowitz
| EXECUTIVE
SUMMARY |
 Many CPA
firms now provide insurance and
investment services to their clients in
addition to core services. This can be an
attractive avenue to growth that
increases client retention and firm
revenues, but it carries certain
reputational, legal and economic risks. To limit liability
the firm should offer planning
and/or investment products through a
separate, genuinely independent legal
entity. An LLC, for example, can keep
liability for product activities separate
from the firm’s core business and
partners’ personal assets, and it
offers some tax benefits.
Firms must adhere to
the rules and regulations
imposed by additional governing bodies,
including state laws, securities laws,
GAO regulations and PCAOB regulations.
Regulatory oversight and licensing are
complicated, involving specialized
education, testing and recurring
compliance obligations.
Ideally, planning
services and products should
complement the firm’s core business.
For example, life, disability and
long-term-care insurance and annuities
are planning products for preserving
wealth or income (core). Health, auto and
homeowners’ insurance are designed
to protect clients against unanticipated
losses (noncore). Investment products to
accumulate wealth are noncore.
Brokers generally
receive sales commissions for
insurance products. Those commissions may
be less than half of what the insurance
or investment company pays to move its
products. The CPA firm’s affiliate
entity should negotiate brokerage fees
based on the complete
compensation the service provider gets
from insurance and investment companies.
Service and transaction contracts for
insurance and investment products should
include the CPA firm affiliate to protect
future business.
Anthony
Sardis, JD, LLM, is
president of Insurance and Investment
Advisory Group, New Brunswick, N.J., a
consulting firm specializing in financial
product distribution. His e-mail address
is sardis@iiagllc.com. Edward
Mendlowitz, CPA/ABV/PFS,
a partner in WithumSmith+Brown, is the
author of several books and articles on
tax, estate planning and CPA practice and
a JofA Lawler Award winner. His e-mail is
emendlowitz@withum.com.
|
 roviding
insurance products and other investment advisory
services to clients is an attractive avenue to
growth for many CPA firms. The key to minimizing
risk and maximizing client satisfaction and the
firm’s financial returns is thoughtful,
informed preparation. Don’t let a rush to
expand into new practice areas lead you to
overlook important implementation decisions. What
you learn on the following pages can help you
avoid reputational, legal and economic exposure.
| Regulatory
Requirements An estimated 15,000
AICPA members are NASD-licensed to sell
investment products and nearly 11,000 are
licensed to sell insurance products.
Source:
AICPA, www.aicpa.org.
|
PRINCIPAL PRINCIPLES
CPA firms that specialize in personal financial
planning say two important reasons to sell
investment products, including insurance, are
being able to tailor planning implementation to
individual clients’ needs and, of course,
revenue growth. Clients like being able to
conveniently obtain advisory services, products
and administration in one place, and they stay
with firms that provide easy access to them. The
firm benefits because financial planning products
can potentially provide large fees.
But one risk to
CPA firms is that the rules governing how they
may accept compensation for insurance and
investment advisory products are not yet fully
tested. Practitioners are bound by professional
ethics in their client dealings and must exercise
utmost propriety and caution in interpreting all
relevant ethics rules. Failure to comply can
result in censure or decertification. To avoid
potential conflict of interest some firms take
the step of creating affiliate business entities
through which to offer clients financial planning
products (see “Growing PFP Services”).
| |
 Growing PFP Services PA firm Janover
Rubinroit, LLC (www.jrllc.com), with offices in
Garden City, N.Y., and New York
City, in business since 1938, has
grown into an 80-person family of
affiliates via careful mergers
that have brought together new
markets and services. In the PFP
arena, the group now encompasses
JRF Asset Advisors, LLC, which
provides full-service planning
and advisory services; JRS
Financial Services, LLC, which
handles compliance and
administrative functions; and JR
Benefit Services, which provides
life, health, disability and
long-term care insurance.
Janover
managing partner Mark K. Goodman,
CPA, and JRF partner Jay H.
Freeberg, CPA, tailor investment
planning to maximize returns and
minimize the effects of income
taxes and inflation as well as
the risk and liabilities inherent
in a securities portfolio. Their
insurance planning advice is
designed to help clients
understand the correct amount and
type to keep their net worth in
place.
Goodman and
Freeberg’s best practices
for managing risk while
implementing PFP growth have been
to
 Choose the
best regulatory lawyers to advise
on ownership structure. “The
form of ownership is an issue for
any type of business. In
professional services the
potential for malpractice is
always an issue,” says
Goodman.
Have at
least two partners familiar with
every client’s account.
Know the
products and for whom they are
best suited. “I’m aware
of clients’ insurance needs
and tax brackets,” says
Goodman. “Knowing all the
puzzle pieces helps us give
clients better service.”
Make sure
partners have licenses
appropriate to the functions they
perform. Freeberg, an MBA and CFP
who sells investment products,
holds Series 7, 24, 27, 63, 65
securities licenses, for example.
Three staff people have insurance
licenses and accompany Freeberg
on sales calls.
Take your
time developing a financial
services niche. Besides education
and licenses, it’s important
to get experience, Freeberg says:
“Pay particular attention to
a full up-and-down market
cycle—three to five
years—to learn how to
perform well in a poor
market.”
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|
Payment
involves two general requirements. First, a firm
may not accept commissions from audit or attest
clients. Second, if a firm does accept
commissions from a nonrestricted client, the
client must acknowledge in writing his or her
understanding of the fee policy before
any services are rendered (see exhibit and “Risk Management Checklist”).
| |
 Sample Disclosure
Statement |
| Receipt
of Commissions
Acknowledgement Our
firm has referred you to
[service provider] for
product consulting
(and/or sales). Our firm
shares commissions and
fees through its
affiliation with the
service provider. Neither
the firm nor its
employees are responsible
for or participate in the
service provider’s
recommendations.
Please sign
below to indicate your
understanding of the fee
policy. Feel free to ask
[service provider] for
additional details or
solutions.
Thank you
for your business.
Client
signature
__________________________________________________________________
Date
__________________________________________________________________
|
|
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Firms
also must adhere to the rules and regulations
imposed by other governing bodies, including
state laws, securities laws, GAO regulations and
PCAOB regulations. Regulatory oversight and
licensing are complicated, involving specialized
education, testing and recurring compliance
obligations. While those requirements reinforce
many that are covered by CPA professional ethics,
they must be satisfied independently.
| |
Risk Management Checklist  Did
you obtain the client’s
written acceptance of commission
payments before making a
recommendation? This
consent is required whenever the
firm receives commissions, even
it uses an independent broker to
write an engagement transaction.
Did
you follow a due-diligence
process for product offerings? A
firm should offer only products
from reputable sources. While a
firm may be able to use an
independent expert as a quality
control process for product, the
firm must monitor its product
portfolio.
Did
you perform due-diligence for
sales suitability? Sales
activities are subject to ethics
requirements whenever a firm
receives commissions, even if the
firm uses an independent broker.
Carefully monitor the suitability
of the products sold and the
associated sales activities.
Do
you have at least two licensed
members with tenure? This
will ensure continuity in the
event one of them becomes
unavailable for any reason,
including death, disability or
retirement. A gap in licensing
could void a product sale or
affect commissions.
Did
you obtain your errors and
omissions insurance
provider’s approval? Confirm
that activities relating to
financial products are covered
and describe the extent of
exclusions, if any.
Do
you have distributions and sales
contracts in place? Define
the rights and responsibilities
of the firm and its providers in
written agreements. (See “Contract
Essentials.”)
Do
you regularly assess activities? A
firm should periodically review
its product platform and sales
activities to ensure they remain
consistent with the firm’s
standards and ethical
requirements.
|
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CLOSE BUT SEPARATE
Financial planning products can include life
insurance, derivative transactions, variable
annuities and private equity investments, among
others. The scope of products a firm chooses to
offer can be all-inclusive or limited to a select
type of product. In other words, a firm may
choose to offer life insurance, but not stocks.
The final offering is known as a product
platform.
To limit
liability, a CPA firm can offer a product
platform through a separate legal business entity
that employs appropriately licensed sales
representatives. Closely integrating the new
entity with the CPA firm gives the two a unified
appearance that’s reassuring to clients.
The proximity of
the two businesses also permits cost-effective
sharing of resources and makes new expenses in
salaries, marketing and overhead easier to
manage. It is, however, essential to strictly
observe all corporate formalities to ensure the
new entity’s genuine independence.
The form of
business entity is a very important decision. An
LLC can segregate liability for product
activities from the firm’s core business and
partners’ personal assets, and it offers
some tax benefits, but options vary by state.
Choosing the best form for an affiliate financial
products business ultimately depends upon a range
of factors and the jurisdictions in which
operations take place. The decision can be
complex and legal counsel is advised.
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Contract Essentials Nonsolicitation.
Prohibit agents and
service providers from soliciting
firm clients, employees and
related parties.
Vesting.
All compensation
should be 100% vested (paid to
the firm).
Sales
practices. The
agent or service provider should
comply with all regulatory
requirements and adhere to
additional firm standards.
Terminations.
Require that the
agent or service provider
facilitate the transfer of client
assets to a new agent upon
termination.
E&O.
Require agents or
service providers to carry and
provide proof of an errors and
omissions insurance policy.
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LICENSE TO SELL
Licensing is a critical part of offering
financial products. A firm and its sales agents
in the affiliate entity must conduct client-based
activities in a licensed format. The person
soliciting sales must always be licensed as must
anyone who receives commissions. If the new
entity is paid commissions by a third party, the
entity itself must be licensed. In most cases,
state insurance laws allow a licensed corporation
to receive commissions and subsequently
distribute profits upstream to unlicensed
shareholders. SEC regulations are stricter;
anyone receiving securities-based compensation
must be registered.
Licensing
requirements vary by product or service;
generally speaking, the four categories are
Life
and health. Licensing is based on a state
insurance department exam.
Property
and casualty. Licensing is based on a state
insurance department exam.
Securities.
Licensing is based on the SEC exam;
candidate must be sponsored by a broker-dealer.
Registered
investment adviser. Licensing is based on
examination by either state or federal securities
regulators.
BUILD A COMPLEMENTARY PORTFOLIO
Most CPA firms don’t consider financial
services their core business strategy, yet many
want to provide every product their clients
request. It’s a good idea to resist that
impulse and limit investment products and
services to only those that complement core
offerings. Overdiversifying can dilute the value
of core services, and products that aren’t a
good fit may create significant risk.
These are common
product categories.
Planning products. They
are designed to preserve wealth or income and
include life, disability and long-term-care
insurance and annuities. Recommended products
complement core offerings such as estate,
business or financial planning.
Service
products. These products are
designed to protect clients against unanticipated
losses. They include health, auto and
homeowners’ insurance, for example. Such
product recommendations do not result from a
firm’s core offering.
Investment
products. These are designed to
accumulate wealth. This category is
transactional—based on market
trades—and as such the most removed from a
firm’s core services.
Before making a
decision to offer a product, carefully consider
the type and amount of service you will have to
provide with it. Failure to service a product can
lead to client dissatisfaction—a direct
conflict with the firm’s goals.
SELLING WELL
To do the actual selling, a firm can insource,
outsource or use a combination of the two. If
selling is insourced, the CPA firm’s
employees (trained and licensed as noted)
recommend products the affiliate entity provides.
This option can provide a high level of control,
equity and compensation, but it does have higher
fixed expenses, opportunity costs and risk
exposure than outsourcing.
In outsourcing,
the firm hires independent contractors such as
stock brokers and insurance agents to sell
products, and they pay the firm a portion of the
revenue. This option reduces the firm’s
exposure to liability, has no or low fixed
expense and provides diverse product expertise.
In a merger, those professionals may even become
the affiliate entity.
Some firms develop
a hybrid method. Certain products lines are
insourced and others outsourced. The lines can be
divided based on portfolio. For example, a firm
could insource planning products that complement
core offerings and outsource service and
investment products as a way to limit liability
exposure and ongoing service obligations.
To sell well the
firm needs
Expertise.
The success of a product platform
depends in large part on a CPA firm’s
apparent and actual depth of knowledge
(expertise). Besides obtaining the education,
experience and licenses discussed earlier, CPAs
can get a Personal Financial Specialist (PFS)
credential. It is unique to the profession, and
in most states it meets Registered Investment
Advisor (RIA) requirements. Information about the
PFS designation is available from the AICPA (see
the resources box).
Objectivity.
Professional ethics require a CPA
to objectively serve the client’s best
interests at all times. Other authorities such as
NASD have standards to similarly ensure that
investment products are suitable for the clients
who buy them. Firms should develop operating
procedures to manage their own and their
affiliate entities’ sales activities to
ensure that all transactions serve the
client’s best interests. For example,
Limit
compensation. When compensation for a
product is too high, salespeople will feel
pressure to try for sales that aren’t wholly
in the client’s best interest. Limiting the
selling party’s salary or commission to the
lowest rate for the product class helps lessen
the risk.
Separate
the planning from the product. Some
sophisticated planning concepts have been
designed for generating sales more than for
fulfilling clients’ true needs. Your
priority is, of course, to ensure that every
product your firm recommends legitimately fits
the client’s financial plan.
Examine
several product options for each engagement. Document
a recommendation to verify that it has been based
on examining several suitable products and
choosing the option with the best features for
the client.
Review
and monitor recommendations. Periodically
check to determine the types of products sold,
the planning concepts underlying the sales and
the percentage of sales by the product provider.
Concentrated positions can indicate bias,
creating an objectivity exposure.
RESEARCH THE REVENUE STRUCTURE
Another conspicuously complex aspect of providing
financial products and services is compensation.
When CPA firms sell insurance and investment
products through a separate legal entity
(broker), that entity contracts with agents or
general agents (service providers) of insurance
and investment companies to access products. As
compensation for selling insurance products,
brokers generally receive sales commissions. In
fact, those commissions are only one chunk of
what the insurance or investment company pays to
move its products. In some cases commissions may
be less than half the available compensation.
To get the best
payment terms for its affiliate entity the firm
should negotiate fees from an informed position.
Make sure you learn all the types of compensation
the service provider gets from insurance and
investment companies (see “Compensation
Glossary”).
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Compensation Glossary As brokers, CPA firms
receive a direct share of the
sales commissions the insurance
and investment companies pay to
agents and third-party service
providers. Firms also can
negotiate to obtain a share of
the standardized fees the
insurance and investment
companies pay general agents or
service providers.
Bonuses. Many
insurance and investment
companies pay agents bonuses for
reaching certain production
levels. Those bonuses will not be
shared with CPA firms unless it
is specified in contract
negotiations.
Distribution
allowances. Insurance
and investment companies also pay
distribution allowances to the
processing entity—often the
general agent with whom the CPA
firm has a contract. The
allowances can represent an
additional 50% of the annual
premium; if negotiated some of
this may be shared with
high-volume brokers.
Renewals.
Many insurance and
investment products pay income to
agents on a recurring basis,
often annually. Unless specified,
broker firms may not receive any
part of the renewal fees even
though renewals are a result of
the continued client-CPA/broker
relationship.
Sales
compensation. Life
insurers pay two forms of sales
compensation: a commission that
usually ranges from 50% to 70% of
first-year premiums, and an
expense allowance that generally
is from 30% to 60% of
commissions. Investment
transactions may be based on a
gross number, while the
broker’s percentage of
premiums depends on production
levels.
Soft
dollars. Insurance
and investment companies also pay
agents for expenses unconnected
to a specific transaction or
product. These payments offset
marketing costs, software
licenses or other costs of doing
business.
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Define
and document compensation terms in both service
and transaction contracts (see “Contract
Essentials”).
Whenever possible, make sure the name of the firm
or affiliate financial-products entity appears on
applications and contracts. Arrange to have the
insurance or investment company pay the
firm’s share directly to the firm rather
than to a general agent or other intermediary.
Doing this documents the firm’s right to
continuing compensation (in other words
“vests” it), reduces payment delays and
serves to secure the client’s ongoing
business in the event the relationship with the
broker of record ever terminates.
WATCH THOSE MOVING PARTS
Many firms have made the strategic decision to
sell insurance and investment products to their
clients. Offering financial products and services
provides a range of competitive and economic
opportunities for CPA firms, but with those
opportunities come risks. Entering the market too
quickly can lead to a failure to carefully assess
and limit those risks.
To keep from
undermining long-term objectives, your firm or
its affiliate should follow the advice it gives
clients—account for and audit each element
of insurance and investment offerings. It’s
a process with many “moving parts.” You
need to pay attention to all of them. 
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