Disclosing Insurance Commissions

BY NEIL ALEXANDER

ost clients are sharper than their advisers give them credit for. That makes them the most likely people to identify—and question—a financial arrangement that appears to influence a CPA’s judgment. Should a client somehow fail to discover an undisclosed commission arrangement, his or her attorney or even a competing insurance agent will almost certainly blow the whistle. Once revealed, a hidden commission arrangement could destroy the CPA’s credibility with a client. And that’s just the beginning. To prevent this from happening, here’s what CPAs need to know about disclosing commissions.

“WHY DISCLOSE?
The most obvious reason is that the AICPA Code of Professional Conduct, Rule 503—“Commissions and Referral Fees”—requires disclosure. Here’s the part of rule 503 pertaining to this discussion: “A member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.” It’s also important to note that rule 503 prohibits CPAs from accepting commissions from certain attest clients, regardless of disclosure. CPAs can find the entire text of rule 503 at www.aicpa.org/about/code/et503.htm.

CPAs work hard becoming their clients’ trusted advisers. Receipt of commissions may appear to sway that judgment. People judge others by their own experiences and what they would do in similar situations. Even if a particular fee arrangement does not actually influence a CPA’s judgment, it may appear to—just as bad from the client’s viewpoint. In such situations the CPA becomes just another insurance promoter and his or her role as trusted adviser and valued source of independent advice evaporates. Clients begin to question whose best interests the CPA has at heart—the client’s or his or her own?

CPAs should also be aware that some state boards of accountancy have their own rules on commissions and referral fees. Practitioners are advised to check with their own state board to ensure these rules are not more restrictive than the AICPA’s.

Telling clients about a commission arrangement before they, their attorney or—even worse—a competing insurance agent discovers it, keeps the relationship open and aboveboard. Disclosure is not a negative thing. The fact is, money is not usually the issue with most clients—unless the CPA fails to make the disclosure early and in a forthright manner.

GETTING CAUGHT
CPAs can get caught failing to disclose commissions in a variety of ways. Here are just a few of the most common:

The client asks why the CPA brought a particular insurance agent into the transaction. If the client has to ask, the damage is already done. Any answer other than “we have a commission-sharing arrangement” conflicts with rule 503.

The client or his or her attorney queries the state insurance department to find out if the CPA holds an insurance license. If the CPA does, he or she is most likely receiving a commission.

A competing insurance agent asks the client about the CPA’s commission arrangement.

Wrongly believing him or herself to be the client’s exclusive gatekeeper, the CPA threatens the insurance agent with blocking this and all future transactions with the firm’s clients unless the CPA gets a cut. Frustrated agents somehow get word to the clients of this abuse.

REVIEWING INSURANCE TRANSACTIONS
When accountants review insurance transactions originated by others, the question of who pays their fees may come up. In California, for example, anyone who receives a fee from a client for insurance-policy-review services must have a life policy analyst license. If the fee comes from the insurance company, then the CPA is an insurance agent (and must be licensed as such) with proper disclosures to the client as prescribed by rule 503. CPAs cannot bill for reviewing insurance transactions on a client’s behalf without appropriate licenses. And free advice is often worth what the client pays for it.

WHEN AND HOW TO DISCLOSE
Rule 503 does not discuss when CPAs must disclose commission arrangements. CPAs should disclose before discussing anything related to insurance with the client. Timing is important and speaks to the most crucial reason for disclosure: To preserve the CPA’s professional reputation for independent judgment with individual clients, the firm and the profession. If a CPA makes the disclosure any later than when first discussing insurance with the client, he or she may end up in a defensive posture.

In making the disclosure, CPAs should issue a letter to the client saying something to the effect of: “In connection with the AICPA Code of Professional Conduct, Rule 503, I hereby notify you that should an insurance transaction be consummated, I will receive part of the commission.” Reiterate this point verbally to the client and the client’s attorney, if he or she is present.

Apologies for having a commission arrangement are unnecessary. CPAs should reinforce the fact that they are still the client’s advocate. The CPA’s role remains to oversee implementation of the client’s financial strategy. To do that effectively, the CPA has entered the insurance business and carries the appropriate licenses. The longer disclosure is delayed, the more unsavory the commission arrangement appears.

ANSWERS TO CLIENT QUESTIONS
Because insurance has not historically been a major part of the accounting profession, some clients view commissions as negotiable in the way some fees may be. Some demand the CPA’s share of the commission. In such situations, the response is up to the accountant. However, when CPAs perform a service that’s valuable and properly disclosed under AICPA guidelines, they are entitled to be compensated for their efforts. That should be the end of the discussion.

Neil Alexander, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is nalex@alexcap.com.