Client-Centered Professional Financial Planning
Overcoming Challenges and Creating Opportunities for the Profession

By Walter M. Primoff, Robert L. Gray, and Joseph W. Tucciarone

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Yet it remains common to hear senior CPA firm owners proclaim, “As long as I’m here, we’ll never do financial planning!” While there are valid reasons for not providing PFP, too often this proclamation is not based on sound objective analysis. For some firm leaders, the very term “financial planning” recalls one or more of the following haunting images: a client seeing the CPA as a salesperson, not a professional; a CPA abandoning objectivity and selling a client inappropriate high-commission investments or insurance; and an impaired or lost client relationship, along with related malpractice liability, all due to client investment losses. Other PFP practice concerns involve questions about gaps in expertise; the time and financial resources required; finding competent potential affiliation partners; and questions about the skills and infrastructure required to run a successful financial planning business.

The above concerns have common qualities:

• They are often rooted in misperceptions. These can often be overcome by learning about the proven professional processes, systems, and procedures used by a growing number of CPAs who are competently providing PFP services.
• They are primarily “CPA-firm centered,” even though there are two other important perspectives. The first is “client-centered,” addressing PFP needs from the client’s point of view. For example, are there PFP services that clients would prefer their CPAs to provide, but the issue was never really properly discussed? The second concerns external competitive forces. How will a decision on offering PFP affect the strength of a firm’s client relationships, profitability, value, and viability?

Experience has shown that the risks posed by the above images and concerns can be managed. (For example, PFP malpractice risk is on par with that of attest, tax, and other common services, even after the recent market downturn and corporate scandals.)

Offering PFP is not for every CPA firm. But all firm leaders, especially those of local firms, owe it to themselves, their clients, and their employees to objectively examine this issue with an open mind. Unfortunately, the above issues have often been used as reasons to avoid a serious analysis of PFP pros and cons. But while these perceptions have remained static, PFP as practiced by CPAs has evolved into a set of professional services requiring the breadth of CPA expertise. A changing competitive environment is also at work. From the authors’ perspective, making an informed choice on whether to provide PFP is vital. The quality of this choice may impact client relationships, firm growth, competitiveness, and the ability of CPA practice owners to exit their firms on desired financial terms.

Most discussions address the generic practice of “personal financial planning.” The authors prefer the trademarked term “Professional Financial Planning” where CPAs are concerned. This term emphasizes the professional process used by CPAs and some others when planning for clients. In addition, CPAs are uniquely equipped to handle the PFP issues of successful small business owners, because the CPAs’ planning involves a myriad of intertwined personal and business considerations.

The Roots of Misperception

From the early 1970s into the 1990s, the CPA profession was shaken by external forces that created both the financial planning industry and massive changes in the CPA profession’s ethical environment.

Although the term “financial planning” was not in vogue until the 1980s, CPAs had practiced in this area since the profession’s inception. As early as 1906, David Kenley wrote, in the Journal of Accountancy, that one important CPA role was to be a client’s “financial physician.” Many CPAs followed Kenley’s route. They became their clients’ primary financial counselors, coordinating matters such as planning for taxes, retirement, estates and trusts, and business succession. All these areas became key PFP service components. CPAs rarely recommended specific investments. However, it was not unusual for them to make ballpark projections on average rates of return on investment, necessary for a client to maintain a defined lifestyle. If the related investment risk seemed too high, the CPA would have the appropriate discussion with the client.

Once planning was complete, often with the help of attorneys, actuaries, and other professionals, CPAs referred clients to life insurance agents and stockbrokers to help implement the plan. These salespersons usually had little technical training or education in the above planning areas. Financial and insurance products were generally simple and well understood. Most CPAs’ clients’ largest assets were generally their businesses, if they had one, then their home and their car. While some individuals had investment portfolios, most investments were held in professionally managed defined-benefit or defined-contribution retirement plans.

But as the 1980s approached, primary building blocks for creating a financial planning industry were coming into place. These included the first personal computers, as well as tax law changes favoring 401(k) and other personally controlled retirement accounts over centrally managed plans. The financial products industry was creating a flood of new, highly flexible and equally complex investment and life insurance products, which few product agents had the technical background to understand. In the hands of a professional, these were tools that could help clients meet their financial goals, but in the hands of many of these salespeople, they could be snake oil.

As the 1980s progressed, many individuals found a new need to personally manage their retirement funds. It was not unusual for successful individuals to have rollover IRAs with substantial balances, and these investors needed help. CPAs were perfectly positioned to fill the void. They were entrenched as the public’s “most trusted financial advisors.” Many were following the “financial physician” route laid out by David Kenley, already coordinating many of the advanced planning services that would fall under the rubric of PFP. It would have seemed logical for the CPA profession to lead the way during the foundational stages of the financial planning industry.

At the time, however, few CPAs understood the difference between ethically permitted fee-based investment advice, and the then–still-prohibited commission-based selling of securities. (Many practitioners remain uncertain.) Nor did they realize that they already had the technical acumen to readily learn investment theory and the few other key PFP elements that lay outside the scope of existing CPA services. Had the profession’s leaders understood the need and opportunity, the necessary continuing education and support framework could have been created and promoted. Instead, the profession was undergoing disruptive regulatory change and was mired in a debate over the pros and cons of recognizing formal practice specialization. (A few local-firm CPA pioneers did step up to the plate. Today some are successfully helping clients manage investment portfolios exceeding $1 billion.)

While the profession largely sidelined itself, CPA clients’ need for PFP services kept growing. The profession’s absence from the initial financial planning market created a vacuum that was quickly filled by two groups: the relatively few holders of the still unfamiliar Certified Financial Planner credential, and the aforementioned salespeople, who now sold increasingly complex insurance and investment products for which few had the necessary technical background. With the “financial planner” term unregulated, the salespeople and many of the major corporations behind them saw the opportunity to use the title to connote competence that was simply lacking. All too often, investors were thrown to the wolves, investing significant rollover IRA funds with, and buying complex insurance products from, incompetent or unscrupulous financial product sellers.

It was the actions of this salesforce that created the initial image of financial planning as an often shady, product sales–driven activity in the minds of the public, regulators, and CPAs themselves. CPAs often saw the results of the incompetence and greed firsthand.

In 1986, the AICPA established its PFP Section. A year later, its financial planning specialty designation, now called the PFS (personal financial specialist), was created, a credential recognized by regulators as being on par with the CFP, but which only CPAs can earn. (Today, the growing PFS community has nearly 4,000 credential holders.)

In the end, CPAs’ late arrival to the financial planning table was costly to both the profession and its clients. Alan Dorkin, managing partner of a successful New York CPA firm, perhaps summed it up best when he said: “If the profession’s heated debate about practice specialization had ended by the early 1970s, CPAs would have owned the markets for most financial planning, valuation, and employee benefit consulting services.” Had this happened, instead of initially being viewed as a product promotion tool, PFP would have been more likely perceived initially as the professional process now used by CPAs in the provision of PFP services.

Professional Financial Planning Process

In the authors’ view, the goal of a PFP engagement is to develop a plan designed to help individuals achieve the financial security necessary to realize their dreams. The first step requires good listening skills to discover the client’s dreams. If the dreams are so unrealistic that they would require winning the lottery, it may take additional steps to modify a client’s goals to make them realistic enough to create a plan.

Once the client’s goals are established, PFP becomes a collaborative professional activity, often requiring coordination of expert teams of varying composition, depending on an engagement’s nature. Team members may include CPAs, attorneys, actuaries, valuation professionals, investment experts, and insurance professionals. CPAs are well suited to serve as team quarterback. The team is generally supported by sophisticated software, with a growing ability to use the Internet to coordinate its activities and optimize client planning.

At this point, the process enters an analytical phase, much of which is within CPAs’ existing expertise; for many, it would be a natural extension of accounting and tax practice. A plan typically starts out with an investor’s current financial position. Analyses are then performed that project earnings, investment returns, cash flow, debt, taxes, and similar factors. The plan will integrate other areas, such as liquidity planning, education funding, retirement planning, eldercare planning, estate planning, investment planning, business succession, and the like. Properly performed, this is never a product-oriented process. Products will follow the plan’s design parameters. It is true that, in the hands of a product sales–oriented organization, the process can be rigged for a desired outcome. One of the CPA’s key PFP roles is to help prevent this from happening to unsuspecting clients.

The fear of many CPAs is that if they offer PFP services, they will be seen as salespeople rather than professionals. Prior to the 1980s, when investment and insurance vehicles were simple, this may have been true. Today, however, many of these vehicles have become extremely complex. They require expert customization, which CPAs can professionally provide or oversee, to properly manage risk and achieve client goals. The increased expertise that CPAs who offer PFP services gain about financial products gives the CPAs a greater ability to protect clients from being sold inappropriate products by overly aggressive salespeople.

The investment-planning component generally follows the Nobel Prize–winning modern portfolio theory (MPT). If conservatively applied, it uses statistical methods to enable an investor to have a reasonable chance of enjoying up markets, while having a high probability of being protected from catastrophic loss. CPAs have the background to learn the skills required, or to oversee affiliated service providers. MPT generally enabled CPAs to avoid the problems that faced many others during a major market downturn. (For a more thorough introduction, see Roger C. Gibson, Asset Allocation—Balancing Financial Risk, McGraw Hill, 2000.)

A typical comprehensive PFP engagement proceeds as follows:

• Help the client establish and express financial and nonfinancial goals.
• Meet with the client to gather relevant data.
• From the data, prepare a current life information summary, including cash flow, balance sheet, risk management elements, will, living will, powers of attorney, and the like.
• From this information summary, determine who is needed for a professional financial planning team.
• Prepare a preliminary analysis and meet with the client and the financial planning team to determine if the goals must be modified.
• Prepare the first draft of the financial plan and review preliminary recommendations with the client and the financial planning team.
• Prepare the comprehensive financial plan and deliver it to the client.
• Provide implementation assistance as desired by the client.
• At the client’s discretion, monitor and, when appropriate, update, the plan.

Not every PFP engagement involves this comprehensive process. A client may be interested in just one element, such as retirement planning. Regardless of the type of engagement, a whole range of software and other practice aids is available to help CPAs, whether they deliver services internally or in conjunction with affinity partners. [See the AICPA’s PFP area (pfp.aicpa.org) and the Financial Planning Association (www.fpanet.org). For a more complete understanding of the PFP process, see the book review of Lewis J. Altfest’s Personal Financial Planning, on page 16.]

Like other services, CPAs performing PFP services set themselves apart by adhering to the General Standards in the AICPA’s Code of Ethics (Rule 201) and their state CPA society’s code. This entails:

• Having professional competence for all services, either internally or through properly overseen, competent third-party providers.
• The exercise of due professional care in the performance of professional services.
• The adequate planning and supervision of professional services.
• Obtaining sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

In addition to knowledge of technical standards, PFP practice may require additional licenses related to investment advice, life insurance, and securities sales, depending on the nature of a firm’s PFP services. The AICPA’s PFP section also issues practice standards.

Accounting firms have different views on charging for PFP services. The options generally include financial plan preparation fees, often on a project rather than an hourly basis; general PFP consulting fees; investment management fees (not commissions); fully disclosed life insurance commissions; and fully disclosed securities commissions. Some firms charge plan preparation and consulting fees. Some charge or share in investment management fees. Others accept insurance and securities commissions as well.

The authors have seen CPA firms successfully operate PFP practices, meet their fiduciary obligations to put clients’ interests first, and maintain strong client relationships under all of these fee arrangements. Regardless of the fee structure, clients generally trust their CPA to do the right thing. As discussed below, CPAs usually rise to the occasion. In our experience, CPAs offering PFP services under professional standards are seen by clients as professionals, not as product salespeople.

Ethical and Fiduciary Environment

For much of the profession’s history, CPAs practiced in an ethical cocoon. The intent was to ensure that CPAs would always put independence first in relation to attest services, and objectivity first in relation to all other services. The structure was supported by ethical pillars that prohibited CPAs from engaging in a number of common competitive business practices. CPAs were prohibited from advertising; soliciting business away from other CPAs; engaging in competitive bidding against other CPAs; accepting commissions and contingent fees; holding out to the public as a CPA if not working in a CPA firm; and having non-CPA owners of CPA firms.

From the early 1970s to the 1990s, the same period that the financial planning industry was developing, the AICPA, state CPA societies, antitrust regulators, and the courts were engaged in a public-policy tug of war over two differing public interests, that of CPA independence ansd objectivity, and that of competition. In the end, with the profession strongly supporting its traditions, the baby was split, mostly on the side of competition. Most of the above ethical pillars were struck down, primarily on first-amendment or anticompetitive grounds. Left standing were prohibitions on commissions and contingent fees for attest services requiring independence.

For nonattest services, CPAs were thrust into a new competitive environment, for which few had been trained and for which many were unprepared. A common refrain of veteran CPAs was, “If I had known the profession was going to change like this, I wouldn’t have entered it.” Inside the cocoon, the rules were clear. But in the new environment, CPAs were now forced to ponder the meaning of ethics rules requiring objectivity and avoidance of conflicts of interest within a world of advertising, competitive bidding, and even commissions.

Interestingly, the CPA profession was born with a conflict of interest, in that audit clients paid the CPA’s fee. Wouldn’t that cause CPAs to adjust client financial statements in the client’s favor? By and large, with few exceptions, the public and regulators have perceived the answer to be “no.” This is especially true with local firms, which are also the primary PFP practitioners. However, in times when the profession was not perceived to be living up to its responsibilities, pressure to self-regulate, and sometimes government regulation, followed.

PFP has become central to the profession’s ethical dilemma. Of all of the changes to the ethics code, many CPAs believe that the most abhorrent is the ability to accept commissions. As discussed above, PFP can be provided without accepting commissions. However, when the possibility of commissions is present, some difficult dilemmas can arise. This is especially so when PFP providers are seeking to offer client-centered, as opposed to CPA firm–centered, services.

Today, for PFP and other engagements where independence is not required, CPAs have an ethical responsibility to remain objective and avoid conflicts of interest. CPAs who serve in a trusted advisory capacity also have separate fiduciary responsibilities to their clients. These legally require them to act in their clients’ best interests and put clients’ interests ahead of their own. (See Primoff and Gray, “Fiduciary Responsibility and Opportunity,” Tax Advisor, April 2006, and Dan L. Goldwasser, “Avoiding Fiduciary Liability,” The CPA Journal, July 2002.)

Therefore, for PFP or other nonattest engagements where CPAs are seen as trusted advisors, the following four questions arise for each practitioner:

• Am I being objective?
• Am I avoiding conflicts of interest?
• Am I acting in my client’s best interest?
• Am I putting my client’s interest ahead of my own?

Consider the common scenario in which a client’s trusted CPA has quarterbacked her PFP engagement. After the plan has been prepared and reviewed by the expert team, the implementation options are presented to the client. The plan calls for fee-based investment management and life insurance. Plan implementation calls for the CPA’s monitoring for an additional hourly fee. The client asks the CPA, “Isn’t there some way for you to be paid out of the investment fees and life insurance instead of me having to pay you out of my pocket?”

If the commissions and fees are clearly disclosed, as ethically required, and the client completely understands the options, is it in the client’s interest or the CPA’s interest not to accept the commission?

Not long ago, one of the authors met with the managing partner of a leading CPA firm. During a discussion on PFP, the partner said, “Any CPA, including me, who can sell a client inappropriate insurance to collect a $50,000 commission, will.” The author looked straight at him, saying, “No, you wouldn’t!” The partner looked back, saying, “You’re right!”

The new rules do not require any firm to accept commissions. But for firms that do, more personal responsibility and appropriate controls are required. George May was a pioneering senior partner of Price Waterhouse and a philosophical giant of the profession. In the mid-1950s, at the age of 80, he was asked about the ethical propriety of CPA firms becoming involved in the then-growing area of management consulting. He said that CPAs certainly have the competence. Clients have the need for their services. In the end, he noted, it would depend on the personal character of the CPAs involved.

On a similar note, former SEC Commissioner A.A. Sommer, speaking at an AICPA leadership meeting, said, “Any profession that fails to self-regulate and meet its perceived responsibilities to the public will find itself regulated by government.”

From our experience, CPAs have lived up to their ethical and fiduciary obligations in the PFP arena. Should they ever do otherwise, government will close the doors. In May’s words, this is a matter of character. If CPAs maintain it in the PFP arena, they will continue to earn and deserve their clients’ trust, regardless of how they are paid.

Client-Centered Communication

One comment the authors often hear from partners in successful CPA practices is, “Most of our wealthy clients are financially sophisticated, and even when they aren’t, they have the PFP area well covered by competent people. We do the tax work and some of the estate planning. They would never come to us for the other stuff.”

When we are actually engaged with a successful client of a CPA who believes this, however, it is not unusual to find that wills need to be updated; that the wrong beneficiaries are listed on wills, trusts, retirement plans, and insurance policies; that succession planning for a business has not been discussed; and that other matters need attention, some seriously so. We sometimes even learn that clients would be not only pleased, but relieved for their CPA to be involved.

Most non-CPA financial planners would give almost anything for a law that required clients to sit down with their planner once a year to discuss finances. Yet, many CPA tax preparers waste the opportunity to build client relationships over tax season. The rush to get the work out often trumps meaningful client discussions that could lead to far more relevant and lucrative engagements than preparing a tax return.

The CPA’s view of client needs is often firm-centered. The client-centered view is from the point of view of the individual’s goals and dreams. The phrase “financial planning” may mean little to the client. But saying, “I think we can help you send the kids to college, retire comfortably, and even buy the boat you’ve dreamed of,” could lead to a PFP engagement. Both phrases may mean the same thing, but they are worlds apart.

Because of the need to ferret out client goals, PFP is one of the best services for developing effective client-centered communication. From our experience, most CPA firm clients have a range of PFP needs. Even though some CPAs are certain that clients do not want them to address these needs, experience often tells us otherwise.

The PFP Competitive Environment

Today, a CPA firm has a host of competitors, all coveting the same clients. Any number of CPAs has lost a “best client,” the one who would never leave, to another CPA firm aligned with a PFP team. Other CPAs face decreasing relevance, as they slowly transform from being a client’s most trusted financial advisor to becoming a trusted tax expert, one who takes direction from the leader of a PFP team who has become the client’s most trusted financial advisor.

The authors’ vision of a client-centered PFP mission is “to help clients realize their life’s dreams that require financial security.” While many CPAs are focused on tax minimization, which is important, financial planners are focused foremost on clients’ goals and dreams. For most CPAs, client relationships are their most valuable asset. When CPAs are not offering PFP services to their clients, those individuals may develop a relationship with others that may become strong enough to weaken or even displace the CPA as a primary financial advisor.

The CPA profession let broad control of PFP services slip trough its fingers by sidelining itself during the formative years of the marketplace. Today, it is possible that CPAs are in an equally precarious position. Modern web-based PFP services and collaborative software (such as eMoney’s “360 Pro”) enable a PFP team to help clients achieve financial security in ways that were almost unimaginable a decade ago. CPAs who do not understand these services may be putting themselves at a serious competitive disadvantage.

While PFP is not the answer for every firm, from the authors’ experience, it is vital for CPAs to understand the nature of modern PFP services and how they are perceived by their clients. We believe it is important for all CPA firm owners to seriously explore the issues addressed in this article in an openminded way—for the benefit of their clients, their employees, and themselves.

©2008 The New York State Society of CPAs. Legal Notices