War Story: PFP/Investment Advisory Services

By John F. Raspante

Michael Adams, CPA, has built a successful tax practice over the years, branching out into personal financial planning advice as clients ask for it. He adds staff members to help him with tax prep work while he keeps his personal financial planning (PFP) work going during and after the tax season.

Adams finds that the brutal pace of tax season has to be continued into the post-season just to keep his PFP practice going. Without an off-season in which to recover, he starts to experience symptoms of burnout, committing more errors and oversights.

Ads for turnkey asset management and financial services programs catch Adams’ attention. Being able to turn more work over to a service provider would simplify his life considerably. After extensive discussions and analyses of how the programs would match up with his clientele, he selects what he feels is the best option, ZYGO Securities, and meetings are held to get the program up and running.

The initial phase includes a lot of training for his staff and himself in the ZYGO program as well as in preparation for securities licensing exams. The time invested puts a larger dent in the firm’s income than Adams expected, so a considerable amount of new business now needs to be generated. A financial planner from ZYGO meets with the firm to establish timetables for the firm’s production goals. The planner then comes back once a week to update staff on program developments and keep them on target for new business.

While ZYGO provides much of the marketing expertise for the firm, staff CPAs are expected to market and sell the services and products. The CPAs are not by nature suited to selling, so ZYGO reps often step in to close the sales with clients, who tend to become confused by this handoff. Some of the wealthier clients begin to consult with their attorneys as well in order to obtain “second opinions” on transactions, further complicating matters.

One day Adams receives a summons out of the blue from one of his wealthy clients of 12 years, Herbert Bergman, who claims the firm and ZYGO gave him bad investment advice that led to him not selling his Dot Gone stock at the right time. One of Adams’ staff CPAs remembers explaining the differences between various types of stock sales to Bergman over the telephone, but not advising him on anything to do with a specific transaction. Adams suspects that Bergman also received advice from an attorney or a ZYGO rep and pieced together bits of oral advice to come up with his own faulty conclusions.

Loss Prevention Tips

When other professionals make mistakes, the CPA is sometimes named as a defendant in order to bring additional compensation to the client. In other cases, the client might hold the CPA responsible for failure to exercise due diligence over his or her entire financial picture. Juries may also hold CPAs responsible for overseeing or monitoring the decisions made between the client and the investment manager. Accordingly, CPAs should not view themselves as “just the CPA” and the investment manager as “the professional managing the investments.”

One liability in an alliance is that clients are directed by the CPA toward a particular resource, as opposed to clients choosing for themselves. Juries believe that clients are partly responsible for their own finances, so if clients ultimately decide who will work best with them, it helps insulate the CPA from liability. The more involved clients are in the decision-making process, the less liable the CPA will be.

An engagement letter, signed by the client, should spell out the following:

• The nature of the work that the CPA and other professionals will perform.
• The limitations of the work.
• Who will be responsible for which tasks and which decisions.
• Who will coordinate the investment activity.

The letter should state that: 1.) the client understands the assumption of risk in any investment; and 2.) the CPA is not responsible for the outcome of investments.

Further, the CPA needs to review materials that alliance partners are sending to common clients so that there are no conflicts with the CPA’s engagement letter. In this particular instance, the engagement letter from the CPA and the materials from ZYGO should have clearly stated who was responsible for making buy-sell decisions and who was responsible for maximizing tax benefits from the transactions.

Camico recommends that, whenever possible, CPAs put advice in writing (including risks and limitations). This helps protect the firm from off-the-cuff oral advice that could be misconstrued by clients who are confused or overloaded with technical information. Factors to consider in determining whether to memorialize your oral advice include:

• The amount of money at stake.
• The riskiness of the situation.
• How often the situation occurs with this particular client.
• The characteristics of the client.
• The likelihood that the client will act without appropriate due diligence.

Some planners devise a written investment plan that includes a statement of investment policy, spelling out the approaches with all of the client’s investments. Other planners produce a series of documents, reports and recommendations that achieve the same objective.

Written advice achieves the following:

• Protects the firm from advice that might be provided by a staff member who is inexperienced or unfamiliar with the client’s circumstances.
• Enables the firm to carefully research and reflect on the underlying issues before rendering its opinion.
• Permanently documents the firm’s advice and position for all to see, including future juries.
• Helps the firm collect fees for its services. Clients are often more willing to pay professional fees if they have something in writing.