Financial Services—Configuring the Practice

Source: Journal of Accountancy

Approximately 15,000 members of the AICPA are licensed to sell investment products, and 11,000 are licensed to sell insurance.

Financial services is an attractive revenue generator for CPA firms because firms can adapt financial products to their clients’ needs. In addition, clients have the advantage of one-stop shopping. Here is some advice:

Compensation

Rules for receiving compensation for financial products are complex and not necessarily known in all cases. Many firms establish separate entities to provide these services and products.

Firms are not permitted to receive commissions from attest clients. And when commissions are received from non-attest clients, the client must have acknowledged it in writing.

Most states allow affiliated entities to receive insurance commissions and distribute income to unlicensed shareholders. But recipients of compensation for the sale of securities must be registered with the SEC.

Products

The firm can establish a product platform (a list of products offered) and sell the products via a separate entity. Employees of this entity must have appropriate licenses. The form of this entity should be determined after consultation with legal counsel.

It is tempting to want to offer every product a client might want. But it is advisable to restrict offerings to those that are complementary with your firm’s other services. For example life insurance, annuities, and disability and long-term-care insurance are complementary with estate planning services. Offering an unlimited array of products can detract from your core services and create additional risk. An alternative is to outsource non-complementary products.

Best Interest of the Client

Firms should always serve the best interests of their clients. For example, if compensation for products is extremely high, your sales representatives may be unduly pressured to sell them even though the client is not being well served. It may be wise to limit compensation for sales of these products. Every product recommended by the firm should be appropriate for the client’s financial plan. It is a good idea to review more than one product option and document reasons for the final recommendation.

Contract with Investment or Insurance Companies

Insurance commissions may be only part of what is available to brokers. Sometimes the commission is less than half what the insurance company pays for selling its products. See Compensation Glossary to learn more about kinds of compensation available.

You should have contracts with the investment or insurance companies to protect your interest. A contract should:

• Be with the firm or its affiliate.
• Provide for compensation to be paid directly to the firm or its affiliate, not to a general agent or some other intermediary. This will establish your right to be vested in renewals and assures continuation of payments if a broker is terminated.
• Prohibit solicitation of your clients.
• Provide for E&O insurance.

From Journal of Accountancy, January 2007. http://www.aicpa.org/pubs/jofa/joahome.htm. For the complete article, click on the following link: www.aicpa.org/pubs/jofa/jan2007/index.htm, and select the article: Sell Financial Products Well.