Courts look unkindly at CPAs who advise clients beyond their qualifications - for instance, by dispensing legal advice (if they're not attorneys as well). Knowing where to stop and refer clients to other professionals, as well as how to manage the other specialists in a client's financial life, are critical skills for effective investment advisors.
Stepping over the line can be overlooked in many situations. But when clients begin to complain, CPA advisors can be vulnerable primarily in two areas - objectivity and competence.
"When the market goes sour, a client often looks to be made whole," said John Raspante, a CPA and loss prevention specialist for high-volume insurance carrier Camico, in Freehold, N.J. "When things go down, clients question whether the CPA was objective in making investment recommendations."
If the CPA got paid a referral fee or commission, doubts are planted in jurors' minds if a case goes to trial. "Whether or not the commission was disclosed, the plaintiff's attorney disclosing 15 percent commissions based on the advisor's recommendation has a serious impact," explained Raspante.
Competence is equally scrutinized, as attorneys dig into reports to find the education and continuing professional education requirements of the advisor in question. Raspante related the common legal analogy of advisors to dentists: "Jurors respond when the plaintiff's attorney asks if they'd have an emergency root canal if they found out their dentist had only performed a couple of the operations. If the defendant advisor declares that he does 2 percent of his business in an investment advisory capacity, but doesn't have a professional designation or CPE credits to back up his claim to competency and invested his client's million-dollar portfolio anyway, their minds are nearly made up."
The line between legal and illegal areas of advice is sometimes gray. The tax code, for example, is a matter of law. Similarly, qualified pension plans comply with the wide body of laws under ERISA. "If the advice is ancillary to the primary service, the crossover is not blatant," said Raspante.
Similar wrinkles exist in differing state laws. The definition of when a CPA begins to practice law varies by the state.
"States with strong bar associations have stricter rules," says Sidney Blum, CFP, CPA/PFS and director of financial advisory services at Leonetti & Associates, in Buffalo Grove, Ill. "But one area that's certainly clear is drafting documents. I may peruse them for clients, but not draft [them]."
Often, staying clear of the crossover to legal or other professional advice is as much a practical matter as anything. Michael M. Eisenberg, of Eisenberg Financial Advisers in Los Angeles, is both an attorney and CPA. "I can't do everything and I love financial planning," Eisenberg said. "My legal background can save the client money, because I lay out everything for their attorney, but there's only so much a person can do."
In addition to legal specialists, Eisenberg suggests names of other professionals depending on their depth of knowledge.
As CPAs move into financial services, their risk of client complaints rise as well.
Most experts agree that obtaining professional designations and CPE is a good hedge against possible legal action. "Investment advisory was allowed as ancillary to my core business as I first started with financial services," said Blum. "But I went back and really studied before giving advice, because I could see the potential for getting into lots of trouble without the depth of knowledge of the new area."
For example, both Eisenberg and Blum advise clients on insurance needs, but neither suggest amounts or specific policies. "I have a strong understanding of the use of term or whole life insurance," Blum said. "But there are too many choices beyond that. In whole life alone there are several different types of policies that an agent needs to keep current on."
An effective financial plan using a multiplicity of advisors needs a team leader, and most CPA advisors position themselves in that role. If the advisor receives no payment for the referral, then the legal liability transfers to the outside professional.
The logistics of joint meetings, personal idiosyncrasies and sources that the client may suggest complicate the task of leading the team. Blum recently had a client who wanted to work with a certain attorney who Blum felt didn't have the needed competencies. "It was hard to do, but this lawyer seemed like a fish out of water in the area the client needed help," said Blum. "I suggested they get a second opinion and the client found the second attorney superior for the job."
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