Financial planning can be a very lucrative area for accountants. But take care! Unlike in traditional tax and accounting work, special pitfalls await. Here's one example:

The NASD recently announced that it has ordered Ameriprise Financial Services, Inc., formerly American Express Financial Advisors, to pay a fine of $500,000 for failing to adequately supervise the firm's sales of 529 plans. NASD also directed it to pay approximately $750,000 to compensate more than 500 customers.

According to the NASD's press release, during the period May 2001 through October 2003, when the firm was American Express Financial Advisors, only one 529 plan was reportedly being sold, a plan sponsored by the state of Wisconsin, and approximately 32 percent of the sales were to customers who lived in state tax-advantaged 529 plan jurisdictions. As a result, those customers didn't receive state income tax benefits available to 529 plans purchasers. The $750,000 is to compensate those accounts that experienced substantial lost state tax benefits. In settling, Ameriprise neither admitted nor denied the allegations, but consented to the entry of NASD's findings.

Something like this is most likely to rise when a CPA is a registered representative of a broker/dealer, and is limited as to what 529 plans he or she may offer clients. In investigating whether to enter a relationship with a broker/dealer, CPAs should look out for possible limitations and restrictions as to what investments or products they can recommend or sell to a client.

It should come as no surprise that NASD found that the firm's procedures during this period were not reasonably designed to achieve compliance with suitability obligations in the sale of 529 plans. Not to recommend investments in 529 state plans where the clients reside and can obtain a substantial state income tax deduction, and instead actively encourage investment in another state plan where there is no deduction, seems to be obviously bad advice.

This reinforces my belief that CPAs can't really dabble in financial/investment planning. The commitment has to be substantial, and an extensive due diligence must be performed for any potential business partner.

A fear that many CPAs have who are considering getting involved in financial and investment planning is that if an existing traditional tax or accounting client has a bad experience as a result of the financial/investment planning advice, the CPA will then lose all the other work from that client. The NASD action shows that the fear might be well founded.

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