One frequent concern accountants have when considering offering wealth management is whether or not such a move would create an ethical problem or a conflict of interest.
The American Institute of CPAs’ (AICPA) Code of Professional Conduct states that an accountant cannot refer a product or service to a client for a commission if the accountant or his or her firm also performs audit, review, or compilation services, or examines prospective financial information for a client. If any of these services are not being performed, the AICPA Code of Professional Conduct states that an accountant can receive a permitted commission or referral fees. While this practice is forbidden by a few states, many states’ laws allow accountants to receive commission and referral fees as long as these fees are disclosed, in writing, to the client. Unless an accountant is in one of the restrictive jurisdictions, there is no ethics violation, per se.
But what about a conflict of interest?
Generally speaking, almost anything can be considered a conflict of interest. The determining factor as to whether a conflict of interest exists is if an accountant is operating under a different standard of care when providing accounting services versus receiving compensation for wealth management services. As long as the accountant is serving in a fiduciary capacity in both instances, there is no inherent conflict of interest. That line gets blurred when an accountant provides (or refers out) wealth management services and/or product sales and is compensated through a “fee-based” structure versus a “fee-only” structure.
“Fee-based” means that the accountant can receive both a fee from the client and a commission from financial products such as annuities and insurance.
“Fee-Only” means the accountant’s only source of compensation is from fees paid directly to the advisor from clients. This could be an hourly fee, a retainer fee, or a fee based on a percentage of the assets under investment management. Regardless of the type of fee, the point is that the client pays only a fee and no other type of compensation. No commissions are received and, thus, the advice and compensation is totally independent of any financial products (e.g., insurance, annuities) recommended to the client.
No compensation system is perfect and free from all conflicts of interest, but if an accountant operates both his accounting practice and wealth management services using the same standard of care (a fiduciary standard) and the same compensation method (fee-only), he or she will most closely align the client’s interest with their own, to the benefit of everyone involved.
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