ost clients are sharper than their advisers give them credit for. That makes them the most likely people to identify—and question—a financial arrangement that appears to influence a CPA’s judgment. Should a client somehow fail to discover an undisclosed commission arrangement, his or her attorney or even a competing insurance agent will almost certainly blow the whistle. Once revealed, a hidden commission arrangement could destroy the CPA’s credibility with a client. And that’s just the beginning. To prevent this from happening, here’s what CPAs need to know about disclosing commissions.
CPAs work hard becoming their clients’ trusted advisers. Receipt of commissions may appear to sway that judgment. People judge others by their own experiences and what they would do in similar situations. Even if a particular fee arrangement does not actually influence a CPA’s judgment, it may appear to—just as bad from the client’s viewpoint. In such situations the CPA becomes just another insurance promoter and his or her role as trusted adviser and valued source of independent advice evaporates. Clients begin to question whose best interests the CPA has at heart—the client’s or his or her own?
CPAs should also be aware that some state boards of accountancy have their own rules on commissions and referral fees. Practitioners are advised to check with their own state board to ensure these rules are not more restrictive than the AICPA’s.
Telling clients about a commission arrangement before they, their attorney or—even worse—a competing insurance agent discovers it, keeps the relationship open and aboveboard. Disclosure is not a negative thing. The fact is, money is not usually the issue with most clients—unless the CPA fails to make the disclosure early and in a forthright manner.
The client asks why the CPA brought a particular insurance agent into the transaction. If the client has to ask, the damage is already done. Any answer other than “we have a commission-sharing arrangement” conflicts with rule 503.
The client or his or her attorney queries the state insurance department to find out if the CPA holds an insurance license. If the CPA does, he or she is most likely receiving a commission.
A competing insurance agent asks the client about the CPA’s commission arrangement.
Wrongly believing him or herself to be the client’s exclusive gatekeeper, the CPA threatens the insurance agent with blocking this and all future transactions with the firm’s clients unless the CPA gets a cut. Frustrated agents somehow get word to the clients of this abuse.
REVIEWING INSURANCE TRANSACTIONS
WHEN AND HOW TO DISCLOSE
In making the disclosure, CPAs should issue a letter to the client saying something to the effect of: “In connection with the AICPA Code of Professional Conduct, Rule 503, I hereby notify you that should an insurance transaction be consummated, I will receive part of the commission.” Reiterate this point verbally to the client and the client’s attorney, if he or she is present.
Apologies for having a commission arrangement are unnecessary. CPAs should reinforce the fact that they are still the client’s advocate. The CPA’s role remains to oversee implementation of the client’s financial strategy. To do that effectively, the CPA has entered the insurance business and carries the appropriate licenses. The longer disclosure is delayed, the more unsavory the commission arrangement appears.
ANSWERS TO CLIENT QUESTIONS
Neil Alexander, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is firstname.lastname@example.org .