The risk of providing unintentional financial advice

In 2024, 4.1 million Americans turned 65. Additionally, 54% of Americans aged 40—49 are part of the “sandwich” generation, having both a parent over 65 and at least one child younger than 18. As a client’s trusted business adviser, a CPA often hears about the concerns clients have about their financial future. The CPA, wanting to help, or even just continue the conversation, may provide what the client later asserts was investment advice. When that “advice” does not provide the anticipated financial benefit, it can lead to a professional liability claim alleging the CPA provided erroneous investment advice. Consider these common situations and how a casual, friendly conversation can quickly turn into a heated debate.

‘WHAT SHOULD I DO WITH MY RETIREMENT ACCOUNT MONEY?’

While meeting with their CPA to review their tax returns, an individual client mentioned that they were concerned about retirement and the amount of tax they would have to pay on their individual retirement account (IRA) when making withdrawals. The CPA mentioned that he had several clients that had converted traditional IRAs to Roth IRAs and were not taxed on the distributions in retirement. The CPA suggested that the client follow up with their financial adviser to discuss this possibility further, but he did not document the conversation in either an email or a follow-up correspondence.

Subsequently, the client converted their traditional IRAs to a Roth IRA. The conversion resulted in a six-figure tax bill that was made known to the client during preparation of the following year’s tax return. The client, who did not consult with their own financial adviser, was shocked and claimed that the CPA should have informed them of the tax impact of the conversion. If so, the client asserted, they never would have converted, as they anticipated being in a lower tax bracket during retirement.

The client sued the CPA, seeking additional tax paid, penalties, and interest on the loan required to pay the tax. The client asserted the CPA provided negligent investment and tax advice. The claim investigation revealed that there was no written communication with the client regarding discussions that took place before the conversion. This, ultimately, was detrimental to claim defense, as there was no evidence to support the CPA’s version of the events.

Unfortunately, situations similar to the above are not isolated events. Other common claim scenarios involve long-term clients asking their CPAs for their thoughts on a potential investment, sometimes in a closely held business or real estate venture. In one example, a CPA presumed the client was seeking advice regarding the tax consequences associated with the structure of an investment and provided this advice. However, the advice was not documented, nor was there an engagement letter defining the scope of services delivered. Later, after the client lost the entire investment, he sued the CPA, alleging the CPA failed to warn him of the associated risks.

RECEIVING BANK AND BROKERAGE STATEMENTS

A CPA provided tax-compliance and bookkeeping services to a wealthy but unsophisticated long-term client. The client mentioned that her financial adviser had died and asked if the CPA had any recommendations. The CPA recommended someone another client had raved about but with whom the CPA had no direct experience. The client proceeded to transfer all of her investments to the adviser. On occasion, the client and adviser would call the CPA and ask questions related to the client’s investment portfolio. The CPA also received monthly brokerage statements to do accounting for the client’s trust.

Over the next several years, despite few distributions to the client, her investment portfolio declined significantly in value. The client sued both the adviser and the CPA, alleging that the adviser “churned” her account to generate commissions and that the CPA was negligent for recommending the adviser and failing to supervise the adviser’s activity.

The investigation revealed that the adviser did, in fact, “churn” the account. Engagement letters issued by the CPA did not address the scope of the bookkeeping services, but, rather, indicated that tax-compliance and limited planning services would be provided. The adviser did not have errors-and-omissions insurance and had limited assets. As a result, the client vigorously pursued her claim against the CPA.

RISK CONTROL RECOMMENDATIONS

As these scenarios demonstrate, many practitioners, especially those who provide “only” tax services, fail to recognize the risks associated with providing advice, even incidental advice, related to client investments. Below are items a CPA may wish to consider to help mitigate risk.

Establish clear scope in engagement letters

Engagement letters issued for tax-compliance services should indicate that tax planning services, even limited planning services, are not within the scope of the engagement. Separate engagement letters for tax planning services should narrowly define the scope of services, including advice regarding the tax consequences associated with investments considered by the client. If the CPA receives monthly brokerage statements or has online access to a client’s investment account activity, consider including engagement letter language disclaiming responsibility to review investment performance or appropriateness for the client and limiting the CPA’s responsibility solely to preparation of tax returns.

Unless qualified to do so, decline to provide investment advice

Without additional training, CPAs are typically not qualified to provide investment advice regarding the suitability of specific investments for clients. Additionally, investment advisers are subject to state and federal regulations. CPAs with appropriate qualifications should consult the resources available to members of the AICPA Personal Financial Planning Section, including the Statement on Standards in Personal Financial Planning Services.

Consider brokerage statement options

CPAs do not customarily receive original investment account statements or have access to online information regarding client investments. To the extent it may be necessary to obtain these statements to provide requested services, consider obtaining duplicate account statements or securing “read only” access to online account information.

Limit and document discussions with client brokers and investment advisers

Limit discussions with brokers and investment advisers to obtaining only the information necessary to provide tax services to the client. Summarize discussions in some sort of written documentation such as a memo to the client file or email correspondence with the client.

Provide options for referrals

When providing clients with a professional referral, a CPA should provide at least three options, advise the client to conduct due diligence on the advisers, and disclaim, in writing, any responsibility for selecting or supervising the adviser or monitoring investment results. Before providing referrals to investment advisers, the CPA should verify that the advisers are licensed and in good standing and advise the client to do likewise. For more, read the Professional Liability Spotlight column “Unintended Consequences of Professional Referrals” published in the November 2020 JofA.

IN SUMMARY

CPAs often are solicited for advice regarding potential investments. A CPA should refrain from providing specific investment advice unless he or she has been adequately trained and licensed to serve as an investment adviser. Establishing a clear understanding with the client regarding the scope of services to be provided and documenting related conversations, including further actions required by clients, may help eliminate misunderstandings and resulting professional liability claims related to investment advice.

Nest egg

$37.8T: Total amount held in U.S. retirement plans and accounts as of Dec. 13, 2022.

Source: U.S. Retirement Assets: Data in Brief, Sept. 20, 2023, Congressional Research Service.

Deborah K. Rood, CPA, MST, is a risk control consulting director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.

This article provides information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.