After a nearly year-long drafted and public comment period, the Executive Committee of the AICPA’s Personal Financial Planning section adopted its “Statement on Standards in Personal Financial Planning Services” (SSPFPS) on January 1st of this year, with an effective date of July 1st.
What’s notable about the new SSPFPS, though, is that it’s not merely intended as a best practices guide from the AICPA’s PFP section about how (CPA) financial planners should try to conduct themselves. Because the PFP section’s Executive Committee has standard-setting authority under the AICPA, and most state boards of accountancy adopt AICPA standards as their own laws (and have in the case of SSPFPS), the effective result of the new rules is (in most if not all states) an enforceable set of professional standards under state law. And for financial planners who want to claim that they’re subject to the “highest standards” regarding the services they provide to their clients, the AICPA’s new SSPFPS may represent a new highest bar in the profession… at least in terms of enforceable standards.
The bottom line, though, is that while technically CPA financial planners have already been required to adhere to the AICPA’s Code of Professional Conduct – including as it pertains to their financial planning services, which includes a fiduciary-like requirement to avoid conflicts of interest that impair objectivity, disclose potential conflicts of interest that do not impair objectivity, and always act in the best interests of their clients – the new SSPFPS provide significantly more in-depth guidance about how to conduct themselves appropriately, and in a manner that could potentially be enforced in a court of law! Which means that while the rules ultimately apply only to those subject to the SSPFPS in the first place (including both CPAs who work in a state where the state board of accountancy has adopted the standards, and even non-CPAs who are members of the AICPA and deliver personal financial planning), they nonetheless may represent the broadest and most enforceable fiduciary professional standard yet to financial planners – not just regarding investment activities but all financial planning duties – and a powerful potential precedent in the future regulation of financial planners.
Understanding The AICPA’s Statement On Standards In Personal Financial Planning Services (SSPFPS)
The AICPA’s Statement On Standards in Personal Financial Planning Services (SSPFPS) was created by the Personal Financial Planning (PFP) division of the AICPA (the “other world” of financial planners), after an exposure draft was released last year, followed by a public comment period, and then a final deliberation and review by the PFP Executive Committee last December. The final SSPFPS was issued in January of this year, and became effective as an AICPA standard on July 1st, superseding the prior Statement on Responsibilities in Personal Financial Planning Practice as the prevailing rules for CPA financial planners.
Similar in concept to the CFP Board’s Standards of Professional Conduct for CFP certificants, the SSPFPS is designed to create professional standards for CPAs who actually provide Personal Financial Planning (PFP) services, and either: 1) holds out to the public as providing PFP services; 2) engages in any activity that would require registration as an investment adviser (under Federal or state law); or 3) sells a [financial services] product as a result of a PFP engagement. In other words, if the individual holds out as a planner or gets compensated as a planner for providing planning services, the SSPFPS applies. Providing planning services is defined as:
“PFP is the process of identifying personal financial goals and resources, designing financial strategies, and making personalized recommendations (whether written or oral) that, when implemented, assist in the client in achieving these goals. This process may include implementation or recommendations or monitoring or updating the engagement. PFP services encompass one or more of the following activities:
- Cash flow planning
- Risk management and insurance planning
- Retirement planning
- Investment planning
- Estate, gift, and wealth transfer planning
- Elder planning
- Charitable planning
- Education planning
- Tax planning
For those who provide PFP services and are subject to the standards, the (CPA) financial planner must have competence in the areas in which services are provided (i.e., possess an adequate level of knowledge and skill), must evaluate potential conflicts of interest and either navigate them objectively and disclose them (if possible to be objective, and otherwise terminate the engagement), and disclose in writing all compensation the planner or his/her firm or affiliates will receive for services rendered or products sold (including methods, amounts, and time period of compensation, along with any indirect compensation or noncash benefits received [e.g., from referrals to other providers]). In addition, similar to the CFP Board’s rules, the CPA financial planner must follow a process of defining the scope of the PFP engagement, obtaining and analyzing information, developing and communication recommendations, implementing recommendations, and monitoring and updating – though notably, by default the standards do not assume the CPA financial planner will provide implementation, and monitoring and updating, as part of a financial planning engagement unless specifically articulated as part of the scope of the client engagement in the first place.
The SSPFPS also incorporates by reference the AICPA’s overall Code of Professional Conduct, which includes a requirement to maintain fundamental principles of professional ethics, but also provisions that commissions must be disclosed but are permitted (as long as the CPA is not also providing functions related to an audit or financial statement review), along with a requirement that the CPA must maintain objectivity and be “free of conflicts of interest”.
Ultimately, the scope of the AICPA’s standards are generally limited to those who are members of the AICPA – although notably, that includes both CPA financial planners and non-CPA associate members who provide personal financial planning services! However, because many state boards of accountancy adopt AICPA standards as their own enforceable professional standards under state law, the SSPFPS would also apply to CPA financial planners providing PFP services in states that adopt the rules, even if the CPA financial planner is not a member of the AICPA. Because some states update their rules more frequently than others – and not all states uniformly adopt AICPA’s standards as their own – specific applicability of the rules to non-AICPA members will vary from state to state. Nonetheless, most states automatically implemented the rules when they became effective on July 1st, effectively making them the applicable professional standard for determining fiduciary breaches under state law; as of this writing, the only states that still have not yet affirmatively adopted the standards (though many may do so soon!) include Alaska, Arizona, Georgia, Hawaii, Maine, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, and Vermont.
Fiduciary, Commissions, And The AICPA’s SSPFPS
Notably, at no point in the AICPA’s SSPFPS is the word “fiduciary” specifically used to articulate the duties of a CPA financial planner. However, the behaviors the SSPFPS requires substantively confer an obligation to act as one with clients. The rules do require the CPA financial planner to follow the AICPA’s Code of Professional Conduct, with guiding principles of integrity, objectivity, independence, and due care, which sets the requirement for CPAs to act in the best interests of their clients at all times, and also to avoid conflicts of interest which impair objectivity (and potential conflicts which do not impair objectivity must still be disclosed). Thus, in essence, the new PFP standards, paired with the existing AICPA Code of Professional Conduct, amount to a fiduciary standard for CPA financial planners and the details of how to comply with one, even without necessarily using the word – or at least, that’s how the SSPFPS drafters expect the courts will interpret the standards.
Yet it remains unclear how exactly the AICPA’s SSPFPS will be reconciled with the fact that it does explicitly allow that CPA financial planners may be compensated for implementing products. In point of fact, the AICPA actually “must” allow members to receive commissions if they wish, per a decision from the Federal Trade Commission that the AICPA cannot restrain members from receiving commissions and may only guide their ethical behavior regarding what they do in order to receive such compensation. Thus, the SSPFPS requirement for financial planning “implementation engagements” that “a [planner] who is engaged to participate in recommending products should… disclose in writing any compensation received for recommending products.” Nonetheless, it remains unclear in practice how the SSPFPS fiduciary duty and the potential to receive commissions will co-exist harmoniously. Notably, the ambiguity about how to reconcile commissions and an implied fiduciary duty is not unique to the AICPA’s SSPFPS; in point of fact, the CFP Board also requires CFP certificants to act as fiduciaries with their clients (when actually providing financial planning or material elements of financial planning), and commission compensation is permitted as long as it does not otherwise affect the actual product recommended (which must still meet the standard) and the compensation is properly disclosed (a compensation disclosure that itself has recently been subject to much CFP Board confusion).
On the other hand, the reality is that a fiduciary standard is not necessarily equivalent to a ban on any and all commissions of all sorts; the legal precedents of fiduciary generally do require that unmanageable conflicts of interest be avoided, but not that no form of a commission or contingent compensation can be allowed in any way (e.g., lawyers can still work on contingency fees that amount to huge back-end compensation for successful implementation, and in financial planning many have pointed out that AUM “fees” look awfully similar to 12(b)-1 “commissions” as well). However, for any compensation that could possibly present a conflict of interest, it must be demonstrated both that the potential conflict can be managed, is being managed, and that there is a process to crafting recommendations that can be validated as leading to an appropriate unbiased recommendation.
In this regard, the AICPA’s SSPFPS may be setting the groundwork for the future of navigating the intersection of commissions and fiduciary in financial planning, as their standards for “Implementation Engagements” explicitly require documentation not just of the engagement and what is recommended, but how the selection criteria for the products were established, and what information was gathered to establish a reasonable basis to fitting the client needs to the product selection criteria. In other words, the SSPFPS establishes the framework for a defensible process to demonstrate that the recommendation was made with integrity and objectivity and really was in the client’s best interests, regardless of the fact that contingent compensation may happen to also be attached. (And if the recommendations cannot be crafted objectively, though, even with a valid process, then the SSPFPS rules do require that the CPA financial planner terminate the engagement.)
Ultimately, though, because the new SSPFPS are simply the standard of professional conduct that can be applied by the courts – at least in states where the boards of accountancy have already adopted them – the precise interpretation of these rules will likely evolve with case law over time, as clients file suit over allegations of improper (non-fiduciary due to conflicts of interest) recommendations, and the judges and juries decide how the rules should and will be interpreted and applied. Of course, for the large segment of the brokerage industry that still commonly use mandatory arbitration clauses (and some RIAs, though there is pressure on the SEC to eliminate the practice for fiduciary RIAs), the sad fact remains that the courts may not have much opportunity to evaluate and apply the SSPFPS to evaluate whether the (CPA) financial planner’s alleged actions constitute a breach of fiduciary duty. Nonetheless, in the meantime it may be an environment of “advisor beware” for CPA financial planners affiliated with broker-dealers who are implementing commission-based products (and a potentially significant disruption to CPA-centric broker-dealers like HD Vest), especially given the significant penalties that can result under law from a breach of fiduciary duty!
Two Practice Standards For Financial Planning – CFP Board And AICPA PFP?
In the end, the AICPA’s implementation of its new SSPFPS represents yet another framework for the potential oversight of financial planners, and the professional standards to which they are subject – albeit with a scope that is limited to AICPA members, and/or CPAs working in states where the state board of accountancy has adopted the AICPA’s standards as their own. The AICPA’s SSPFPS are fundamentally similar to the CFP Board’s rules – which are also limited in scope, as they only apply to CFP certificants practicing financial planning or material elements of financial planning. And both standards require those doing financial planning to act in the interests of their clients, maintain professional ethics, manage and disclose conflicts of interest (and avoid unmanageable conflicts). Nonetheless, the rules are not precisely the same across both organizations.
While some differences are relatively minor – for instance, the CFP Board advocates a 6-step financial planning process of Establish Goals/Relationship, Gather data, Analyze data, Develop a plan/recommendations, Implement, and Monitor, while the AICPA’s SSPFPS is a 5-step process where “Obtain [Gather] data and Analyze” are combined – other differences are more significant. For instance, the CFP Board has been criticized for requiring advisors to disclose compensation that “could” occur even if the planner doesn’t intend to receive it and the client will not pay it, while the SSPFPS simply require that planners disclose “all compensation the [planner] and the [planner’s] firm or affiliates will receive for services rendered or products sold.” (emphasis mine) And the SSPFPS rules apply simply because a CPA (or simply an AICPA member!) represents to the public/clients that they will provide PFP services (or uses the PFS or CFP designations that imply it!) and provides even just one activity area of financial planning, while the CFP Board’s rules are not based on how a financial planner holds themselves out but only by the scope of services actually provided, which has also been criticized as being confusing to the public when a CFP certificant can hold out as a CFP professional but then avoid CFP professional responsibility by “just” selling products and not actually providing the financial planning advice implied by having the CFP marks. In this regard, again, the AICPA’s SSPFPS are arguably a clearer and less-potentially-confusing-to-consumers set of standards than what the CFP Board currently puts forward.
But by far, the most significant difference between the CFP Board’s rules and the AICPA’s SSPFPS is that already in many states, the SSPFPS has been integrated into a set of professional accounting standards that already have a history of being applied with the force of law in evaluating whether a professional has breached fiduciary duty, while the scope of the CFP Board’s standards has been limited to only its own disciplinary process. The distinction is significant, because the maximum consequences for a breach of fiduciary duty under the CFP Board itself is “just” a public letter of admonition and/or a suspension or revocation of the marks but no financial consequences to the certificant (and no financial remedy to the damaged client), while a fiduciary breach under SSPFPS that winds up as a civil action in state court could result in a requirement to pay significant financial damages (in addition to the fact that the CPA could lose his/her license from the state board of accountancy). And of course, the “loss” of the CFP marks versus the CPA license is itself a meaningful distinction, as the CFP marks are ultimately “just” a voluntary designation, while the CPA is truly a license (and without it the CPA may no longer be able to practice accounting… although ironically, could potentially still practice financial planning as a non-CPA!). In addition, there’s a significant difference in the ability to investigate allegations; lacking legal and regulatory support, the CFP Board has no power to subpoena documents or witnesses, or even to investigate complaints itself beyond what those involved voluntarily provide, while a state board of accountancy does have such powers, and a judge presiding over a case of fiduciary breach under SSPFPS that ends up in court has even more power to compel discovery. Thus, while the standards are fairly similar, the reality is that the AICPA’s SSPFPS potentially provides more substantive actual enforcement consequences and consumer protections – not to mention establishing a series of case law that other practitioners can rely on, which is more robust than CFP Board’s limited “Anonymous Case Histories” guidance.
Of course, the reality is that many “financial planners” (and “advisors” and “consultants”) are not subject to the rules of either organization – if the person is not a CPA subject to the rules, and is not a CFP certificant, the only point of accountability is their regulator, which may still apply a fiduciary standard in the case of RIAs but a lower suitability standard for registered representatives of broker-dealers. On the other hand, even in the case of a fiduciary duty for RIAs, the scope of that duty may be limited to just investment-related functions, while the SSPFPS provides a professional standard of care and fiduciary guidelines that can apply to all of a financial planner’s actions. Nonetheless, as financial planning continues to grow, and discussion bubbles up regarding the potential implementation of a uniform fiduciary standard for all “advisors” and the long-term potential for financial planning to be regulated of its own accord (rather than by the products that are implemented pursuant to the plan), the standards today for “just” CPAs and CFP certificants may become the laws of tomorrow for all those who hold out as delivering personal financial advice. And for financial planners who want to voluntarily subject themselves to the highest, most enforceable standards with respect to all of their financial planning work for clients, arguably the best standard may no longer “just” be operating as an RIA or being subject to the CFP Board’s practice standards, but being a (non-CPA Associate) member of the AICPA (especially since the PFP section has some nice member benefits for non-CPA financial planners as well)!
In this regard, then, perhaps the most notable aspect of the AICPA’s new rules is simply that the CFP Board – and the Financial Planning Coalition more broadly – have not yet been successful (at least that I’m aware of!) in getting their professional standards applied as the basis for determining a breach of fiduciary duty in court. To a large extent that may again be limited by the common use of mandatory arbitration agreements in financial services, but nonetheless there appears to be some greater potential that the AICPA’s SSPFPS could actually see the light of day in court – if only because they’re applied to CPA financial planners who are not part of the traditional financial services establishment and don’t use mandatory arbitration agreements, but who do provide personal financial planning advice to consumers. Or in other words, the AICPA’s PFP section may have done an end run around the entire regulatory advocacy effort of the Financial Planning Coalition and put its own professional standards in place – admittedly pertaining only to CPA financial planners, but potentially establishing case law precedent for financial planning standards that may well become the template for Financial Planning Coalition efforts down the road as well.
In fact, if it takes long enough for either the Department of Labor or the SEC to act on their own respective fiduciary-regulation-of-advisors rulemaking proposals, it’s possible that lawsuits and enforcement actions against CPA financial planners may even end up being cited at the Federal level. The new SSPFPS rules also raise the potential for interesting new studies of the “impact of fiduciary” on what types of clients CPA financial planners serve, and whether their state-law-enforceable fiduciary standard leads them to work less with the middle class, or if a future study may find that ‘despite’ their fiduciary obligations CPA financial planners actually work more with the middle market than today’s broker-dealer registered representatives because of the trust imbued in them as fiduciaries.
The bottom line, though, is simply this: in an environment where the bulk of the financial services industry has been actively fighting about the potential regulatory future for financial planning, financial advice, and the scope of fiduciary, the AICPA’s PFP section has quietly executed an end run around the entire process, implementing professional standards that could become part of court cases on breach of fiduciary duty by CPA financial planners (or even non-CPA financial planner members of the AICPA!) regardless of whether they are regulated as an RIA or not, and pertaining not only to the investment advice they provide but the full scope of personal financial planning services. Now the only question is whether the CPA financial planners will continue to exist largely in a world of their own separate from the rest of the profession, with their own PFS designation, their own practice standards, and their own conference (admittedly perhaps the best advanced financial planning conference in the country right now), or whether the AICPA’s actions will begin to force them to converge with the rest of the financial planning world… or at least, drag them all up to the AICPA’s more enforceable fiduciary professional standards.