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June 1994

Proposed statement on responsibilities in personal financial planning practice. (Personal Financial Planning)

by Sarenski, Theodore J.

    Abstract- The Executive Committee of the AICPA's Personal Financial Planning Division has recently issued three statements which serve as guidance on how personal financial planning assignments should best be completed. Statement No. 1, 'Basic Personal Financial Planning Engagement Functions and Responsibilities,' defines personal financial planning engagements and urges practitioners to comply with long-established accounting codes and standards. It stresses the importance of communication and documentation to the successful completion of assignments. Statement No. 2, 'Working with Other Advisers,' offers guidance for engagements requiring skills or services outside the CPA's area of expertise. Statement No.3, 'Implementation Engagement Functions and Responsibilities,' discusses the implementation of a personal financial planning engagement.

How the PFP Division Began

The Federal Investment Advisor Act of 1940 specifically exempted CPAs (as well as attorneys, engineers, and teachers) from the definition of investment advisor for registration purposes as long as individuals engaged in those fields provided investment advice, "solely incidental to the practice of their profession." This exclusion recognized the decades-old role CPAs play as financial advisors. Although it may be argued that CPAs have been providing personal financial planning services for years, it was not until the 1980s that financial planning became associated with a formal and distinct practice area.

The AICPA was concerned about forces outside of the profession that were investing considerable resources to promote programs and legislation that would be detrimental to CPAs providing financial planning services. Because CPAs were not distinguished as financial planners from all others providing this service, the AICPA in 1986 established a personal financial planning committee which created the Personal Financial Planning Division to provide various services to CPA members who were engaged in this specialty.

To advance the cause of the CPA as a personal financial advisor, the PFP Division developed the Accredited Personal Financial Specialist (APFS) (now Personal Financial Specialist (PFS)) in 1987. This designation is available only to CPAs. To achieve this title, a written examination testing professional competence in the areas of professional responsibility, personal financial planning process, personal income tax planning, risk management, investment planning, retirement, and estate planning must be passed. Practical experience amounting to 250 hours per year for a three-year period is required. In addition, six references are needed to substantiate personal financial planning activities. These demanding requirements show the public that a CPA with the PFS designation is well qualified to assist in the personal financial process.

To ensure that members of the PFP Division are provided with adequate guidance, members receive a three-volume set of manuals prepared by the committee providing direction for a personal financial planning engagement. Though the manuals are non-authoritative and do not constitute standards or preferred practices (the same as Statements on Responsibilities) they are published for the guidance of members of the AICPA practicing in this specialty. The manuals address the Code of Professional Conduct including, but not limited to, general standards, competence, due professional care, planning and supervision, sufficient relevant data, and compliance with standard.

In 1988, the committee was given the authority to become a senior technical committee and thus issue advisory statements. The division has issued three such statements, two were released in October of 1993. Statement No. 1--Basic Personal Financial Planning Engagement Functions and Responsibilities, forms the cornerstone for a CPA to follow in establishing a personal financial planning practice. The statement defines personal financial planning engagements as "only those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals." It states that a personal financial planning engagement includes all of the following:

a. Defining the engagement objectives,

b. Planning the specific procedures appropriate for the engagement,

c. Developing a basis for recommendations,

d. Communicating recommendations to the client, and

e. Identifying tasks for taking actions on planning decisions.

Three other types of engagements that can be performed in financial planning are:

a. Assisting the client to take action on planning decisions,

b. Monitoring the clients progress in achieving goals, and

c. Updating recommendations and helping the client revise planning decisions.

Statement No. 1 urges the CPA to follow established codes and standards that have existed in the CPA profession for many years. The statement supports the notion that CPAs are the best equipped, from a historical standpoint, to offer quality, objective personal financial plans to the public. The CPA is advised to carry out a PFP engagement in conformity with the AICPA Code of Professional Conduct. Guidance is given when tax advice, which is often an integral part of a financial plan, is provided to the client. A PFP plan may also include the preparation of personal financial statements or financial projections.

The literature cautions the professional to consider the Statements on Standards for Accounting and Review Services, Statement on Standards for Attestation Engagements--Forecasts and Projections, Guide for Prospective Financial Statements, and Personal Financial Statements Guide when preparing such statements for inclusion in a financial plan.

Statement No. 1 emphasizes the importance of documenting the CPA's understanding of the scope and nature of the services to be provided. The documentation should include a description of the engagement objectives, the intended scope of the services including any limitations thereto, the fee arrangements, and the roles and responsibilities of the CPA, client, and other advisers in the financial planning process. The key to a successful personal financial planning engagement is communication and documentation.

Statement No. 2, Working with Other Advisers, includes guidelines for assignments that require expertise or services the CPA does not perform. When not providing full services it is necessary to communicate a scope limitation and its potential effect. The statement provides an example of a CPA who believes the valuation of a client's business is an essential ingredient of a financial plan. Lacking the skills to complete such a task, the CPA may advise the use of a competent consultant. Should the client decline the suggestion, the CPA, with the client's concurrence, may formalize the plan without an expert appraisal. In essence, the value of the business used for financial planning purposes will be the client's judgment of its worth.

The statement offers the following wording a CPA might consider using when a limitation of this nature is placed on his work:

At your request, an independent valuation of your business has not been obtained. Such a valuation may have affected the conclusions reached in your financial plan.

This pronouncement contains guidelines to be considered when a CPA recommends a provider of outside services. Direction as to what criteria should be considered when recommending another adviser and the information that should be communicated to the client in such instance is included. Some of the information a CPA should consider prior to recommending another adviser involves determining the following:

1. Any prior experience the CPA has had with the adviser;

2. The professional credentials of the adviser;

3. The judgment of others regarding this adviser; and

4. If the adviser has any relationship to the client.

When a CPA utilizes another adviser, the client should be informed in writing what role the adviser will play. Generally a CPA would review and evaluate the work of the adviser. If this is not done, the client should be notified. The statement provides appropriate wording to disavow accountability for the consultant's work. It includes:

We have used the ABC Company's estimate of the value of your real estate in developing your financial plan. We have evaluated their estimate and do not accept responsibility for it. If a different value were used, different recommendations may have resulted.

Statement No. 3, Implementation Engagement Functions and Responsibilities, describes implementation in a personal financial planning assignment. Implementation is deemed as including activities such as selecting investment advisers, restructuring debt, creating estate documents, establishing cash reserves, preparing budgets, and selecting and acquiring specific investments and insurance products. When a CPA is requested to implement a personal financial plan, an agreement must be reached with the client delineating the work to be performed. This should be documented so the client, the CPA, and any other adviser have a full understanding of the responsibilities and tasks.

The Statement provides guidance on planning the execution of such tasks, communicating with the client, the process for choosing products or services, and the CPA's role in making selections. Advice is also given as to the best approach to use when implementing decisions made by others. When advising the client, it is necessary to consider his or her objectives and economic position, financial factors not within the control of the client, e.g., inflation, taxes, and investment markets as well as those factors which are not of a financial nature, e.g., family situations, client attitudes, risk tolerance, investment preferences, etc.

The statement provides two specific examples of implementation engagements involving risk management and investment planning. Each of these illustrations provide the information and steps essential to a satisfactory completion of an implementation assignment.

Richly Rewarding

Personal financial planning can be a richly rewarding experience for the CPA. It involves a level of understanding and assistance to clients that is not possible in many other accounting engagements. The AICPA, through its formation of the PFP Division, and development of the PFS designation, publication of the Statements on Responsibilities in Personal Financial Practice, assists the CPA in providing an unsurpassed level of service.

Information regarding the PFP Division of the AICPA can be obtained by writing to: AICPA, Attn: Personal Financial Planning Division, P.O. Box 1016, New York, N.Y. 10109-1014 or by calling (800) 862-4272 (menu #5).

We are very grateful to Phyllis Bernstein, CPA, Director of the PFP Division of the AICPA, for her assistance in documenting the history of the Division.

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