CPAs Compute Pluses, Minuses of New Law Allowing Commissions
Your certified public accountant may be tucking something extra into the tax-planning checklist she sends you next year--perhaps a pitch to sell you insurance, or a suggestion that you invest your retirement funds with her.
Starting Jan. 1, CPAs will be able to accept commissions, something they have been prohibited from doing in California since 1947.
The fall of the 52-year-old prohibition, which prevented CPAs from selling commission-based insurance and investments or managing money for a percentage fee, comes at a time when other financial planning professions are moving in the opposite direction, toward fee-only or fee-based practices.
Some accountants insist that their profession is finally catching up with the times and that accepting commissions allows them to compete with brokers, bankers, insurance agents and others who have crowded into the field.
“Who is a better person to be objective for our clients?” Ward K. Bukofsky, a CPA with Braverman Codron & Co. in Beverly Hills, said at a Los Angeles conference on the issue earlier this week. If accountants don’t become a client’s chief financial planner, he said, “someone else will step into that place, and they may be less competent and less objective.”
Many CPAs worry, however, that the rule change means their profession is giving up what they say is its most prized attribute--the public’s perception of CPAs as impartial.
“It’s going to put our integrity to the test, our independence, our objectivity,” said David P. Beringer, a CPA with Martin Werbelow in Pasadena. “And that’s the thing we have going for us. This will take some of that away.”
The controversy, and the added layers of regulation that accepting commissions portends, probably will keep most CPAs on the sidelines. But some CPAs are already laying the groundwork to sell investments, manage money, negotiate real estate deals and arrange insurance contracts for clients who have long depended on them for tax advice. CPAs who want to perform such services legally must qualify for new licenses and registrations, and thus invite new layers of regulatory scrutiny to those they already have from the state Board of Accountancy and various CPA societies.
Others who have abandoned their CPA designation because of the prohibition say they may consider reactivating it. Michael K. Rosenthal, a partner in an insurance and estate-planning firm in Woodland Hills, dropped his CPA license 13 years ago after discovering some clients preferred paying commissions to fees.
“What was more important for the client was implementing the plan, as opposed to charging a hefty fee to tell them what to do,” Rosenthal said.
California isn’t breaking new ground. The national CPA association, the American Institute of Certified Public Accountants, changed its rules banning commissions in 1990. Since then, 32 states have passed laws allowing accountants, who are licensed by state accountancy boards, to be paid commissions or asset management fees.
The permission to accept commissions isn’t absolute. The California bill, which Gov. Pete Wilson signed into law in May, forbids CPAs from accepting or paying fees for client referrals. CPAs also cannot accept a commission if they are performing audits or other professional, objective reviews. A CPA who prepares a small business’ financial statements to submit to a bank for a loan, for example, would not be allowed to take a commission from the client, said Pamela A. Hunter, a CPA with McDowell, Dillon & Hunter in Long Beach who led the California Society of CPAs team that studied the issue. CPAs must detail their commission arrangements to clients in writing on the CPA’s letterhead.
The society itself, which remains sharply divided about whether CPAs should accept commissions, took no stand on the California law.
Advocates say the change is simply one more step in the CPA’s evolution from tax expert to full-service planner. CPAs say their individual tax practices already often involve giving advice about investments and other financial matters. The number of CPAs who have earned a “personal financial specialist” designation, which requires three years of financial planning experience, has more than tripled in the last five years, to 2,465, said Joel Allegretti, public relations manager for the institute.
But increasingly CPAs face competition from financial service providers who have moved into tax preparing and consulting fields, said Diana P. Sanderson, the society’s president. Sanderson said client demand also drove the change toward commissions. “Clients want more services and they want more flexibility,” Sanderson said.
Many, both pro and con, worry that CPAs are risking soured public opinion and more lawsuits.
Ron Klein, an attorney in charge of claims handling for professional liability insurance company Camico, warned at the conference that juries might hold CPAs to a higher standard than other professions.
“It is because of the public’s view of CPAs as objective, independent fact finders that the first, visceral reaction [to the idea] is one of conflict of interest,” Klein said.
CPAs may find themselves more vulnerable to lawsuits for other reasons. While disputes with brokers usually must be settled through arbitration, CPAs who get investment licenses may find themselves facing civil suits as well as arbitration, because many investments have tax-related components, Klein said.
The accountants’ debate reflects larger changes in the financial services professions, as those who once called themselves insurance agents or stockbrokers are now restyled as asset managers, investment advisors and financial planners.
Brokerages increasingly encourage asset management accounts that charge fees based on the amount of money under management, rather than basing brokers’ pay on per-transaction commissions.
Financial planners are moving away from commissions as well. Membership in the National Assn. of Personal Financial Advisors, a trade organization of fee-only financial planners, has grown from a handful of members at its founding in 1983 to 635 planners in 45 states. The association recently won a trademark on the “fee-only” designation after a tug-of-war with several other organizations representing financial planners, all of which wanted access to the coveted mark.
One of the largest groups of planners, the Institute for Certified Financial Planners, has seen the percentage of planners who accept only salaries or fees rise from 23% in 1993 to 30% last year. At the same time, the number of planners who make their living solely on commission dropped from 32% to 22%. Most CFPs now use a combination of fees and commissions, said Carol Monge, spokeswoman for the College for Financial Planning in Denver, which surveys the ICFP membership each year.
Sanderson, the CPA society president, said she could not predict how many of her fellow accountants would set up commission-based practices next year. Most, she said, would move slowly, if at all.
“CPAs by nature want to study it,” Sanderson said. “They’re pretty conservative.”
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Times staff writer Liz Pulliam can be reached by e-mail at liz.pulliam@latimes.com
