: American Institute of Certified Public Accountants - Submission

September 21, 2015

Via Electronic Mail

Expert Committee to Consider Financial Advisory and Financial Planning Policy
Alternatives
c/o Frost Building North, Room 458
4th Floor, 95 Grosvenor Street
Toronto, Ontario
M7A 1Z1
Email: Fin.Adv.Pln@ontario.ca

Re: Financial Planning/Advice Consultation

Dear Expert Committee Members:

The American Institute of Certified Public Accountants (AICPA) appreciates the opportunity to comment on the Expert Committee’s request for input to help them in exploring financial advisory and financial planning policy alternatives.

The AICPA is the world’s largest association representing the accounting profession, with more than 412,000 members in 144 countries and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets standards for the profession, including the Statement on Standards in Personal Financial Planning Services (SSPFPS), which provides authoritative guidance to members who provide personal financial planning services. It also develops and grades the Uniform CPA Examination, and offers specialty credentials for CPAs who concentrate on personal financial planning, forensic accounting, business valuation and information management and technology assurance.

We commend the Ministry of Finance and its Expert Committee for their efforts to strengthen the legal framework surrounding the regulation of activities of individuals who offer financial planning, advice and activities. We believe the most important step towards consumer protection is to elevate the standard of care as it relates to conflicts of interest and potential conflicts of interest as we have outlined in our response to item 3. Further, it is important for consumers to be able to differentiate among service providers due to the various levels of standards, ethics and minimum competencies in place for individuals who offer these services today.

Because there are many influential disciplines involved in the provision of financial advice with existing rigorous frameworks in place, it is important to ensure that any new regulations do not result in duplicative regulation. Organizations and regulatory bodies involved in personal financial planning should work together to help the government or other independent body establish minimum standards and guidelines. Professionals who satisfy these guidelines through existing frameworks should be accepted and not subject to meeting further requirements.

AICPA has reached out to organizations who are members of the Global Accounting Alliance, an alliance of leading accounting professional bodies in significant capital markets, including Canada, to work together in identifying alternatives for oversight.

1. What activities are within the scope of financial planning? Is the provision of financial advice different from financial planning? If so, please explain the distinction.

Both US and Canadian CPAs have been practicing in the personal financial planning space for over a century, long before these services were commonly referred to as personal financial planning and long before many of the other designations were established. AICPA defines personal financial planning as follows in our Statement on Standards in Personal Financial Planning Services (SSPFPS):

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 the client in achieving these goals. This process may include implementation of recommendations or monitoring or updating the advice. PFP services encompass one or more of the following activities:

  1. Cash flow planning
  2. Risk management and insurance planning
  3. Retirement planning
  4. Investment planning
  5. Estate, gift, and wealth transfer planning
  6. Elder planning
  7. Charitable planning
  8. Education planning
  9. Tax planning

We do not believe that the provision of financial advice is different from financial planning and to make such a distinction would cause further confusion to the public.

2. Is the current regulatory scheme governing those who engage in financial planning and/or the giving of financial advice adequate?

The regulatory landscape for financial planning advice and services is highly complex and difficult to understand even for those working in this area. Jurisdictions around the world differ in how they regulate these activities; individuals may be regulated for all elements of financial planning, some elements or none at all. For example, in the US, the CPA profession is heavily involved in financial planning advice and is regulated for these activities. Those that manage investments are regulated as Registered Investment Advisers by the Securities and Exchange Commission or state securities regulators, investment brokers are regulated by the Financial Industry Regulatory Authority and insurance sales providers are regulated by state insurance regulators. Activities such as tax planning, organizational structuring, saving and cash flow planning may or may not be regulated depending upon the advisor’s professional and regulatory affiliations.

There are also multiple organizations and professions involved in financial planning. Statutory professional bodies include CPAs and lawyers. Government regulated financial institutions include portfolio managers, stock brokerages, mutual funds sales firms, banks and insurance brokerages. There are non-regulated credentialing organizations such as CFA Institute, Investment Management Consultants Association and CFP Board as well as voluntary industry membership organizations which represent broad bodies such as insurance brokers. All of these organizations typically have various levels of standards, ethics and minimum competencies in place.

While there is regulation of some individual planning activities in place currently, there are inconsistencies and gaps in the oversight of those providing financial planning advice and services and this causes confusion and potential harm to the public. For example, in the US, Registered Investment Advisers are held to a fiduciary standard (duty of loyalty, prudence and care) when providing investment advice to individual investors while brokers are held to a lesser suitability standard. Instances of inadequate advice are often tied to advisors who are not required to act in their client’s best interest or who have a conflict of interest that entices them to put their own interest ahead of their client’s. E.g., conflicts of interest could exist that lead an advisor to sell a product to their client that is not in the client’s best interest simply because the advisor is better compensated for selling that product. The method of compensation may create a compelling conflict of interest that entices an advisor to act against the client’s interest, regardless of professional standards.

3. What legal standard(s) should govern conflicts of interest and potential conflicts of interest that may arise in financial planning and the giving of financial advice?

As noted above, we believe that most instances of inadequate advice are a result of conflicted advice. The AICPA Code of Professional Conduct (Code) imposes the obligation to perform professional services in a way that will serve the public interest and demonstrate a commitment to professionalism. Consistent with that requirement, the Code requires that a member maintain objectivity in fulfilling professional responsibilities. These principles have no exception. Therefore, disclosure does not provide a way to allow for impaired objectivity resulting from a known conflict of interest. A "potential" conflict is any apparent conflict that could but does not actually impair objectivity. A potential conflict of interest must be disclosed in a manner that allows for informed client consent, and managed to ensure the potential conflict does not impair objectivity and professional judgment. Otherwise, conflicts of interest that unavoidably impair objective advice require members to decline to perform or discontinue the professional services. This approach is applied in the SSPFPS as:

The member should evaluate whether any conflicts of interest exist with regard to the engagement as follows:

  1. If the member determines conflicts of interest exist, the member should determine whether the engagement can be performed objectively.
  2. If the member determines the engagement can be performed objectively, the member should disclose all known conflicts of interest and obtain client consent.
  3. If the member determines that the engagement cannot be performed objectively, the engagement should be terminated.

While we support a higher standard as outlined above for all professionals providing financial planning advice, we understand that this may not be practical in all circumstances. A best interest standard that requires professionals to put the interests of their clients ahead of their own would go a long way towards strengthening the legal framework in place today. At a minimum, given the inherent conflict of interest with compensation, prior to providing financial planning advice and financial planning products, disclosure of compensation should be made in writing and signed client or customer informed consent obtained. If an AICPA member determines that professional services can be performed objectively, the member has to disclose compensation and obtain client consent. Compensation disclosure is applied in the SSPFPS as:

Prior to beginning the engagement, and throughout the engagement as circumstances dictate, the member should disclose in writing all compensation the member and the member’s firm or affiliates will receive for services rendered or products sold. The disclosure should include

  1. the method of compensation, including the impact of indirect compensation;
  2. the amount of compensation;
  3. the time period over which compensation will be received; and
  4. the compensation, including noncash benefits, received by the member for referrals to other providers.

If compensation alternatives are offered, the member should disclose the differences in these alternatives in writing.

4. To what extent, if at all, should the activities of those who engage in financial planning and/or giving financial advice be further regulated? Please consider the following in your response:

  1. Licensing and registration requirements;
  2. Education, training and ethical responsibilities;
  3. Titles and designations of individuals who engage in financial planning and/or the giving of financial advice;
  4. Specific activities that should be included or excluded in a regulatory scheme;
  5. Costs and other burdens of regulation;
  6. Regulation of compensation; and
  7. Complaints and discipline mechanisms.

We believe that, at a minimum, any additional oversight should take into account the existing regulatory scheme. With any solution, organizations and regulatory bodies involved in personal financial planning (e.g., Canadian CPAs, US CPAs, the legal profession, CFA Institute, CFP Board, investment advisers, the insurance and brokerage industry, etc.) should work together to help the government or other independent body establish minimum standards and guidelines. To ensure that professionals are not faced with duplicative regulations, those who already meet the minimum requirements should be accepted and not subject to taking further testing and meeting other qualifications. Because there are so many influential disciplines involved in the provision of financial advice, it is important that any additional regulation be overseen through an independent organization.

5. What harm(s) and/or benefit(s) do consumers experience in the current environment? Please provide specific evidence to support your views where available.

As stated above, we believe that instances of inadequate advice are often tied to advisors who are not required to act in their client’s best interest or who have a conflict of interest that entices them to put their own interest ahead of their client’s. E.g., conflicts of interest could exist that lead an advisor to sell a product to their client that is not in the client’s best interest simply because the advisor is better compensated for selling that product. The method of compensation may create a compelling conflict of interest that entices an advisor to act against the client’s interest, regardless of professional standards.

The free flow of capital from investor to investment requires objective advice unimpaired by conflicts of interest. The enormous negative impact on capital markets, society and the economy when advice is driven by an advisor’s self-interest is not quantifiable.

When the US Government Accountability Office studied whether financial planning should be regulated in the US, it found that the extent of problems related to financial planners is not fully known because data on complaints, examinations and enforcement activities is not specifically tracked to financial planning activities. In the small sampling that was connected to those who held themselves out as financial planners, the cases involved allegations of such things as defrauding clients through marketing schemes, receiving kickbacks without making proper disclosures and the sale of unsuitable products.

6. Should consumers have access to a central registry of information regarding individuals and entities that engage in financial planning and the giving of financial advice including their complaint or discipline history?

Even if additional regulations are put in place to close the gaps, consumer confusion with choosing an advisor will persist given the various levels of standards, ethics and competencies in place (e.g. – there are education, licensing and regulatory frameworks in place today for some financial planning professionals that will remain more rigorous than any minimum standards resulting from this effort). We believe that a central registry allows consumers to make informed decisions on professionals they choose to work with and is in the best interest of the public.

Availability to Serve as a Resource

Thank you for considering our views on the Expert Committee’s request for comment. If you would like to discuss our comments more in-depth or have any questions, please contact Lyle Benson, Chairman of AICPA’s Personal Financial Planning Executive Committee, at lyle@lkbenson.com or Andrea Millar, AICPA Associate Director of the Personal Financial Planning Division, at 919.402.4818 or amillar@aicpa.org.

Sincerely,

Lyle Benson, CPA/PFS, CFP
Chairman, AICPA Personal Financial Planning Executive Committee