The CPA’s guide to Investment advisory business models

Personal Financial Planning Section

The CPA's guide to

Investment advisory business models

Have you crossed the line when providing investment advice? Dinsmore & Shohl LLP 2nd Edition

Investment Advisory Business Models

The CPA's guide to investment advisory business models

About the AICPA Personal Financial Planning Division & Acknowledgements ............................ 2 Introduction.................................................................................................................................. 3 Who Is an Investment Adviser? .................................................................................................... 8

- Investment Adviser Defined.............................................................................................................................8 - Difference Between Investment Adviser and Financial Planner ...............................................................12 Do I Need to Register as an Investment Adviser?....................................................................... 13 - Are CPAs Exempted from Registration as an Investment Adviser? .........................................................13 - Registration of Affiliated Entity in Lieu of Registering Accounting Firm ..................................................15 - Can CPAs Rely on the Family Office Exemption from Registration? ........................................................16 Hypothetical Examples Highlighting Registration Issues ........................................................... 17 Where Do I Register? .................................................................................................................. 21 - Do I Need to Register With the SEC? ............................................................................................................21 - State Registration ...........................................................................................................................................23 - Investment Adviser Representative Registration ........................................................................................24 How Do I Apply for Registration? ............................................................................................... 26 - How Do I Get Access to IARD? ......................................................................................................................26 - Filing Form ADV ..............................................................................................................................................26 - What Are the Filing Fees? ..............................................................................................................................28 - When Does the SEC Approve My Registration? ..........................................................................................28 What Are My Duties as an Investment Adviser? ......................................................................... 29 - What Does It Mean to Be a Fiduciary?..........................................................................................................29 - Compliance......................................................................................................................................................29 Professional Considerations ...................................................................................................... 36 - Objectivity, Integrity, and Disclosure.............................................................................................................36 - Independence and Investment Advisory Services ......................................................................................37 - Commissions and Referral Fees ...................................................................................................................38 - High Standard of Care....................................................................................................................................38 Conclusion ................................................................................................................................. 39 Appendix 1--Business Model Table ........................................................................................... 40 Appendix 2--Resources.............................................................................................................. 44 Appendix 3--Glossary ................................................................................................................ 45 Appendix 4--SEC Release No. IA-1092 ...................................................................................... 47 Appendix 5--Descriptions for CPA and PFS--Part 2B of Form ADV............................................ 58 Appendix 6--Form ADV .............................................................................................................. 60

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Investment Advisory Business Models

About the AICPA Personal Financial Planning Division & Acknowledgements

Personal Financial Planning (PFP) Section

The PFP Section is the premier provider of information, tools, advocacy, and guidance for CPAs who specialize in providing estate, tax, retirement, risk management, and/or investment planning advice to individuals, families, and business owners. Learn more at PFP. All AICPA members are eligible to join the PFP Section.

Note: The additional resources that this guide references on the PFP Section website are included with membership in the PFP Section (this includes all CPA/PFS credential holders). Nonmembers can purchase some of these resources on the AICPA Store at .

CPA/Personal Financial Specialist (PFS) Credential

The CPA/PFS program allows CPAs to gain and demonstrate competence and confidence in providing estate, tax, retirement, risk management, and/or investment planning advice to individuals, families, and business owners through experience, education, examination, and a resulting credential. More information on the education opportunities, exam preparation options, the PFS exam, and general CPA/PFS credential requirements and benefits can be found at PFS.

Acknowledgements

The AICPA's PFP Division appreciates the commitment to excellence that is exhibited by our volunteer members. Jean-Luc Bourdon and Ellen Bruno's consistent contributions to the role of CPAs in personal financial planning over the years and dedication to helping members understand the regulatory and compliance environment is evident through their involvement, including their extensive roles in helping to shape and update the second edition of this guide. We wish to extend our sincerest gratitude to them for their devotion and enthusiasm to providing insights and clarity to our members in an area that is quite complex. We also want to give special thanks to Dinsmore & Shohl LLP for their in-depth role in content development and review.

Notice to Readers The general information contained in this Guide is provided by the American Institute of Certified Public Accountants as a service to our members. The Guide discusses general principles applicable to investment advisers. It is not, and is not intended to serve as, legal or any other professional advice applicable to any particular person or matter. It is not intended to, and the AICPA specifically disclaims any intention to, offer legal advice to members with regard to their own conduct or situation. Members should consult their own legal counsel for application of the principles discussed in this Guide to their particular situations.

This publication has not been approved, disapproved, or otherwise acted upon by any senior technical committees of, and does not represent an official position of the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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Introduction

CPAs who serve individuals and families offer personal finance guidance (aka financial planning) of wide-ranging scope and depth. For instance, CPAs offer one, some or all of the following services: tax, estate, retirement, risk management or investment planning. Some practitioners incidentally address these various topics, while others provide in-depth specialized services, full financial plans and/or personalized investment advice. The growing complexity clients face to plan their financial future leads them to seek trusted, objective and professional advice.

As the range of financial topics clients wish to discuss expands, two questions have become common and important. First, when does the financial advice I provide in my CPA practice require registration? That question will be answered in the following pages. Second, should I become an investment adviser? That question has a very personal element, but you should know that CPAs are in an optimal position to add investment advisory services to their businesses.

Surveys show that CPAs are ranked among the most trusted advisers. They put their clients' interests first when providing advice, which is an especially critical element that the American public seeks in investment advisers. Adding personal financial planning (PFP) services can help a CPA firm attract and retain clients and increase its revenue as reported in an AICPA Economic Benefit Survey of PFP Services.1 Respondents to the survey affirmed that offering PFP services had a positive impact in deepening and retaining client relationships as well as financially for their firm. If you decide to provide investment services to clients, the type of services and related business model you select will determine your legal and regulatory requirements. The following are the most common regulatory business models used in providing investment services to clients:

Investment Adviser. An investment adviser (IA) provides advice to clients about investing in securities for a fee rather than a commission. This business model may require the CPA or CPA firm to register as an investment adviser with the SEC or one or more states.

Investment Adviser Representative. An investment adviser representative (IAR) provides investment advice to clients on behalf of a registered investment advisory (RIA) firm. This model may require the IAR to register with one or more states and subject the IAR to the regulatory requirements applicable to registered investment advisers.

Solicitor. A solicitor "finds" and refers clients to an investment services provider for a fee or other benefit. A solicitor may be required to register as an IA or IAR in some states.

Registered Representative. A registered representative ("RR") is licensed to sell securities for a broker-dealer and receives a commission on the sale. An RR is required to register with

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Investment Advisory Business Models the Financial Industry Regulatory Authority (FINRA) and is subject to the regulatory requirements applicable to FINRA member broker-dealers.

The most common regulatory business model for CPAs providing personal financial planning ("PFP") services is the investment adviser model. This guide is intended to assist AICPA members in understanding the registration and regulatory provisions applicable to investment advisers under the Investment Advisers Act of 19402 ("Advisers Act") and similar laws adopted by the various states. In this guide, you will find information on the following:

Determining when you cross the line between providing investment advice "solely incidental" to your practice and providing investment advice that is "not solely incidental," which is one of the elements that determines if you must register as an investment adviser;

CPA standards of professional conduct implicated when providing investment advice or services;

The business models available for your firm in providing investment services (appendix 1); and

Resources available to you as you start or grow a planning & tax advisory services business (appendix 2).

Certain definitions used in this guide are set forth in appendix 3.

2 Investment Advisers Act of 1940, 15 U.S.C. ?80b-1 et seq.

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(p. 8)

(p. 13)

(p. 13)

(p. 21)

(p. 26)

(p. 29)

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Investment Advisory Business Models

Federal and state securities laws define an investment adviser as a person or entity who, for compensation, is engaged in the business of providing advice on securities.3 This definition creates a threeprong test to determine whether an individual qualifies under the statutory definition of investment adviser, as illustrated below. If you meet all three requirements, you are deemed to be an investment adviser and are thus subject to federal and state investment adviser registration and regulation, unless an exclusion is available.4 Due to the complexity of the facts and circumstances nature of the three-prong test, some CPAs find it helpful to first determine if they qualify for the accountant's exclusion from the definition of investment adviser before applying the three-prong test. If a CPA qualifies for the accountant's exclusion, the CPA is exempt from registration regardless of the result of the application of the three-prong test. The accountant's exclusion is also discussed shortly.

3 Advisers Act ?202(a)(11), 15 U.S.C. ?80b-2(a)(11). 4 Id.

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