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How to Keep Yourself Out of Trouble When Your Accounting Firm Offers Investment Advice


Adding wealth management services to your tax practice is an excellent decision, but when are you required to register as an official investment advisor? Expert Lawrence Sprung of Mitlin Financial, Inc. delves into this complicated topic.

May 28th 2020
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Wealth management services can be an excellent addition to a tax practice. Throughout this series, we have discussed several ways you could add these services. The options I mentoned previously include starting your own investment arm or outsourcing this component of your practice.

As a client’s tax advisor, it is only natural to have conversations with them about their investments. However, when doing so, you must remain within the parameters of providing limited investment advice. Once you expand your advice and involvement beyond the scope of limited investment advice, you will be required to register as an “investment adviser” under the Investment Advisers Act of 1940. A safe harbor provision exists for certain provisions, including accountants. It allows them to provide investment advice as long as it is incidental to their profession. Keep in mind, this exception is not available to the accountant who is acting a financial planner; they must register.

Qualifying under the scope of limited investment advice can be complicated. Generally speaking, as a tax advisor, you can provide investment advice that's incidental to your services. The advice would need to be in general terms when discussing investments as part of a client's overall financial plan.

Once you begin going down the path of providing advice that's specific to certain securities, you may be crossing the line. Also, you can comply with the exemption when providing planning servoces for an individual component of a client's financial situation, but once you cross over to providing a holistic plan with specific recommendations, you may need to register as well. This exemption is in place to protect the majority of tax advisors from needing to register when they are advising clients on a limited basis, but you need to be aware of what will require you to take the next step to register as an investment advisor.

Tax advisors who are looking to advise their clients on their investments while being compensated for it should highly consider forming a separate arm of their practice and getting registered. This will allow them to provide full investment advice and guidance but will also require that they maintain the proper compliance mechanisms. This is really for those who have the resources, knowledge, and desire to provide these services. You will be acting as a fiduciary, which is not new, and you will need to act in your clients' best interest.

Taking this step would require having the appropriate infrastructure in place to service this additional business line. You may be able to leverage some of your current staff from your tax practice to limit hiring and significant capital outlay at first. Assuming this entity becomes a full-fledged practice of its own, you will most likely require dedicated staff at some point.

Many of the other resources you would need, outside of human capital, could potentially be piggybacked from the tax practice. Ideally, you would want to begin growing the investment practice with clients from your tax firm. This would create the ability to cross-sell your current clients and expand your share of wallet with them. You are a trusted advisor to them already, so this should be a natural fit.

Accountants who are looking for an easier way to offer these services while remaining involved in the process should look to build a relationship with an advisory firm that you refer your clients to. This would allow you to remain involved in the client’s situation while having a registered advisor deliver advice and guidance. Essentially, this can provide you with the opportunity to have input without the obligation to register. All you need to do to avoid having to register is ensure you don't go beyond providing limited investment advice. 

Firms you may be looking to associate with may require you to register or affiliate with them to cover yourself (and them) on the registration issue. This will allow you to provide investment advice beyond the limited statute and even be compensated. You will need to be aware of any compliance constraints you may need to operate within if and when you are registered as an advisor with a firm. The registration is to make sure you are covered for the advice you are giving, but it is important to understand what your compliance obligations will be for this ability and your fiduciary duty.

Understanding what you can and can’t do is paramount to remaining compliant. Providing specific investment advice, full financial plans, or simply violating the scope of limited investment advice can land you in a troublesome spot with the Securities and Exchange Commission (SEC). The SEC is the regulatory body that oversees the investment advisor world, and they would ultimately be the ones to alert you that you are not complying with regulations and are required to register as an advisor. If the SEC has to contact you because you didn't register when you should have, there will be penalties: These could be anything from a slap on the wrist to potential fines. Many factors will be taken into consideration by the agency when determining the appropriate penalty.

We would recommend that you consult with legal counsel regarding your situation to see if you are required to register or not. You will want to have a clear understanding of what advice you will or will not be providing, whether you'll be compensated for your advice or referrals, and what your relationship will be with the firm or advisor you are working with. All of these components may have an impact on the advice provided to you by your attorney. Registration is not a huge hurdle that should detract you from exploring adding these services to your practice.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal, and/or tax advice.

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