eyes wide open - fees or commissions - Statistical Data Included

California CPA, Sept, 2001 by Jerry Nightingale

CPAs Choose Carefully Between Fees & Commissions

the question used to be, and to some CPAs it still is: should CPAs be allowed to accept commissions? Since 1999, California CPAs have been allowed to charge commissions following passage of SB 1289, which revised California Business and Professions Code Sec. 5061 to allow a licensed accountant to accept commission-based compensation for defined services.

Now the question is, should CPAs charge fees or commissions-- or some combination of both--if they provide financial planning and products such as life insurance, mutual funds or stocks?

For some CPAs, the answer is clear--a fee structure is objective, commissions are not. But for others, commissions are an opportunity to provide clients with flexibility in managing their money, giving the CPA and client the best of both worlds.

"One size really doesn't fit all," says Robert Lovejoy, CPA, CFP, PFS, whose San Mateo-based firm charges both fees and commissions. Lovejoy, who has been a CPA for 40 years and a CFP for nearly 20, charges a fixed set-up fee, then offsets his commissions back to the fixed fee.

"I always give advice in the best interest of the client, whether it maximizes commissions or not. There are practitioners who are the same, and some who are not," Lovejoy says, adding that charging commissions doesn't mean the practitioner is biased, but it puts the burden of proof on the CPA. "It becomes a greater problem to determine whose interests are being met--the client or the adviser--which does not mean you can't get just as good, just as objective advice."

PAST PERCEPTIONS

Yet there still seems to be a stigma associated with commissioned brokers within the CPA community. The prevailing idea is that a person who makes a living by selling a product, such as stocks or insurance, is suspect when giving advice to buy or sell. In fact, when a CPA tells someone in the accounting community that they accept commissions, the common reaction seems to be, "How could you?"

"The major complication with being compensated with commissions is that taking commissions provides the opportunity to be less than objective. Not that a person will be, it's just that a person is no longer totally independent," says Richard Blake, managing partner at Pearson, Del Prete & Co., LLP in Palo Alto.

The nature of commissions provides an opportunity for a conflict of interest. While if one takes fees, that opportunity is significantly reduced. That is similar to "auditing keeps honest people honest." A corollary seems to be, "Fees keep objective people objective."

Rob Healy, a CPA and registered investment adviser in Walnut Creek, agrees. "If you're charging a fee, it's as unbiased as you can get," says Healy, whose firm is fee-based. He added that many people have a preconceived notion that a firm may not be objective if it's charging commissions. "I didn't want to have that preconceived notion. But, there are times when I think commission is appropriate, especially when clients are only interested in a onetime transaction instead of an ongoing relationship."

THE COMMISSION BENEFIT

Some clients may want to just park their money and receive a dividend or interest check on a regular basis. Management of their assets and paid advice is not desired. For these clients, fees could unnecessarily drain their interest checks, especially if the interest is coming from low-interest bearing municipal bonds.

In a commission structure, if a client buys and holds a stock position for a number of years, that client only pays a commission on the purchase and no other fee until the position is sold. While the client is holding the position, the broker is still providing services to the client, including monitoring the client's portfolio and sending reports.

One client, who is a CPA, prefers to pay commissions because he can easily deduct the commission charges when he sells his holdings. If he paid fees, he would first have to meet the 2 percent adjusted gross income requirement of miscellaneous deductions before he could take any deductions for the fees. In the very least, he would be giving up at least 2 percent of AGI on a fee basis.

An aggressive tax treatment that has been used recently involves a yearly allocation of the fees' "transaction" portion (as opposed to the non-transaction portion) to the principal investment. If this treatment holds, it would decrease the disadvantage associated with fees as a tax deduction.

In many instances, since commissions are low to stay reasonably competitive with discount brokerage houses, the client is getting advice virtually for free. But, if that client were paying a fee based on percent of assets under management, the client would incur additional costs against their investment. The longer the client holds the position, the greater the client's cost.

"For accounts under $100,000, you really need to consider if it makes sense to charge a management fee," says Randy Pierce, CPA, who is a sole practitioner in Irvine. He adds that a few of his clients are seeking financial advice on amounts below $50,000. "Hardly anyone is going after that client," he says. "You give them basic advice and charge them a commission. But to charge them a management fee ... it doesn't work on a small scale."