Outline of Testimony
By Bernard Blum, CFP, CPA/PFS, AEP
Representing the Financial Planning Association
Hearing on SEC Independence Rule Proposal
Wednesday, September 13, 2000
New York, NY

1.	Introduction
2.	Reliance on Certified Audits in Financial Planning
	A.	Investment Advisory Services
	B.	Investment Supervisory and Asset Management Services
	C.	Retirement Planning
	D.	College Planning
3.	Impact of Auditor Independence on Financial Planning
4.	Conclusion

Outline of Testimony
By Bernard Blum, CFP, CPA/PFS, AEP
Representing the Financial Planning Association
Hearing on SEC Independence Rule Proposal
Wednesday, September 13, 2000
New York, NY

1.	Introduction
	The Financial Planning Association ("FPA") is the largest financial planning association in the U.S. FPA represents 29,700 professional planners and others who are an integral part of the planning process. Their financial planning clients include more than 2 million Americans and their families. FPA supports auditor independence and the proposed SEC rule changes to safeguard the integrity of the core information on publicly traded companies used by professional advisers in making investment recommendations and managing client assets. Mr. Blum represents FPA at the hearing in his capacity as a member of the national Government Relations Committee, and as a Certified Financial Planner designee. He is also a CPA, current chair of the Connecticut State Board of Accountancy, and holds an accredited financial planning designation awarded by the AICPA.
2.	Reliance on Certified Audits in Financial Planning
	Comprehensive financial planning is a means of helping individuals and their families achieve their personal financial goals in life. Broken down into separate practice areas, four specialty areas of financial planning (listed below) rely implicitly on the objectivity of certified financial statements issued by CPA firms in connection with publicly traded companies.
	A.	Investment Planning and Advisory Services
		Investment advice is a core part of the financial planning process. It may be provided separately or as part of a comprehensive financial plan. Financial planners, who provide investment advice for compensation, and as a regular part of their business, are generally required to register as investment advisers with the SEC or state securities administrators. Approximately 90 percent of CFP practitioners offer investment planning and advisory services. Mr. Blum's firm is registered with the SEC.
	B.	Investment Supervisory and Portfolio Management Services
		A critical step of financial planning involves implementation of the financial planning recommendations. Many clients prefer having their professional adviser involved in this process. The majority of those recommendations involve securities assets. Approximately 67 percent of CFP practitioners planners provide asset management services, and many also provide investment management consulting services. Planners who do not directly manage client assets but provide an independent assessment of the portfolio managers' performance offer the latter service.
	C.	Retirement and Pension Planning
		Retirement planning for individuals and couples is the most widely offered service by financial planners. Approximately 87 percent of financial planners provide such services. Retirement and pension planning inevitably requires investment recommendations to help pre- and post-retirement clients meet their personal financial goals.
	D.	Education Planning
		Approximately one-third of CFP practitioners also provides investment advice to families wishing to meet a basic goal of financially assisting their children in financing a college education. Investment recommendations made with respect to college and other educational funding is generally a separate specialty area from other investment or portfolio management services.
3.	Impact of Auditor Independence on Financial Planning
	Financial planners typically never question the reliability of a company's financial statements in making specific recommendations to buy or sell equities. They are primarily concerned about other aspects of the investment recommendation: tax consequences, income and rate of return of the security or mutual fund, and liquidity and volatility of the overall asset allocation. It is beyond their capacity, or the investing public's ability, to determine the objectivity of the attest function in connection with these other fundamental evaluations. Accurate data on quarterly earnings statements, initial public offerings, and other financial records is critical to ensuring that objective information is released to the public. Accurate information is even more critical, given the abysmal savings rate of Americans and their need to play `catch up' in meeting their retirement goals. At a time when millions of Americans are entering the equities market for the first time, and increasingly transferring assets from bonds into the more volatile equity markets, it is important that auditor independence, as a fundamental cornerstone of market analysis, remains insulated from potential conflicts of interest.
4.	Conclusion
	Because of the broad concern with maintaining auditor independence, FPA generally supports the proposed changes to the Auditor Independence Rule to ensure integrity of the attest function at a time when accounting firms are increasingly offering other services that may create significant conflicts of interest. FPA also supports a constructive dialogue between the Commission and the AICPA to resolve these issues.

STATEMENT OF

BERNARD BLUM, CFP, CPA/PFS, AEP

Of the

FINANCIAL PLANNING ASSOCIATION

Before the

SECURITIES AND EXCHANGE COMMISSION

New York, NY
September 13, 2000

I. Introduction

Chairman Levitt and Commissioners, good afternoon. My name is Bernie Blum. As a Certified Financial Planner practitioner and member of the national Government Relations Committee of the Financial Planning Association, I am pleased to testify in support of the Commission's proposed revision of the rules relating to auditor independence.

Like many financial planners, I started my career in a different area of the financial services industry. I began as an accountant more than 40 years ago, and continue to be actively involved as a CPA in my firm. I currently serve as chair of the Connecticut State Board of Accountancy. I care deeply about both professions. It isn't unusual for accountants to move into financial planning. Sixteen percent of CFP licensees are CPAs. So I fully understand and sympathize with the trend in the accounting profession to offer more comprehensive services to our clients.

Some of you may have heard the story in the national media recently that financial planners were rated as having the best job in the country. According to one article in USA Today, "low stress, high income and plenty of time off" were major reasons why my colleagues and I are at the top of the list this year. I'm not sure I would agree with the rationale, but I would concur from the perspective that the job satisfaction that we get from helping people meet their financial goals is tremendous.

Mr. Chairman, as for the low stress aspect of a planner's job, I think we would all like to keep unnecessary stress out of our lives. One way to help financial planners accomplish this is to do what you have proposed in this rule, and that is to maintain true independence in the attest function of publicly traded companies. There have been others who have appeared before you far better qualified to discuss the technical aspects of the rule. They have provided to you, in my opinion, with evidence that the existing rule may be getting frayed around the edges, as it were, because of the growing conflict with other consulting services offered by the auditing firms to their clients.

It is FPA's position that, whether the problem of independence is significant or not, there is a growing perception that these conflicts of interest can interfere with external audits. That is our chief concern. My testimony will focus on why financial planners support a strengthened SEC rule to anticipate and prevent the erosion of public confidence in financial statements certified by the accounting profession.

II. Reliance by Planners on Certified Audits

As a CPA, I can tell you that I have been following this issue for some time. However, as a financial planner, I suspect that many of my CFP colleagues have not paid as close attention. It's a little like taking certain things in life for granted. I think many of us have always taken audited financial statements for granted. In a way, without the certified audit, financial planners simply would not be able to do their jobs. It is truly the basic, core data around which our capital markets operate.

Financial planners who provide advice on the stock market, of course, rely implicitly on the accuracy of the financial statements reviewed by CPA firms. While comprehensive financial planning involves many practice specialties outside of giving securities advice - these services may include advice on long-term elder care, divorce, tax, and estate planning -- investment advice remains a core part of the planning process. FPA has identified four specialty areas that involve advice on publicly traded securities, and that we believe would be negatively affected by erosion of the Independence Rule.

Perhaps the most commonly recognized specialty area is that of investment planning and related advisory services. Approximately 90 percent of CFP practitioners offer investment planning to their clients separately or as part of developing a comprehensive financial plan.

The second specialty area is in the management part of the securities business, in which financial planners act as portfolio managers, and in some cases provide investment management consulting services. Planners who do not directly manage client assets, but provide their clients with an independent assessment of other portfolio managers' performance, offer the latter service. About two-thirds of FPA members provide these services to their clients.

Retirement and pension planning is another area in which the auditors independence rule has a direct impact. It is probably the most widely offered financial planning service, given the obvious demographic changes resulting in a higher demand for our services by baby boomers. Approximately 87 percent of financial planners provide retirement planning. Retirement and pension planning, of course, generally requires investment recommendations to help client prepare for retirement or to maintain a certain lifestyle after reaching retirement age.

Finally, education planning is provided by about one-third of CFP practitioners. In many instances, our clients rely on stock market investments to finance their children's college education. Because of the difference in investment time horizons and other factors, investment recommendations made in education planning are generally treated separately from other investment or asset management activities of the financial plan.

In summary, outside of a limited client engagement that does not involve comprehensive financial planning, we are directly affected by what happens to the auditing process. By `we,' I mean not only the 29,000 members of FPA, but also the 110,000-plus investment advisers who rely on the same financial data.

III. Impact of Auditor Independence on Financial Planners

As I mentioned earlier, financial planners tend not to question the reliability of a company's financial statements when they make specific recommendations to buy or sell securities. That's not their job. Planners are primarily concerned about other complex factors involved in securities investments: tax consequences, income and rate of return, liquidity and volatility, the client's investment time horizon, risk tolerance, and so on. It is simply beyond the planner's capacity, and the investing public's as well, to assess the accuracy of, or to be directly concerned with, the attest function.

Accurate data on annual earnings statements, initial public offerings, and other financial records is critical to ensuring that planners have reliable core information upon which to base their investment recommendations. It's not unlike buying a car. If you don't know what's under the hood, and how well it runs, it's a risky purchase. Understanding the relative financial health of a company in making the decision whether to invest in it is even more critical today, given the pressing need by many Americans to play `catch up' to meet their retirement goals. And I don't use the term `catch up' casually. Industry statistics show that Americans families procrastinate in planning for retirement. Many of our clients tend to seek us out after a watershed event in their lives, such as having their first child, going through a divorce, or belatedly contemplating retirement planning when the kids leave home for good, that forces them to think about their future financial goals. None of these events are optimal times to start planning, of course, which is why the rates of return offered historically by the securities markets often present the best solution to achieving the client's financial goals in these situations.

Millions of Americans are, of course, entering the stock market for these reasons. Just last week, the Investment Company Institute reported that more than 88 million individual shareholders now own mutual funds, up 6 percent from last year. At the same time, the typical fund investor has an annual household income of less than $75,000. According to a January survey of 401(k) plan participants by the Employee Benefit Research Institute and the ICI, in 1998 the median account balance for participants, net of plan loans, was only $13,038. Nearly three-quarters of plan balances were invested directly or indirectly in equity securities. These kinds of numbers tell us, as professional advisers, that most Americans don't have much room for error in their investment decisions. Tomorrow's retirees clearly need to accelerate their rate of investing in the equities markets today in order to achieve financial independence upon retirement.

Let me make one other observation. Most financial planners are strong advocates of portfolio diversification. Many 401(k) plans, however, also contribute in-kind shares of the company sponsor. The I CI/EBRI report indicates 17.7 percent of plan balances are invested in the employee's company stock. The risk of concentration in a single stock means that the average investor must rely even more on the integrity of a single company's audited financial statements.

News stories, such as a recent one in the Wall Street Journal about the SEC investigating a Big 5 firm in connection with an alleged audit failure, is alarming to professional investment advisers. The response from the accounting side was that, quote, there's never been a case where an audit failure in any way related to non-audit services, and from the enforcement side that it's very difficult to prove a violation.

Mr. Chairman, opponents of the Rule proposal nonetheless claim it is a solution in search of a problem. I can only tell you that the investing public can't afford the cost of an experiment that threatens the intent of the Independence Rule. The current rule has worked extremely well in the past. We need to make sure that it continues to function well in the future. The Commission must act responsibly, and promptly, to update the Independence Rule in response to the new market dynamics.

We simply can't afford any unnecessary accidents in the stock market. The markets generate enough volatility on their own, as we all know. If the markets become even riskier as the result of lower external audit standards because the SEC did nothing, investor confidence in our equities markets will begin to erode. In my own personal experience, I have found few clients willing to take on more risk, which they might be forced to do if they can no longer automatically rely on audited financial statements, to meet their long-term investing goals.

IV. Conclusion.

Mr. Chairman, in conclusion, we cannot go back to yesterday and simply put on green visors again. Those days are gone forever. The accounting graduate today is turning to other lucrative career paths. Change is coming fast. In the near future, you will not be able to tell the difference between a bank, an insurance company, and a brokerage firm. Where flexibility in the final Rule permits the broadening of such services by accountants into areas where they are not in conflict, we truly support such changes.

On the other hand, we remain firmly grounded in the belief that financial reports must be prepared by independent and objective accountants in order to maintain the public's trust. Information must be current, and someone who is truly independent must be able to verify this data for the investor. In order for the SEC and the state Boards of Accountancy to monitor the auditing functions, there must be a clear delineation in the revised Rule on when an auditor is or is not independent and objective.

Questions raised in the SEC rulemaking are valid and important, and ultimately must be answered. These issues must be addressed jointly with the accounting profession in a constructive dialogue that to-date regrettably has seen both sides talk past each other, not to each other. In our opinion, a group of key SEC staff and AICPA leadership should discuss these issues to determine proper solutions and interpretations.

Mr. Chairman and Commissioners, thank you for your time. I'd be happy to respond to any questions.