There are several ways to serve your clients in the financial planning world. No model is wrong or right -- but there are some that may work better than others depending upon the makeup of your firm.

For example, if your goals include maintaining control over the client relationships and being certain that all advice given is coordinated, holistic, independent and dispensed with your seal of approval, then a comprehensive model will work best. If your goals are to make more money through referral fees or with multiple relationships where you will refer out most of the work and day-to-day nurturing of the client relationship, then another model will work better.

There are two broad considerations when evaluating your options. First is the service model, with many options available to you. Second is your compensation and revenue model, with three distinct methods to get paid from these valuable services.

On the service side, let me start with my least favorite way of serving your clients in the financial planning space -- through a referral relationship for compensation. If your firm decides not to build a wealth management division, then referring clients to a competent professional may be good service. Most firms not willing to deliver these services simply ignore their clients' needs in this area.

Referring your clients to another planner, however, may send a message to your clients that you are not interested in serving them in this capacity. If you choose this route, be sure to earn your referral fee and participate in the planning process. Some states won't even allow revenue sharing unless you are an active participant. You will ultimately be responsible for your choice of a referral partner, and that choice should be made as a fiduciary. Is the referral because the professional that you have chosen is truly the best at all of the major areas of planning -- or simply the one with the most referrals back to you or the most lucrative compensation-sharing program?

Another significant limitation of this method is the complete loss of control. If your referral partner has changed firms, and moved your clients from Firm A to Firm B, you must go along with that partner's choice of new firms if you want your compensation stream to continue.

Last and maybe most significant under the referral model is that your clients may view themselves more as clients of that advisor than of your firm.

 

From scratch

The second model is building it yourself. This can be expensive and time-consuming. The firms that have a greater likelihood of prosperity from building the practice from scratch are likely only the largest firms. They have both the capital and the client base to absorb the huge costs for registration, compliance, technology and human capital. Firms that have done this in the past decade have paid a high cost, often with mixed results.

If you decide to build, make sure that you have a very thorough business plan and that you have the commitment from all partners to support this division as they would the audit, tax or any other significant service area of the firm. Many who started without a business plan and the complete buy-in of all partners have left the wealth management business completely.

Perhaps a better alternative is to acquire a practice. The qualities that are important include the target firm's culture, team and client base. Many planning firms are dominated by the leader/owner, and frequently thin on quality staff. If this is the building method that you choose, think about looking for a practice that has an associate wealth advisor, a good administrative person and well-documented systems and processes.

Don't get caught up in the size of the firm's assets under management. While that is indeed an indicator of future revenues and their client profile, it does not always translate into a holistic, well-rounded planning practice. Clients are more loyal to a firm that services the entirety of their personal financial lives, rather than simply the commoditized asset management side. You also would not want to acquire a firm whose clients are not matched up well with your current client base.

 

The affiliation model

The next service model would be to affiliate with an existing company that has experience working with multiple advisors. A wealth management business with CPA firm experience and the experience of working with non-CPA advisors may suit you best. The cross-pollination of CPA planners with non-CPA planners with diverse backgrounds is the best mix.

Within the world of potential affiliation partners, there are many different models. You can affiliate with some firms and run your PFP practice yourself, serving all clients within the confines of existing firm personnel. On the other extreme, you can also affiliate with a partner that will permanently assign you a competent, like-minded professional or have one available to work with you on an as-needed basis.

What matters most is how much attention you'll get from your affiliation partner and their core ethical makeup. Carefully evaluate the quality of the firm's offering in the areas of practice management, marketing and communications, compliance and technical support. Thoroughly examine the firm's commitment to being fiercely independent; are they tied to a large insurance company or other product manufacturer?

Affiliations do not have to be permanent. Financial affiliates change, CPA firms change, and the CPA firm's vision for its success changes. In fact, sometimes it takes an unsuccessful affiliation to recognize what you really want and need from an affiliation partner.

 

The question of money

On the compensation side of the equation, there are three distinct models: firms that work on a fee-only basis, hybrid firms that charge fees and earn commissions, and firms that only earn commissions.

The last choice, commission-only, is a waning model. The appeal of a commission-only business may be fading in the culture of compliance and transparency in which we live. Advisors acting as a fiduciary are important for the profession and are here to stay. That doesn't mean that commissions will disappear entirely from the financial landscape, but it does mean that advisors will need to fully disclose all conflicts of interest, including the compensation received from product manufacturers as a result of implementation activities. This method is also least valuable to an acquirer of your practice.

For years, the fee-only method was the fastest growing segment of the business. Fee-only advisors only receive compensation in the form of fees charged to clients, typically on a fixed or hourly basis for planning activities. For asset management or portfolio oversight services, fees are commonly tied to a percentage of the assets overseen by the advisor or done on a fixed-fee basis. I started as a fee-only planner, and found great success in the early days of my CPA firm simply by touting our independence.

In practice, however, I often see relationships where the compensation is received from assets under management frequently morph into an investment-only relationship, and the holistic planning sometimes takes a back seat. I suggest that you build a pricing structure that recognizes the importance and significance of the wealth management part of the relationship. Even if the cost is based on assets under advisement, design a written service plan for your clients that ensures comprehensive wealth management reviews at regular intervals.

I also challenge the notion that a CPA wealth manager can also be a very good asset manager. Asset management is a full-time job itself, and unless your practice is very small, it is nearly impossible to do a great job as an asset manager and be a holistic and proactive planner. The trend of advisors toward using asset management specialists or separate account managers is continuing to grow.

The last model is the hybrid model, or one in which the advisor charges fees and may also receive commissions. Hybrid advisors may be registered as investment advisors, hold a securities license and maybe even an insurance license. The key to a successful hybrid model is full disclosure to your clients and maintaining a critical eye toward the selection of all products that may be implemented. You should be prepared to show a reasonable basis for your recommendation and why you believe that this is the best solution for your client.

There is no easy answer regarding the best model for your firm. But whichever model you choose, choose to be great at it!

John P. Napolitano, CFP, CPA, PFS, MST, is CEO of U.S. Wealth Management in Braintree, Mass. Reach him at (781) 849-9200.

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