by Gail Perry
Financial planners are an odd breed.
When they join accounting firms, they cross over the clear definitions typically reserved for auditors and tax experts, drawing from the skills of each specialty and adding their own unique brand of tonic — to provide clients with an all-encompassing vision of their financial future.
Planners draw on their knowledge of accounting rules, tax laws, investment performance, and financial strategies to perform their job. While clients may think a crystal ball is involved in the results that they receive, the planners know it is their training and expertise that give them the almost surreal ability to not only envision the future, but to make that vision a reality.
And with financial planning rapidly becoming a standard service offered by accounting firms, it seems that no one prevailing formula exists for the ideal method of compensation.
It’s not uncommon for accounting firms to apply a traditional approach to compensating these somewhat non-traditional professionals.
“All of our financial planners are salaried,” said Steve Rafferty, operations partner for Springfield, Mo.-based BKD. On the surface, it would appear that financial professionals are paid in the same way as their auditing and tax brethren. But a look beneath the surface shows that there are alternative methods of payment.
Accounting firms that have added financial planning to their mix of client services tend to differentiate between financial planners and financial advisors among their staff members. Planners meet with clients, discuss goals and chart a financial course that will enable the client to meet those goals.
Advisors, who go by many different names — including account managers, wealth managers and investment counselors — provide the actual implementation of a financial plan, making and perhaps even choosing the investments, monitoring them, and following through on the wishes of the client.
The compensation models for financial professionals can vary depending on a number of factors, including the type of service provided, the amount of money invested, the performance of the investments and the types of investments.
In 1998, the Personal Financial Planning Executive Committee of the American Institute of CPAs issued guidelines for CPA firms that pay financial planners, and concluded that, “CPAs providing personal financial planning and investment advisory services should consider both regulatory and marketplace forces and the impact on their client relationships when choosing a compensation method.”
The white paper produced by the PFP Executive Committee delineates several possible compensation methods.
- Hourly, fixed or flat fees: Planners charge a pre-determined fee based on the time that they spend on the project or a flat rate for creating a financial plan. The client is charged for the plan, regardless of whether or not the plan is implemented.
- Percentage fees: Fees are based on a percentage of an amount, such as the amount of assets under management.
- Performance-based fees: Performance-based fees are based on the profitability of the client’s invested assets. As the assets increase in value, the planner earns a percentage of the income.
- Contingent fees: Contingent fees are only charged when a specific finding or result is obtained. CPA firms are barred from performing audit or financial statement review services for clients to whom they charge contingent fees.
While the AICPA provides a variety of suggestions for a payment structure for financial planners, Rafferty keys in on what many consumers see as the problem of charging based on the amount available to invest. “If their compensation is driven by directing clients to a specific investment, there’s a potential conflict.”Dean Knepper, a CPA and certified financial planner who left public accounting to start Lifetime Financial Planning Inc., a planning and advisory firm in the Washington area, agreed.
Knepper’s firm is what is referred to as a fee-only firm. “If someone comes to us for advice and there may be an alternative of whether to pay off their mortgage or invest that money, we would be more objective,” he said. “We have nothing to gain if they decide to give us that money for us to manage.”
Many accounting firms utilize different compensation models for financial planners who operate on the front line, meeting with clients and determining their needs and desires, and account managers, who often work behind the scenes, managing investments. It is not unusual for financial advisors to be paid in a more creative fashion than their counterparts who provide the initial financial plan.
Steve Clement, a manager at Seattle-based Moss Adams LLP, described financial planners as those who “sit down with the client and create a detailed financial plan for a fee. The fee stands on its own,” he explained. This makes sense when you consider that some clients prefer to take care of implementing the plan themselves or using an investment professional with whom they have a previous relationship. “There are firms that do financial planning and do not get into implementation at all,” Clement said.
Whether financial professionals should benefit from the performance of investments is “an ongoing debate,” Clement explained. “The advisor is theoretically more motivated by the percentage of the portfolio.” At Moss Adams, financial plans that are implemented and turned over to advisors generate fees based on a percentage of assets under management.
Clement also described another fee option at Moss Adams, the retainer fee, which is a flat annual fee that is “based upon the complexity of the relationship.”
Shane Hill, regional vice president for Hudson Global Resources, a Raleigh, N.C.-based placement and outsourcing firm, works with financial planners regularly and sees a variety of fee structures in the firms where they work. Some innovative firms provide “more of a transactional service,” Hill explains. “It’s more number-driven; the fee is tagged to the quantity of transactions.”
Yet another approach to compensation for planners is in place at Sullivan Bille PC, in Tewksbury, Mass. Stephen Ahern, a partner with the firm, described his firm’s compensation structure for financial planners: “We don’t pay anybody a commission, but I do believe in paying people for performance,” he said. “We’ll carve up a bonus based on retainage — how many clients have stayed from year to year.”
Ahern describes his firm’s approach as a “balanced score card approach. We look at how the client is being serviced and how the individual employee is supporting the goals of the firm.”
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