by Cynthia Harrington
Despite turmoil in the public markets, CPAs are still entering the financial advisory arena - just not at the same pace as a few years ago. While many complain about increased competition for clients, those entering the field find that the move adds value to their practices.
The move to financial planning is still driven by client demand, by the desire to add revenue to the last three quarters of the year and, increasingly, by lifestyle changes.
“Over the last three years, the number of CPAs entering financial services has definitely slowed, but it is difficult to say by how much,” explained Jaco Jordaan, CFP, ChFC, CFS, of H.D. Vest Financial Services. “The important thing is that there are clients who are not getting the advice they need and they will often look to their CPA for help.”
Jordaan sees the industry from a bird’s eye view in his position as manager of the new business division for the Irving, Texas-based broker/dealer catering to CPAs. He explains that advisors starting today deal with very different issues than those of just four years ago. Clients went from fearlessness and unreasonably high performance expectations to abject fear and unreasonably low expectations.
“The concerns of advisors regard how to manage client expectations given their current emotional view of investing,” said Jordaan.
The market decline is driving some CPAs into the advisory business. Michael Muchortow, CPA, set up a little practice in business consulting and taxation after 24 years with Arthur Andersen. Personal contacts and friends sought his advice on their own accounts as the market dropped. “People were decimated by the bear market,” said Muchortow, of Muchortow and Associates, in Mt. Clemens, Mich. “I suppose they came to me looking for advice without the risk of dealing with a person pushing product.”
Mario Saggese, MBA, CPA, of Ridgewood, N.Y., set up his own tax preparation practice a little over a year ago. His new office is closer to his home, so he’s now able have dinner with his family, something he was not always able to do during his 20 years with U.S. Trust, where he managed corporate taxes.
While looking for something to add to revenue after tax season, Saggese began offering retirement plans to his small business clients. That grew to individual clients as he began seeing how scattered most were about their investments.
“Clients were not in control of their financial life. They’d bought mutual funds over the years but had often even forgot what they owned,” said Saggese. “As these assets lost value, my clients were looking for some help.”
One reason for the enthusiasm of CPAs just entering the advice business may be that getting started can be easier for the CPA advisor. Unlike other beginning advisors, CPAs often can just hang out another shingle. After obtaining a Series 6 or Series 7 license, or the Series 65 or 66, and setting up a separate storage spot for the advisory statements and paperwork, the CPA is ready to go. The hardware and staff needed are usually already in place.
There are also plenty of established firms that are ready to assist with the back office, research and training on how to get started. Insurance companies are getting into act, broker/dealers are expanding to offer CPAs help in establishing RIAs, and even regional CPA firms have opened divisions providing full-service investment advisory services to other CPAs.
Judging by the experience of one entrant into the market of assisting CPAs, the biggest demand of starters seems to be for investment expertise and back-office administration.
According to Bob McLoughlin, CLU, LLIF, and a vice president at New York Life, they see most CPAs affiliating with New York Life agents on a part-time basis. Under this arrangement, the first of three models in the Partnership for Professionals program, the CPA consults with a client about their needs and develops a plan. They then go to the agent to select investments and manage the ongoing relationship.
Other CPAs choose the basic plan, under which they refer a client for an upfront fee to the New York Life agent. The third group goes full time, going through the full training program and getting a full-time New York Life agent working in the accounting and advisory office. “The program exceeded our expectations during our rollout phase,” said McLoughlin.
Raymond James’ Investment Advisory Division helps independent advisors set up RIAs.
Matthew J. Matrisian, vice president divisional manager of James’ Investment Advisory Division, in St. Petersburg, Fla., noted the dominant shift in the last three years of firms to fee-based or fee-only compensation structures.
He sees many CPA advisors starting with this model because they have the revenue stream to support it through the accounting practice. “Even with $10 million in assets at a 1 percent fee and 85 percent payout, a firm generates only $85,000 per year and that has to cover all the overhead for the independent advisor,” explained Matrisian. “Compare that to the 2.5 percent to 3 percent commission payment with the same payout.”
Murchortow’s advisory business grew by client demand. He first charged an hourly fee for the financial planning services. He recently affiliated with H.D. Vest to satisfy client demand for asset management and said that he’ll charge a fee as a percentage of assets. These two revenue streams add to the business consulting and tax work. “Right now, financial services represents about one-third of my business, but I’m moving that to half,” said Murchortow. “As long as the client stays happy, that fee for asset management comes in each and every year.”
Joe Kovar, a CPA and partner in Sweeney Kovar LLP, of Danville, Calif., added estate planning, retirement planning and college planning to his accounting services two years ago. Both partners in the firm have Series 6 and 7 licenses, and both chose the fee-based route. “Over the years our client satisfaction surveys kept revealing that they wanted us to get into financial advisory,” said Kovar. “It’s been very well received by them.”
The move hasn’t been a walk in the park for Kovar. In the early going, time was a problem, as was pacing the work. “During tax season we were used to speeding up the task load, and now we had to slow down and spend time talking with clients about their goals.”
He also admitted to feeling cautious about presenting the firm as investment professionals as well as tax professionals. “But, as we’ve gained that confidence, we see that we’re much better suited to deliver these services than some young person charged with making cold calls and selling the hot product of the day,” said Kovar.
