Everything you always wanted to know about advisory, but were afraid to ask

Telling an accountant that they need to develop advisory services is a bit like telling someone, "You need to be enlightened," suggests Darren Root — it's not much use without a clear path.

"In Buddhism, they give you a path — whether it's the right path or not, everybody can debate — but there's a path to enlightenment," explained Root, who ran his own practice for decades, and is also the chief strategist at Rootworks, where he helps CPA firms modernize their practices. "I don't feel the same thing around advisory services. I've been told for 30 years that I need to provide them, but I didn't ever know exactly what it was."

Given the urgency with which a switch away from a focus on compliance services and toward more advisory-focused work is being recommended to accounting firms of all sizes, some clear answers are definitely needed to the major questions posited by that recommendation itself — questions like what kind of services fall under the advisory umbrella, which clients should they be offered to, how do firms need to change to make this move (and how will the move change them), and, perhaps most critically, do they really need to embrace advisory at all?

Before answering any of those, though, it's important to answer one initial question: What, exactly, is advisory?

 
What is it, in itself?

Questions of definition can be tricky, since individual advisory services can look very different from firm to firm. One useful place to start is by differentiating advisory work from consulting, with which it is often conflated.

A good rule of thumb defines consulting as involving one-time engagements, where the consultant comes in to examine a problem or an opportunity for the client, and delivers advice or recommendations or a solution before collecting their fee and departing. "'Random acts of consulting' is what we call it in our training," said Geni Whitehouse, who is a winery advisor at a small CPA firm in the Napa Valley, and also advises CPA firms as the founder of The Impactful Advisor. "You do it one time for a client. You figure it out once and you never do it again. And it's very inefficient and ineffective."

Advisory, for Whitehouse, goes beyond one-off engagements to create a systemic, long-term way of working with clients to help them be more successful. "For me, it's moving in the direction of your client's dreams, helping the client move the needle forward in the direction of their dreams. And unless we're doing that, it is not advisory," she said.

The key components are a long-lasting relationship with a client that leverages the accountant's expertise and all the tools at their disposal to deliver decision-useful guidance, insight and support that helps the client define and then achieve their goals. If that doesn't sound very detailed, that's because advisory services can come in a million different flavors (on which, more below) — and because it's a field that's still being defined.

"Advisory services overall is still a very dynamic, fast-developing area of service, and CPA firms are still figuring out how to categorize their services," said Jin Chang, the founder and CEO of FieldGuide, which develops engagement software for advisory and audit firms. "Advisory historically has been overall more of a general bucket of the CPA firm services that don't kind of naturally fit within traditional audit and tax. And I think what we're starting to see is these more identifiable buckets of services."

As those buckets multiply, Root emphasized the need to keep the entire gamut of the client's needs in mind, and to customize firm services appropriately. "What does providing client advisory services really mean?" he asked. "I think it means that you're holistically serving a customer. So let's say that you have an optometry practice — you should know as a firm what it means to holistically serve them. … I did a session with a bunch of CPA firms and I said, 'Let's figure out what advisory services would be for an optometry practice.' We came up with about 35 things, from different modes of tax planning to different modes of cash flow planning, to ways for them to pay their bills — if you did those 35 things for your optometry practice clients, you'd be crushing it."

 
Is it avoidable?

For all the hype around advisory services, many firms wonder how serious the need to develop these new offerings really is. After all, they have all the work they can handle, they're more profitable than ever, and they can't find enough employees to staff their current engagements, let alone whole new practice areas.

An aversion to change, however, can't prevent it from coming — and it won't mitigate some major trends that are impacting the profession.

"There are a number of external factors that are forcing firms to move into areas beyond tax compliance, and as a result, core services are evolving into more future-focused, integrated services like tax and financial planning advisory services," said Eva Simpson, vice president of tax practice and financial planning at the American Institute of CPAs. "For one, we know the technology will continue to accelerate and impact tax practices, as evidenced by the fact that 46% of individual income tax returns that have been e-filed in 2023 have been self-prepared. … We also have firms that are facing much stiffer competition that's continuing to move into the space."

Similar trends are commoditizing or boosting the competition in most other traditional compliance areas, rendering a long-term move toward advisory services almost unavoidable. And while that time frame may offer comfort to some, it doesn't change the ultimate destination.

"We are going to be a compliance-driven profession for a long time, there's no doubt in my mind about it. Historically, we were there, and those compliance needs still exist — the financial statements, the tax returns," said Jim Bourke, a partner and managing director of the extensive advisory services practice at Top 25 Firm Withum. "But I do believe that across the profession, we are going to continue to see an increase in the percentage of revenue attributable to advisory in that mix. … And I believe you're going to see advisory grow quicker than you will audit and tax."

Carl Peterson, vice president of small firm interests at the AICPA, predicted that, to a certain extent, demographics will help further the shift to advisory, as older partners who've always focused on compliance begin to retire. "They're aging out, where the younger professionals and people taking over your practice are already into this thought process and mindset — 'I hate just doing taxes, really, the fun stuff is everything else.' We're going to see the older people who are not really ready to make the change are going to age out, and the younger staff is already making that change."

 
Even if you can't beat them, why join them?

The shift to advisory may be inevitable, but inevitable, of course, is not the same thing as immediate. The question then becomes, why now, when firms are already making plenty of money?

To start, because they'd be great at it. "CPA firms and CPAs are actually perfectly positioned to be these go-to advisors because, in many cases, whether they acknowledge it or not — which in most cases we're hearing that they don't — they're already doing the work," said AICPA tax and financial planning VP Simpson. "And in addition to that, they're already respected and trusted by their clients for their objective and professional approach to taxes and other financial matters."

In fact, in many cases they're already doing it; they're just not promoting it or profiting from it as they should. "Small firms already do advisory," said Peterson. "They just don't necessarily package it or look at it from that perspective. They think, 'I'm a tax practice, I'm doing this tax work, I'm doing this compliance stuff.' But clients are looking to the CPA typically for advice, and most the CPAs that I know, you're giving that advice to them, you're adding it to your tax preparation stuff that you do, but you're not really packaging it and realizing that you're an advisory firm that happens to do tax compliance as well."

Ad hoc, uncoordinated advice means less standardization, lower efficiency, and missing out on serious profits — profits that aren't coming from compliance work. "Do you think private equity wants to grow the audit piece? The tax piece?" asked Bourke. "Private equity is going to get one hell of a return on their investment if they continue to grow these other revenue streams that firms have, and find ways to sell other services into those firms. That's really the ticket to continued significant profitability in the profession, is looking at these other revenue streams that are driven by advisory."

"The opportunity is massive," he continued. "If you look at most firms, the advisory services growth is outpacing the growth of tax and audit today. That's what's happening. So does it have the ability to step over audit and tax to lead growth? I believe it does."

Much of that growth can come from a client base that already knows and trusts their accountants. "I don't feel like I've ever had to sell anything to my clients before," said Root. "If I shoot an email to one and say, 'Hey, you could save $15,000 if we put this retirement plan in, and based on your cash flow, this works,' it's not like they feel like I'm selling them something. They're like, 'Yeah. When can you get this ready?'"

Simpson summed up the advantages neatly: "Ultimately by shifting focus into advisory services, it'll help enable firms to expand their services and add value to their clients and also spread revenue and workloads throughout the year, rather than concentrating most work around tax deadlines, which can be attractive because it can alleviate stress on employees. And all of this can result in higher client and an employee satisfaction, as well as new revenue opportunities."

As if that weren't enough cause for firms to take a proactive look at advisory services, the final reason is that if they don't do it, someone else will — and likely already is. "We speak a lot with the managing partners and CEOs at CPA firms," said FieldGuide's Chang. "Every managing partner and CEO we talk to is investing big in advisory, because advisory presents the largest growth opportunity in the immediate future for the CPA firms."

(See "Can compliance survive?")

What services should firms offer?

Before she joined the AICPA as vice president of firm services, Lisa Simpson ran a $6 million retail organization in Kentucky that supplied feed, hay, barn supplies, drugs, leather products and more to working horse farms — "Anything you needed," she recalled, "except the horse."

"I had the same challenges that everyone else does — finding people and getting the technology straight and communicating between locations — and there was so much opportunity for someone who's skilled in all of those areas to augment what I brought to the table, and elevate how we ran the business," she said. "I would have jumped at the opportunity for someone to come in with a solution that would not just give me the P&L, but also show me what's happening with my average days of inventory or my cash flow collection processes. what's going on with my days in AR and dashboard that for me so that, at a glance, I can see this is where my challenges are and then what the next step is and this is how we can help."

Pioneers and experts in advisory services say that the best place to start building services is by identifying the kinds of pain points Simpson noted. Likely many of the services that she was looking for would have appeared on Root's list of 35 must-haves for serving optometry clients — with appropriate customization for the industry.

"I've got to think that 80% of the services are kind of universal — retirement plans, kids' education, and stuff like that — but there's things like cash flow planning where it's different for construction clients and different for optometry clients," he said. "You have to peg one industry: How do we bucketize the industries that we're doing, and then how do we create a checklist for that industry?"

Root's list is truly holistic in that it includes personal services to the business owner, like retirement planning. Those aren't always included in the common definition of client advisory services, which is the current flagship of advisory, and the offering that experts most often point to as an example. There, the bundled offerings generally include a foundation of compliance work in bookkeeping, accounts payable and receivable, invoicing, payroll, and tax prep, but then build on that with business advice and CFO-type services, including everything from budgeting and forecasting to strategic planning. The key there is the availability of the financial data to fuel the accountant's advice.

"If I'm going through your transactional stuff and I see that you've made a big investment in a piece of equipment, I could say, 'Have you looked at leasing options, have you done this?' and we could become a partner in the business," explained Whitehouse. "If that person is aware enough to look at that, then this is not just a transaction — this is insight into what's moving through the company. So, let me ask a couple of questions, like, 'Where do you go to see if your business is on track, Mr. Business Owner?' and then open the dialogue we need to get you some insights from there, even though it's not in accounting where I'm spending all my time. … So it starts from that, but the transactions are the starting point for dialogue."

That conversation can become ongoing, she added, with the accountant returning regularly to check on the progress of earlier initiatives and ask questions that uncover the potential for new ones.

When it comes to service types, Bourke recommends starting with CAS. "CAS is the lowest-hanging fruit for advisory services and firms. I think it will continue to be because it's an area that CPAs know. If I throw a cybersecurity curveball and say, 'Start up a cyber practice,' they're all going to say, 'We have no expertise, we don't understand it. Do we have to bring in talent? Do we buy a firm?' If I say start a CAS practice, more likely than not, they're already doing CAS work, but they're not focused on it. … When you examine the advisory services that are being offered by firms across North America, most are in that CAS space. Most have CAS driving that advisory revenue stream."

That said, the advisory services practice that Bourke runs at Withum goes far beyond CAS, including offerings in management consulting, cyber and information security, digital and technology transformation, ESG services, systems and process assurance, transaction advisory, SEC reporting and technical accounting, law firm advisory, and health care advisory.

Many of those were launched simply because people at the firm noticed an opportunity in markets where they already did compliance work. For instance, Withum did a lot of tax prep and financial statement work in the health care space, Bourke explained: "And we're noticing our health care clients are hiring a lot of consultants to help with revenue maximization, and we're like, 'Why are we missing out on that? Why aren't we doing that?' So we started to get into it."

While many of Withum's services stand on their own, Chang pointed to another major bucket of related services. "We're seeing a fast-rising need for RAS, or risk advisory services," he said. "This is a category that combines all the services designed around managing risk and demonstrating compliance with certification and attest reports against regulatory and risk mitigation standards."

For CPA firms, SOC 1 and 2 reports are probably the most familiar services in RAS, but there are also consulting and certification services around HiTrust and HIPAA, Sarbanes-Oxley and, increasingly, ESG. "Similar to CAS, where CPA firms are being asked for outsourced bookkeeping, controllership and CFO services, CPA firms in the risk advisory services context are being asked to help demonstrate trust with their client stakeholders."

While much of the discussion around advisory services tends to focus on business clients, it's worth remembering that individuals need good advice, too. "As baby boomers are transferring trillions of dollars of wealth to the next generation of clients, those clients are looking for an integrated, year-round relationship approach that ties their tax compliance into their broader, more complex financial goals," said the AICPA's Eva Simpson. "They're not just looking for that one transaction on April 15. They want help with their education planning. They want help with their retirement planning, and so on and so forth."

Whatever services a firm ends up offering, it's important to know their limits. "One of the challenges is to ultimately be very focused and define what it is you are going to be doing," said Peterson. "You can't provide advisory services for every business or individual across all spectrums, as most small firms don't have that capacity or the number of professional subject-matter experts in all areas. … You can't do it all."

(See "The first steps toward advisory.")

 
Who should firms advise?

Many accounting firms have client rosters that look like quilts — patched together over time without much rhyme or reason. This can leave firms feeling like they don't have a coherent base to sell advisory services to — but some self-examination can reveal meaningful patterns.

"You have to go through your customer list, which most firms don't do, and you have to figure out what client types you have," said Root. "It could be medical: You could break that down into optometry or dental and other doctors. It could be individuals, it could be construction clients, it could be manufacturing clients, it could be manufacturing clients within the clothing industry."

Identifying those areas of focus is critical. "The beauty of having a focus is that I can see the same patterns across multiple clients, and I can help document them and I know, for instance, that there's going to be basic elements of every wine business that are where the problems arise," said Whitehouse. "So I can point out all your problems."

Firms shouldn't assume they have to cater to whatever pockets of related clients show up in their client roster. "What I'm encouraging firms to do is really think about who their ideal client is," said Lisa Simpson.

This ideal client may be in a niche the firm hasn't even explored yet, but that entrepreneurial partners and staff in the firm are interesting in serving, or it may mean a subset of current clients who have greater potential for growth or need for services — or who are simply nicer to work with.

However the choices get made, the shift to advisory services offers firms an opportunity to reshape the client base in a way that better suits them and their long-term strategy.

 
How does a firm start?

On a practical level, one way to start is to identify whatever advisory services a firm may already be offering (however informally), and then determine what else they need to do to bring extra value to their clients.

"I think the first step that firms miss out on is defining what it means to holistically serve a customer and then doing the work," said Root. "It's kind of like back in the days when we used to do audit checklists: We knew what an audit was. We knew what we were supposed to be doing. So let's create a checklist of all the things; that way we make sure that we do them. It feels like that with advisory services, it's the same thing: There's a checklist of all the stuff we should be doing for that optometry practice."

Whitehouse recommends a similar approach, while acknowledging a major hurdle: "Part of what we have to do to get into advisory is get really clear on what it is we want to deliver as a firm, and get rid of the stuff that we don't want to do. And that's really hard for many firms to do — they're motivated by fear of losing the revenue."

Fear of losing revenue is only one of the mindsets that may be holding firms back from exploring advisory services. Another, according to Peterson, is an unwillingness on the part of accountants to promote themselves as forward-thinking advisors who can help both their individual and their business clients achieve success in the future.

"They like to tell you they're trusted business advisors today with their clients, but they're not known to be that. They're not branded that way, and I think that's where the small firms need to really change to get out of the stereotyped perception that you're a tax prep firm, becoming, 'I'm a business advisor, I'm a tax advisor. We already do tax planning for all of our individual clients, we do tax planning for our businesses and we do financial planning,' but they don't want to necessarily hold themselves out to be a financial planner, or hold themselves out to be an advisor."

"Get away from, 'That's my tax guy,'" he concluded. "You know what? You're more than that tax guy."

(See our special report on "The Future of Advisory Services.")