When CPAs add financial services to their practices, the overwhelming method of entry is to affiliate with a broker/dealer and receive commissions. For many, there is a next stage: transitioning to a model of full financial advisory with compensation from fees based on assets under management. Careful management of the rebranding can ease clients into the new way of doing business.
Informing clients of the change involves many tasks. The communication is crafted, and letters and phone calls follow. "Telling clients about any change in practices is a biggie," says Allan D. Koltin, CPA, president and CEO of PDI Global Inc., in Chicago. "There are risks with the change, in that some won't understand, some will have a bias against, and others wanting to change firms will take the CPA's announcement as an excuse to move."
Client concerns focus on cost first, but also the level of trust in the CPA as advisor. "The first question from clients is whether the new way will cost them more than the old way," says Koltin. "But if the client trusts the CPA, the question of higher cost becomes secondary."
For many CPA advisors, the transition is a necessary one. The advisor is uncomfortable with receiving commissions for product sales. "Receiving commissions taints their perception of being independent or objective," says Koltin.
Chas Smith & Associates assists the CPAs signing on with the Lakeland, Fla.-based CPAlliance with everything needed to establish a registered investment advisory, including the presentation to clients. A large percentage of their new affiliates made the change because they were disillusioned with the commission business. "The reps felt like they were getting paid for selling a product," says Chas Smith's James M. Luffman, CPA/PFS. "It takes more time and work to get the RIA set up, but once they do, they have great flexibility."
Dan Devine is a CPAlliance member who followed the traditional path. Devine started out as a commissioned rep affiliated with a regional broker/dealer in the 1980s. At the time, Florida laws enforced the separation of financial advice from tax work. In fact, CPAs were required to provide a separate entrance for when clients came for estate planning versus getting their 1040s filled in. The rule supported the way of thinking that CPAs needed to keep the services separate.
"We have registered reps come to us saying that they don't want to operate in a model where they have to take their CPA hat off to put their advisor hat on," says Luffman.
Devine sold annuities and life products, as well as mutual funds under Series 6 licensing. "I realized I wasn't giving objective advice," says Devine. "I always considered myself a planner, and wanted to be an advocate for the client."
Devine says that when he first heard of the RIA fee-based model, it rang a bell with him. "It made sense to be able to sit on the same side of the table as the client, and not be acting like I'm feathering my own nest."
Explaining the difference to clients rested on the specific differences between the separate account management and registered investment advisory through Chas Smith and insurance and mutual funds. "I educated clients about the lack of transparency in investment products and the difficulty in understanding the fees they paid," says Devine.
In fact, Devine thought that the slide show that CPAlliance provided for clients was too simple. He believed that they'd laugh. "We discussed simple asset allocation methods and Smith's philosophy of buying good stocks at good prices," says Devine. "And they didn't laugh, because even though it seemed simple, clients didn't know about this before."
Luffman points out that many CPAs find the transition from commissioned rep to fee-based advisor very easy. "There are many similarities to running a tax practice," he says. "The advisor owns their clients, instead of the broker/dealer owning them, and receiving fees is familiar as well."
Most clients don't see much difference either, according to Luffman. "The CPA advisor just explains they are really the same person, still doing asset allocation for the client, but now the advisor is getting paid for it," he says.
Advisors moving from a commissioned arrangement to fees can name several benefits for the client. Usually, the step comes after some time, so the advisor can talk about the depth and knowledge of the business gained in the early years. "The CPA has often gotten their arms around financial advisory while a registered representative," says Koltin. "In addition, the RIA can improve back-office services as well."
The process of informing clients can add or detract from the success. While the change in structure must be delivered in written form, the personal phone call could head off client confusion. "Too often, CPAs just send an announcement letter to the client, because they're fearful of any confrontation," says Koltin. "But really they're saying to the client that they weren't important enough to receive a call."
Not all CPAs feel the need to move to fee-based business. Some find the balance between the CPA and the investment sides. "Sometimes CPAs screw themselves up by believing that the client won't see them as independent if they take a commission," says Koltin.
With proper disclosure and client approval, CPAs maintain their status as client advocates. "Registered reps that have a passion for doing the best for the client and find out first what the client thinks of a commission arrangement can keep the client's trust," says Koltin.
While most of Dan Devine's clients followed him to the fee-based arrangement over five years ago, getting client buy-in to the benefits of advice for a fee isn't always universal. He reports that some of his clients still like to attend the free lunches and seminars, and sometimes end up buying the high-priced annuities presented by speakers. "What I've found out is that clients like to be lied to sometimes."
