There are several ways to serve your clients in the financial planning world. None are wrong or right—but some are definitely better than others.

Especially if your goals include maintaining control over the client relationship and being certain that all advice given is coordinated, holistic, independent and dispensed with your seal of approval. Naturally, I believe that these should be your most important business motives, with client service and relationship-deepening as the underpinning of your financial planning mission.

There are two ways that your choice of model should be addressed. First is the service model, with many options available to you. Second is your compensation and revenue model, with three distinct methods to profit from these valuable services.



On the service side, let me start with my least favorite way of serving your clients in financial planning. This would be with a referral relationship. Referring your clients to another planner, advisor, broker, etc., is a sure way to tell clients that you are not interested in serving them in this capacity. To me, this is about as bad as it gets, especially if you are sharing in compensation from that advisor or receiving referral fees. First of all, what exactly are you doing for your referral fee? Some states won't even allow it. Is the referral because that professional 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 richest compensation-sharing program?

Another significant limitation of this method is the complete loss of control. Just ask those whose referral partner has changed firms, and profited from the ridiculously rich deals that brokers get from new firms when they agree to switch. That is their money, not yours. Even worse, if the advisor's new firm does not allow referral relationships or you do not want to be involved with the new firm, your referral revenue immediately sinks to zero. Lastly, under the referral model, your clients view themselves as clients of that advisor and their firm, not your firm.

The second model is building it yourself. This is clearly the most expensive and time-consuming way of finding success in financial planning for most CPAs. Those that will prosper by building from scratch would include 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 frequently found themselves in the red for years, with partners bickering over resources and the reduction of traditional billable hours from those partners active in the PFP practice. Many also started without a business plan and the complete buy-in of all partners. For firms like this, I've told them that starting the PFP practice will either be the best business initiative that they've ever undertaken, or the beginning of the firm's divorce, with the PFP partners eventually leaving in disgust over the apathy exhibited by the non-PFP partners. If you decide to build, make sure that you have a very thorough business plan and that you've worked it through with some of the great consultants that the financial planning industry has to offer.



Perhaps a better alternative to building from scratch is to acquire a practice that meets your specifications. The specs that are important include the target firm's culture, team and client base. Many planning firms are dominated by the leader/owner, and rather thin on quality staff. I'd stay away from an owner-dominated firm and look for one that has an associate wealth advisor or two and diverse subject matter expertise.

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 well into a holistic, well-rounded planning practice. Clients are more loyal to a firm that services many areas of their personal financial lives, rather than simply the commoditized asset management side.

The knowledge needed for a successful PFP practice is broad and wide, and one person cannot know it all. You would not want to acquire a firm whose clients are not matched up well with the profile of the CPA firm client base. It may also be ideal if your target candidate is looking for a succession plan following a three-to-five-year transition period.

The next service model would be to affiliate with an existing firm that has experience working with CPA firms. In my opinion, this is the best way to successfully compete in the PFP world. And even in the world of potential affiliation partners, there are sub-models. You can affiliate with some firms and run your PFP practice yourself, serving all clients within the confines of existing firm personnel. You may also affiliate with a firm that will permanently assign you a competent like-minded professional or have one available to work with you on an as-needed basis.

Most CPA firms in the U.S. are small firms. Yet when it comes to PFP affiliations, many firms feel that bigger is better, and choose to affiliate with very large organizations. It's a good thing that your clients don't feel that way or you'd spend half of your time marketing. In my opinion, size does not matter. What matters most is how much attention you'll get from your affiliation partner and the quality of the firm's offerings in the areas of practice management, marketing and communications, compliance, and technical support.

Affiliations do not have to be permanent. Financial services firms change, CPA firms change, and the CPA firm's vision for its success changes. In fact, sometimes it takes an affiliation that turns out other than expected for the firm to realize what it really wants and needs from a partner. If your revenue from financial planning does not match that of your tax department, then you need to look in the mirror and ask why. Is it an ineffective affiliation or is your firm not following the practice management advice that it is receiving?



As we shift over to the compensation side of the equation, there are three 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 dying breed. It has been a dying star for some time. The concept of advisors acting as a fiduciary is gaining momentum, and I believe it is here to stay. I also believe that the fiduciary standard is appropriate and necessary to run an ethical financial planning practice and imperative for clients to make informed choices. That doesn't mean that commissions will disappear entirely from the financial planning landscape, but it does mean that advisors will need to disclose all conflicts of interest, including the compensation received from product manufacturers as a result of implementation activities.

Please don't read into this that I feel that commission-only planners are unethical. But my experience does lead me to believe that the advice rendered by such commission-only planners is frequently not holistic and proactive, and often limited to the areas from which they may receive a commission from product sales. Commission-only advisors also run the risk of spending hours on planning services only to go uncompensated if a sale is not made. This goes against the grain of every CPA that I know.

For years, the fee-only method was the fastest-growing segment of the planning business. Fee-only advisors only receive compensation in the form of fees charged to clients. These fees are typically delivered on a fixed or hourly fee basis for planning activities. For asset management activities, 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 and objectivity.



In practice, however, many fee-only planners stop after they have delivered the plan and taken over the management of client assets. I'm sure that this was not their intention, but over time the service model has morphed largely in that direction for many practitioners. I have several problems with this.

First is that I challenge the average advisor, fee-only or otherwise, as to their true abilities as an asset manager. Not because CPA financial planners are not smart enough to manage assets, but because asset management is a full-time business. 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 financial planner. Another observation of fee-only planners is that many have an aversion to insurance. Fee-only planners commonly bash annuities and insurance products, and consequently I've taken over many clients from fee-only planners who were severely underinsured or never learned about the income benefits of annuities. While it is true that there is probably more abuse proffered at the hands of insurance agents than fee-only advisors, this type of generic disdain is hardly independent and holistic.

The last model, and now the fastest-growing one, is called the hybrid model, or one in which the advisor charges fees and receives commissions. Hybrid advisors have both securities licenses and are registered investment advisors. Many also obtain insurance licenses. At first many CPAs cringe at the thought of selling insurance, but it just takes one bad deal from an agent to their client for them to realize that they might have done a better job. And if you are a student of the CPA financial planning industry as long as I have been, you remember the American Institute of CPAs' study of business-owner clients from the late 1990s where 86 percent of business-owner clients would prefer to buy their life insurance from their CPA, rather than from a life insurance agent.

With the graying of America and Boomers retiring in record numbers, annuities have also become a common planning tool for generating sustainable retirement income. All annuity sales require an insurance license, with variable annuities requiring both securities and insurance licenses. Of course, you don't have to sell the annuity or insurance, and you can refer that sale to a buddy. But wouldn't it be a better deal for your clients for you to charge them less in fees and handle that sale yourself?

The challenge for the hybrid advisor is the inherent conflict of interest when recommending products that carry commissions for the recommender. I do believe that hybrid advisors should act under the fiduciary standard, and as such owe independence, objectivity and a duty of care to their clients to examine the entire marketplace of products and recommend only the most appropriate. This conflict is best handled when the advisor fully discloses all compensation that may be received, and also by alerting the client about other outlets for such products, including other advisors or sales organizations.

There is no easy answer regarding the best model for your firm. But whichever model you choose, choose to be great at it. Choose to be great for all of your stakeholders - your clients, your firm and your family and friends.


John P. Napolitano, CFP, CPA, PFS, is chairman and CEO of U.S. Wealth Management in Braintree, Mass.

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