by Cynthia Harrington
Accounting firms beat out the industry averages last year in one key area. Advisors registering for the first time with the Securities and Exchange Commission increased a paltry 3.5 percent. But new registrants with accounting-affiliated advisors grew 26 percent.
"Accounting firms are becoming more sophisticated on how to enter financial services," says industry consultant Allan Koltin, president and chief executive of the Chicago-based Practice Development Institute. "They used to be locked in the debate of whether to establish a compensation structure of fees or commissions. Now they’re set on fee only and they’re working to bring in the business."
The SEC requires registration of professionals holding themselves out as investment advisors with more than $25 million under management. According to National Regulatory Services of Lakeville, Conn., RIAs increased to 7,581 in 2002, up from 7,322 the previous year. Despite the market decline, total assets under management grew even more, from $20.26 trillion to $22.10 trillion a 9 percent increase.
In 2002, 633 registrants reported an accountant or accounting firm as a related person, which is an advisory affiliate or any person any person that is under common control with the investment advisor firm. Last year, only 503 registrants indicated a relationship with an accounting practice.
One firm shepherding some of those new accountant-related RIAs is Chas Smith & Associates of Lakeland, Fla. Chas Smith is an accounting firm with a financial services and asset management practice. They also consult with and train CPAs in setting up the RIA and establishing a financial services practice. Florida-based firms with fewer than four partners have sought Chas Smith’s help. On average 12-15 firms go through their process each year.
Through Chas Smith accountants the compliance issues of establishing an RIA, they are fully grounded in Chas Smith’s asset management strategies, and they’ve been trained on how to educate their future advisory clients.
"This is a process unique to CPAs," says James M. Luffman, CPA/PFS of Chas Smith & Associates. "We are CPAs and we only work with other accountants, so we understand that business real well."
One of the things Smith stresses, in particular, is the importance of educating clients about the way they’ll work with the CPA advisor. "They have to educate them about the long-term nature of investing so they’re not getting calls on April 14 during the peak of tax season about their investments," said Luffman.
Filling out the SEC registration forms guides the compliance discussion as well as decisions about the business model. The first of the two-part form discloses facts about the firm. Firms report the firm’s locations and names of the principals, and legal or financial difficulties of the firm or the principals on Part I. Part II, which advisors are required to give to clients, describes the advisor’s business practices.
"Effectively, filling out Part II of the Form ADV is creating a business plan for the financial advisory practice," said Luffman. "Completing it involves making a series decisions. They have to disclose what exact services they will provide, how they are going to charge for services and will they have custody of client assets on Part II."
Last year, the SEC promised greater ease for advisors that needed to register. Since June 2001, all advisors could file Part I electronically. The resulting Investment Advisor Registration Database is easily accessible by anyone.
Promises of an updated Part II by the end of 2001 are still unfulfilled. "There’s still a glitch in the new system," said Catherine Reynolds, director of marketing, National Regulatory Services, Lakeville, Conn. "Not only is the new form not available yet but even when it’s released, they’re not ready for advisors to file online. Advisors still will have to provide paper copies for clients."
While the registration process forces CPAs to craft strategies for offering financial services, the work of bringing in assets under management remains. "Fewer are questioning the structure, but many are still working on how to make it successful," said Koltin. "Those that aren’t successful are questioning the person in charge."
Firms that are getting results are those in which the head of the financial services area has a direct connection with the partner group. They treat the accounting partners no differently than they would an outside referral source. The financial services head has to not only build trust but get the attention of the accounting partners. "They have infinite things on their list already," said Koltin. "They have to court them, to wine and dine them to be successful."
Firms that complete the Chas Smith program don’t have to use Smith as their asset manager. But Smith builds in an incentive for accountants to do just that. The program costs $2,000, all of which is refunded once the CPA firm has $10 million under management with Smith. "We’d give away the training for free except that we found [that] when they paid for it, their commitment to the process went up," said Luffman.
"That’s what works for us. If we can get a commitment from a firm then we can spend the time helping them to really get their business going," Luffman said. "We’d just as soon have 50-100 firms doing lots of business with us than thousands of firms doing just a little bit of business."
Koltin is seeing another model advancing for smaller firms. John Behr of Oculus Financial in Chicago, set up a new service of his insurance agency to cater to accounting firms. Behr, managing director of Oculus, saw a need for CPAs to have one source for investment and insurance information, and to have that source be objective. "Not only do we write business with over 30 different carriers but we have close relationships with a dozen of the top specialists in different types of policies," said Behr. "They will fly in from all over the country to work with the CPA and the client to tailor just the right program."
Behr’s firm upgraded their client-servicing capabilities, granting access to client data over the Internet. "Finding the right insurance solution is only part of what we do," Behr said. "The CPA also has to know exactly what the client owns."
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