by Cynthia Harrington

The vast majority of tax professionals who make the leap into financial services do so by becoming a registered rep at an independent broker/dealer, that according to a study by Tiburon Strategic Advisors.

Part of the reason is demographic

The great majority of tax professionals work in small firms and small firms are more likely to add financial services as one of a menu of additions to tax work. Large firms enter financial services through the fee-only advisor route or by building alliances with asset management firms, concluded the study conducted jointly by financial services research firm Tiburon Strategic Advisors, H.D. Vest and the National Association of Enrolled Agents, from the practice benchmarking site www.TaxProBestPractices.com .

The study also reported that tax professionals represent a specialized market. And three characteristics define the uniqueness. First, the majority of tax professionals are new to financial services. The second and third reasons are related: Most accountants don’t give up their tax practice. Their core businesses continue to be tax work, and that tax work has strong seasonality.

Three independent broker/dealers find the uniqueness of the accounting profession appealing. 1st Global, GE Independent Accountants Network, and H.D. Vest cater to tax professionals and find a small handful of non-accountants among their reps.

H.D. Vest, headquartered in Irving, Texas, was founded by accountant Herb Vest in 1983, and is the largest of the three with over 6,000 registered reps. This even tops the largest independent broker/dealer LPL, with 4,400 reps. LPL was ranked as the biggest revenue generator by Financial Planning’s 2002 Independent Broker Dealer Survey.

Dallas-based 1st Global was also founded by a CPA, Stephen A. "Tony" Batman, in 1992, and weighs in with 1,200 reps. The Schaumburg, Ill.-based G.E. Independent Accountants Network was founded by Dave Reedy in 1985, and also boasts roughly 1,200 reps.

The new entry in the accounting financial services space, CPA2Biz’ subsidiary Capital Professional Advisors Inc., has 17 member firms, according to the company’s Web site.

The "urge to merge" affects this sector of the accounting profession, as well. Only 1st Global has remained independent. Banking and financial services conglomerate Wells Fargo acquired H.D. Vest last year, while Terra Financial was purchased by G.E. Financial Assurance back in 1998.

The three that specialize in the tax professional market recognize its unique needs and time constraints. Respondents in the Tiburon study, for instance, prepare an average of 600 tax returns per year. "What we found to be successful is acknowledging that advisors need to be able to provide a plethora of services to clients," said Roger Ochs, JD, MBA, and president of H.D. Vest.

CPAs are not just expanding the products that they offer, they are also widening their focus of financial services. "There’s a strong drive to become complete financial planners," explained Batman, chairman and chief executive of 1st Global. "Investors have changed to prefer asset preservation instead of asset creation. To respond, advisors are focusing away from solely managing money and onto total financial planning."

The expanding product line characterizes one trend in the broker/dealer business. Originally, the broker/dealer’s purpose was to provide access to mutual funds, insurance products and the securities exchanges by holding the licenses and processing commissions for reps registered through them. While this basic business accounts for most of broker/dealers’ revenues, to compete effectively, today’s broker/dealers also must offer specialized training, cutting edge software, a complete menu of financial planning product offerings and a registered investment advisory for the reps’ fee-based business.

"The broker/dealer set up is not going away, even though the trend is to work on fees, not commissions," said Ochs. "We’ve been offering fee-based planning services through our registered investment advisory since 1988."

To serve the diverse needs of the accounting community, the trio of large broker/dealers continue to expand their list of products and services. Services usually under the purview of banking top the list of new offers in the last year. Advisors are able to access home mortgages, trust services, educational loans and small business lines of credit through H.D. Vest.

1st Global, for its part, recently introduced a mortgage-planning component to their services and training curriculum.

Firms also have upgraded the software offered to reps in order to support their move to financial services. From total financial planning software to client contact management services, the top three have all upgraded and introduced new products. 1st Global, for instance, shifted to version 2.1 of the ByAllAccounts aggregation software.

Offered under the MyNetWorth service at 1st Global, the service allows reps to set up and manage a client’s full portfolio, including bank accounts and accounts with other advisors. A new offering at H.D. Vest allows reps to download current client tax data into a contact manager program for customized client communication programs.

The trend to fee business continues to grow

The Tiburon study documented that total revenues from the three was broken out into 61 percent from upfront commissions, 18 percent from quarterly management fees, 16 percent from trailing commissions and 5 percent from hourly fees.

Ochs points to two factors driving the trend to fees. One is client driven. Clients feel that paying a fee for the service puts the advisor on the same side as the investor in wanting the accounts to grow. The second is that more CPAs have more confidence the longer they offer financial services.

"As they get more mature in the business, their revenue mix does tip to fee," said Ochs. "They get more comfortable with dealing with bigger accounts and move to a fee because the relationship is important. "They also want a way to annuitize their business. The fees represent an ongoing revenue stream," he added.

H.D. Vest recently added products for their fee-based reps by expanding their separate account program. They added three new money managers, bringing the total to eight managers offering 32 styles.

But the commission-based business isn’t going to disappear. Even the top producers at H.D. Vest report a 50-50 revenue split. "It’s not just new reps that do commission business," said Ochs. "Because a CPA’s goal is to serve all the clients in their tax practice, they sometimes need to do a small $2,000 IRA or set up a $25 per month mutual fund savings plan. Not every client needs fee-based advice."

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