The rising incidence of M&A in the accounting profession says something important. Earning a profit is harder for a variety of reasons. This may be one reason why partnerships between CPAs and Registered Investment Advisors are on the rise: They add a high-margin revenue stream with little effort.
A back-of-the-envelope calculation a CPA might make goes something like this: "Wait a minute, the RIA to whom I refer my clients earns on average about 1% of the assets under management. I should earn a portion of that for the referral, but also for working in concert with the RIA so that my client has tax and investment advice that are integrated. By getting just 30 basis points of the 100 basis points the wealth advisors earn, the $25 million I've referred over the years would contribute $75,000 of nearly pure profit that will grow over time."
This scenario is viable and ethical. Still, when considering how to structure compensation, care must be taken to avoid actual or perceived improprieties. There are three ways a CPA can be compensated for client referrals to wealth managers.
1. Partnership model
Under this model, the CPA and wealth manager form an RIA together, as a partnership. The wealth advisory services are managed by this partnership, and the fees it earns are divided up.
Some CPAs may recoil from the notion of forming an RIA. However, there is a straightforward path for CPAs in good standing, and in most states, the
Those hurdles aside, however, the partnership model offers the most benefits for the CPA. Foremost, with the RIA affiliated with the CPA, the CPA maintains absolute control over their clients who ultimately receive wealth advisory services.
Second, with an affiliated RIA, the CPA will likely be able to command a higher percentage of the overall fees that are earned by the partnership. RIA fees exist in a broad band but largely center on 1% of the assets under management.
In some respects, this can be seen as a very high fee in light of the actual work that needs to be performed. With clients for whom a conventional split between stocks, bonds and cash (say 60%, 35% and 5%) is strategically sound, the asset management is straightforward and inexpensive. Further, firms like BlackRock, Vanguard, Fidelity and Schwab already have AI-driven platforms to manage asset allocation that streamline the workflows. Ultimately, the dynamics of how funds are managed may push wealth advisory fees lower, but in a partnership model, a CPA firm would be well positioned to realize a material percentage.
Finally, an affiliated RIA offers the possibility for the CPA to staff it, asserting more control as a prelude to more material participation into the RIA business. Certainly, this approach offers CPAs an opportunity to dip their toe in the water, rather than jumping in wholesale, where the compliance requirements often prove bracing.
2. Form a separate RIA to collect fees
The formation of an affiliated LLC, which is an RIA providing wealth management services, may, for a variety of reasons, provoke discomfort among many CPAs. A less "involved" approach would be to form an affiliated RIA for the express purpose of collecting the fees that flow from the wealth advisor who is managing and custodying the assets.
The reason to form a separate RIA in this case stems from the possibility that the entity collecting the fees may get audited by the SEC or state regulators. If accounting, tax and wealth advisory fees are commingled, the audit may extend to the entire CPA practice. Collecting fees through an affiliated entity short-circuits this possibility.
The primary advantage of this structure is that it keeps the CPA firm on the periphery of the RIA business. It is not performing any wealth management services but simply collecting fees that flow from these services. This structure will not, however, offer much leverage in determining how services are offered and does not provide a direct on-ramp into providing wealth management services.
3. Straight referral fees
Both parties can achieve a hands-off arrangement through the payment of a straight referral fee. Under this arrangement, the CPA would refer their client to an RIA they have an existing relation with or with whom they are comfortable. The RIA would earn their customary fees, presumably a percentage of assets under management. The CPA would then charge the client an additional fee for managing the relationship with the RIA and overseeing what they are doing.
Some numbers might put this arrangement into context. If the CPA charged a client $2,500 for placing a client with an RIA and staying involved in the relationship, that's the equivalent of earning 50 basis points on $500,000 of the client's assets. What this demonstrates is that relatively modest fees can represent a relatively large volume of assets, and that a straight referral arrangement between a CPA and RIA may capture much of the upside inherent in capitalizing on the revenue potential inherent in client assets.
Moreover, under this scenario, the CPA may be able to deliver a win for their own clients by providing them access to wealth management services at fees that are lower than the typical arrangement of 1% of assets under management. The RIA should be amenable to a reduced fee coming from a CPA with whom they have a relationship because they get a new client absent any marketing costs. Further, the CPA knows which clients can be adequately serviced by a conventional asset allocation model, and advocate for them differently than their clients whose financial picture is more complex.
The great divide
How to collect fees for wealth advisory services might be informed by your underlying motivation for earning these kinds of fees in the first place. Basically, there are two camps.
Some CPAs simply don't want to leave a viable source of revenue on the table. Collectively, their clients have hundreds of millions, perhaps billions, in assets, and finding the right home for these assets where their clients will be well served is not only the right thing to do, but also a profitable thing to do. Under these circumstances, the CPA is not looking for the wealth advisors to expand the relationship, but rather to simply manage assets.
The other camp sees wealth advisory services as an added revenue stream, but also as a strategy to expand their practice. The addition of wealth management may attract new clients, but that's not its most potent draw. Far more likely, and effective, is that wealth management combined with tax planning will help stem an exodus of clients who are likely to defect because they've found an outsourced shop that will do their returns for $200 instead of the $600 you charge. While these may not be coveted clients, the point is, with the right services, including wealth management, over time, they can be grown into coveted clients through a combination of shared AUM fees and a more sophisticated array of tax planning services.
It's worth noting that just because a CPA can earn fees for playing a role in how and where client assets are managed, not taking these fees might be as prudent and honorable as taking them. CPAs enjoy high levels of trust, and venturing into areas where ultimately they do not have control over the outcome may be seen as undermining that trust. However, the highly competitive world of accounting is provoking some hard thinking about how CPAs can grow their practices and/or remain independent. When ancillary revenue streams are considered, equal care should be taken to consider how these revenues are booked and accounted for.
