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Financial planning as a growth engine

Many accounting firms have had it pretty good for the past dozen years. Complexity is on the rise, technology continues to provide gains within service margins, and the CPA continues to be among the most trusted advisors in the world. This combination of factors would make any publicly traded company jealous. Even when compared to publicly held companies, the accounting firms cited in the Top 100 ranking compiled by Accounting Today in March compare favorably to the companies composing the S&P 500. Who said that CPAs can’t sell?

A good economy, just like a high tide for boats, seems to keep all firms rising. I anticipate that will change going forward. Technology, transparency and the commoditization of routine tasks, from closing the books at month’s end to tax preparation, continue to be a threat to all but the most progressive firms. And for the most part, the Top 100 and the larger firms in general are the most progressive. My experience tells me that smaller firms are more tied to their past and not too focused on a bigger, better future for their firms.

So for those looking to grow, where are the opportunities? Advisory services, technology consulting, niche markets, business valuations, M&A, financial planning?

While your size may help dictate how you choose to grow, it’s clear to most CPA leaders that growth is necessary. Clients sell, merge and close their companies, and certain routine tasks may be eliminated from your billable-hour repertoire, so without new clients or revenue sources, the average firm’s revenues actually may decline.

The growth strategy you choose should be something that naturally fits into the demographic of your existing firm clientele. If your clients are closely held businesses with significant value, than business valuation services make sense. If those clients’ average age is in excess of age 60, maybe M&A consulting should be added to the mix. If you are already deep within a certain niche, perhaps expanding it by geographically diversifying or expanding services within the niche may be wise. In all cases, however, financial planning fits well into just about every category of service that your firm may offer.

A natural addition

The obvious reason that it fits well is because of the relationship that most CPAs already have with their clients. Many CPAs feel that they are more fiduciary-oriented and technically trained than many financial planners. The CPA sees most of a client’s financial data on a real-time or at least front-line basis — but they frequently fail at taking that knowledge to the next level of using it to their clients’ financial benefit. And the better clients of many firms frequently state that their only desire from their firm is to spend more time with the partners or senior staff of the firm. That sounds like the perfect confluence of events to build a fast-growing division. Yet, at this stage of maturity for CPA firms, wealth management and financial planning isn’t even tracked as a separate category that is reported.

The best news for CPAs who decide to get serious about wealth management is that the top-tier wealth management firms have grown at a pace far faster than average Top 100 CPA firms consistently over the past five years. It was reported by Investment News research that the median growth of all advisors in 2017 was 17 percent. I know that medians can be misleading, but here is my personal experience.

The smaller advisory firms came nowhere near the median growth and the larger firms that invest in staff and run a good business were well in excess of 17 percent. We have, for example, a team within our firm that grew at 43 percent last year without any acquisitions. That may be easy to do if you are just starting out or very small, but this team was the largest team in 2017 and then grew by an additional 43 percent in 2018. One hundred percent of that growth was fiduciary work from fees, with 0 percent commission-based. Remember, these fast-growing RIAs do not have an entire accounting firm with hundreds or thousands of clients looking to them for guidance. They are grinding it out one new client at a time.

The sources of new clients for a registered investment advisor, or RIA, firm are now fairly well balanced. About one-third of them are former do-it-yourselfers who have finally capitulated and sought professional guidance. Another third comes from other advisory firms, and the last third comes from major wirehouses and Wall Street firms.

On top of faster growth rates than CPA firms, RIA firms also share a significant valuation advantage. Mergers and acquisitions among RIA firms are robust and on a dollar-for-dollar comparison to accounting firm revenues, they are worth significantly more in the marketplace. So while wealth management may be immaterial or not growing inside your firm today, greater focus from firm leaders and resources from capital to people can make this happen.

In my opinion, a well-run accounting firm should be able to equal or exceed their tax department revenues within a short period of time. For smaller firms, a few great wealth management or family office-style clients can easily replicate your three months of tax drudgery. For a larger, well-run firm, it’s likely to take three to five years to reach that relative size. But if you are growing a firm that last year grew at 7 percent, why wouldn’t you want to expand on the services that your best clients need, and may not be getting from their collection of sales people and other financial service professionals? Between the huge demand for fiduciary advice and the fact that your client base hasn’t really seen a compelling offer from your firm, it’s never too late to take wealth management seriously.

Know where the puck is going

Whether you are reinvigorating your wealth management practice or starting from scratch (perhaps again), your starting point should definitely have the endgame in sight. I don’t mean the endgame in terms of selling, although for many firms the value creation from wealth management is a significant part of retirement packages for partners and firm succession in general. I mean the endgame in terms of what you want your entity to look like in five years or when you feel it has reached maturity and parity with your tax division. In my eyes that answer already exists in terms of what the top RIA firms are already doing.

I’d start this conversation by learning about how the top RIA firms themselves have done it. In general, they were willing to compromise short-term revenue opportunities for greater service and longer-term value. Many have ditched their licenses to sell products with commissions in favor of being a fiduciary, and further cementing that fiduciary-like relationship that they already have with their best clients.

To me, if a CPA firm is licensed to sell products, you soon start to sound like the sales people from the insurance and securities businesses that clients are trying to flee. Use this to your advantage and have the courage to be distinct and deliver what the high-net-worth investing public has asked for — a fiduciary relationship that will always act in the best interests of the client.

By the way, I’m not the only one who feels this way. Buyers are assigning higher valuations for RIA firms versus the valuations for firms that are built on commission income. I feel that the current valuation metrics are also telling about where the puck is going in the wealth management space. Buyers will pay a premium for something that represents the future as opposed to a dying star (commission-based advisors) who may become obsolete with one change in the regulation of financial advisors.

The top RIA firms also invest in their firms. Just like a well-run CPA firm, a top RIA firm has great technology, smart people with career tracks, and a marketing and communications plan. Net profit is important, but these firms feel that if the capacity of the firm is challenged, that growth cannot occur as it may otherwise. Think about this.

If your firm has a long list of matters important to its growth that always remain at the bottom of the to-do list, it is likely to function as if it is at the bottom of the list. To-do lists are meant to be done, not permanently reside in your idea bin. By hiring ahead of the need, you will be able to move these items to the done list. If you had a sound growth strategy combined with a good business plan, your growth will come. It isn’t in the best interest of your team, clients or firm if you stretch staff thin just to squeeze out a few extra percentage points of margin. When staff is stretched too thin, you may lose them or clients, and not gain the respect that’s possible if your staff is well-trained and with the program. A great work life, even a great work-life balance, is something that the wealth management space offers to its stakeholders.

If your CPA firm wants a top-tier wealth management practice, shed your baggage with respect to how the old-line CPA firm was built, and start thinking like a leader. Except be a leader in the area that can dominate the firm’s growth plans for a long time to come. And this growth will come in good economies and bad economies.

In fact, bad investment markets in particular may be great for an aspiring CPA firm with a wealth management focus. Bad investment markets often have clients ask what value they are getting for the large fees that they are paying to the incumbent. If all that incumbent has is money management, you may be in the bull’s-eye. But if you’ve delivered on the full wealth management experience, combined with the accounting firm necessities, your firm will be hard for anyone to unseat as the lead advisor.

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