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Finding a better model for a financial planning program

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A lot of time has passed since CPA firms were first allowed to get into the wealth management business. Like all businesses, these practices and business models need to adapt to changing facts, circumstances and situations in order to stay both relevant and valuable. In the CPA space, change is often resisted, as the CPA is frequently a creature of habit and predictability. That sentiment of resenting or fearing change is quite apparent as I speak with firms about their wealth management offering, and ask why they’re still doing things the way they started 15 years ago.

Start this process by asking a few questions: Who are you serving today, and who you want to serve tomorrow? What specific services do you deliver to your clients today, and what would you like to deliver in a perfect world sometime in the future?

If your accounting firm is like many others, you probably started with smaller clients. The theory was to start with the small ones to see how it goes. Firms were unwilling to deliver subpar service to their better clients, so they decided to take small risks by working with small clients. That has been a huge mistake — a mistake so large that still today many CPA firms’ wealth management businesses are loaded with small clients with little representation from the firms’ “A” clients.

Try the exact opposite approach. That is, offer a high-level concierge service for your A clients. It isn’t as easy as saying, “Sure, let’s do that.” It may take a little beefing up of staff or capabilities to serve these clients and structuring a marketing and communications plan to reach and serve them.

Take a close look at your registrations. Are you still bogged down by a broker-dealer? A broker-dealer is only necessary if you intend to get compensated through commissions. The hoops that you go through to maintain a securities license are also a full-time job: continuing education, logs, disclosures, and all of the other requirements that FINRA has placed on registered representatives of broker-dealers.

Having a broker-dealer is OK if you intend to serve small clients whose financial situations do not merit high-end wealth management or even asset management services. But if your firm is trying to move toward a world where your best clients look to you as their personal financial advisor, the securities license is simply baggage. In general, large clients want an advisor who can be a fiduciary and avoid conflicts of interest.

I speak from experience here. At this moment, I carry a securities license mainly to oversee and supervise the firms that I have helped get into wealth management. But those days are nearly over for me. Very soon I will also be without a securities license and only devote my time to large clients and those firms who are serious about serving high-net-worth clients in a fiduciary environment.

Moving models

How does your staff look? In the early days of CPA financial planning, it was very common for firms to affiliate with a wealth manager and, in essence, work clients together for a sharing of the fees or commissions generated. Except for the smallest firms, this is also a model that is in transition, where firms are willing to be more accountable for their wealth management divisions and setting their structures very differently.

There are many potential problems with outsourcing or the joint-work way of doing business. The first and foremost is the ownership of the client and their attendant revenue streams. With most firms, this is a gray area until it becomes a hot issue. It’s gray in that the issue of ownership isn’t a part of the deal. It becomes hot if your outsourced advisor decides to change firms. You now are caught holding the bag for either lost clients or a tough decision. Do you stay with the advisor and also move to a new firm, or do you stay with the old firm and find a new way to properly serve your clients? Many bad decisions have been made over this issue, so do your firm and clients a favor and straighten this issue out now.

Perhaps a more desirable situation is to reverse the scenario. Would you outsource your tax department? The firm should run its wealth management division like any of its other divisions. That means the firm owns the clients, the firm owns the entity, and all personnel who serve firm clients have noncompete and nondisclosure agreements executed.

The person who is your service point guard, whether outsourced, joint work or otherwise. shouldn’t be bothered by this. Economically, you can have the same exact financial relationship in terms of revenue shares. Going forward, however, it will be clear that your wealth management division is owned and operated by your firm. Many firms will make the wealth management partner a partner in either the wealth management firm or the CPA firm, depending on your corporate structure. I feel that the wealth management division is best operated as a separate entity.

Whose firm is it, anyway?

A practice management decision for you is the ownership of this separate entity. Most firms have simply allowed the wealth management division to be owned by all the partners in the same percentage as they own in the CPA firm. While I understand how this makes sense based on history, think about where you’re going. What would a private equity firm do if they were to start a wealth management subsidiary of an established professional services firm? I can assure you that it would not have an ownership structure that mirrors the CPA firm.

There are a few reasons why ownership shouldn’t mirror the wealth management firm. First may be that you have to carve out ownership for the professional management required of the wealth management division. It’s possible that your firm has a CPA partner uniquely qualified to manage the wealth management business, but it’s unlikely — especially if that partner is still saddled with client service and billable hour requirements from the CPA firm. A private equity firm would install a firm leader with a competitive compensation package that would include an equity component. This aspect is frequently variable, meaning the greater the success, the greater the equity reward to this unit’s business leader.

Another reason for a different ownership structure is value. Simply put, a CPA firm, dollar for dollar of revenue, is worth significantly less than a wealth management firm of equal size. I know a frustrating situation for many larger CPA firms is that they have owners of the wealth management business who are reaping benefits but who deliver little to no value for that division.

I understand that CPAs weren’t built to be sales people, but the cross-selling of wealth management services shouldn’t be different from cross-selling accounting, tax, audit, consulting, etc. And the partners who help the wealth management grow should receive more reward than those who do not.

Consider a creative structure where the CPA firm may own 100 percent of the entity upfront, but create a business growth plan allowing as much as half of that equity to be owned by people who are paid to manage and grow that division. To the surprise of your non-wealth-management-supporting partners, a robust wealth management division will eventually become a source of ideal accounting firm prospects. Unlike CPA partners who feel they deserve a part of the wealth management division, the wealth managers are not likely to be banging down your door for equity in the accounting firm.

How are you better?

In order to get to a place where your wealth management firm is as robust as your accounting firm, what you do also needs to be re-examined. In the early days, many CPA firms did a terrible job at financial planning. Like the rest of the wealth management industry, they were more interested in recurring revenue from asset management than in the far more valuable and time-consuming practice of financial planning or family office type of services.

It would be a huge mistake to continue on that track. With fee compression for asset management and commodity-like asset management firms, you need to realistically ask what you do that is so materially better that your clients will stick around forever. In the asset management space, that’s hard to do, and if you do it, it only lasts as long as you are the hot hand with investing.

The time to move to a more robust service model is now. Many firms, both wealth management and accounting alike, talk up a great game in the financial planning space. The reality from the purview of the new clients that our firms serve, however, is very different. Most firms haven’t upped their financial planning game, and now is a great time to do it. It was great for us during the height of COVID-19 to be able to talk to our clients about all of the moving parts in their life, and not just the investment parts.

As life returns to a more normal flow, I believe that many upscale clients are going to look back at their advisory relationships and ask: What did our wealth managers do for us besides investments in the past year? If the answer is nothing, good luck.

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