Think before you build
Is a financial planning practice right for you?
This may be the toughest question that a practitioner can be asked. It is a difficult one because it is a question of context, relativity and materiality.
Each and every firm and practitioner has the ability to design their practice and work week as they wish. A vibrant discussion regarding whether financial planning is right for you is something that should happen.
For example, there are plenty of small practitioners out there who may earn an extra $100,000 per year with a small financial planning practice who find that quite attractive. On the other hand, there are many midsized firms with a financial planning practice in a range of revenues that is material, but they aren’t growing and do not have a large percentage of their clients as planning clients. The direction may be different for both of these firms, with an added level of complexity for the larger firm. That complexity comes from different answers from each partner!
As we begin the discussion, it must start with understanding your client base and their collective needs for financial planning. If your best clients are not-for-profit audit clients or benefit plan audits, than a PFP practice may not be wise. You’ll have ethical conflicts where you simply won’t be able to serve both client needs. If your best clients are closely held business owners who rely on you for more than a financial statement and a tax return each year, then you may find the demand for PFP services quite robust.
The next step is to discuss the service offering. Many firms haven’t done a great job communicating their financial services offering. First, define what you mean by financial planning. Today, the standard of care is rising and financial planning clients may expect more than managing assets or selling financial products. In the early days of CPA firms offering financial planning services, there was interest from many firms. But several years later, many firms still haven’t fully defined their financial services offerings, and many are acting more like Wall Street brokers or any other investment advisor, rather than leading with a robust service offering that goes much deeper than assets under management.
Can you succeed with a practice that looks like any other registered investment advisor? For now, the answer is yes. Clients are still paying fees around the 1 percent range for AUM-based advice. But how are you going to survive as some of the “robo” or technology-based offerings prosper with fees up to 75 percent less than a traditional advisor?
If your offering is AUM-based, with a heavy emphasis on performance and investments, you won’t thrive for long. You will be commoditized down to a similar pricing level or need to step up your holistic advice materially to justify your higher fees. A financial planner needs to do what a robo cannot do in order to thrive, which is to build a deeply personal relationship with your client’s entire family and make sure that all of their financial issues and needs are driven and coordinated through the planning process you lead.
How far will you go?
The service model may be different for each firm. But in terms of building an ideal financial planning practice, financial planning, delivered on a holistic and proactive basis, is the calling. This distinction is important because your clients are confused. Many firms pitch holistic financial planning and they give the client a fake leather binder with their names inscribed on it, loaded with pages of fluff, charts and other useless information. These plans may be valid on the date the book is printed, but as situations change and time passes, the plan may need to change, too.
Furthermore, each practitioner’s definition of holistic is completely different. One practitioner may think that it is sufficient to tell a client to go see their property and casualty agent to make sure that there are no gaps in coverage and that they have enough umbrella liability insurance. Others believe it is their fiduciary duty to be sure that the client is properly protected from all risks and that their plan, including the coverage that they use to transfer risk, is adequate.
It is my view that just about any financial matter that impacts your clients should be included in your planning services. This could mean that you need to do a deeper review of your clients’ P&C coverage or provide more attention to the estate planning advice, rather than a casual referral to an estate attorney to “do the estate plan.” Beyond the plan and the ensuing documentation, the competent planner will make sure that beneficiary elections have been updated and ownership of the assets gets shifted to their trusts.
Based on past experience, if you intend to deliver a proactive and holistic financial planning service for clients, anticipate devoting at least 20 to 40 hours upfront to get to a point where you can make recommendations in the context of your clients’ desires and situation. As a result, clients need to be willing to pay for that time. More complicated situations will obviously take longer. This is especially true if you use a robust software tool and a planning guide or checklist such as the one published by the PFP Division of the American Institute of CPAs. In your world, where clients are accustomed to flat fees or time and rate, that plan should go out the door priced in accordance with other firm practices.
Clients seem to prefer flat fees as opposed to hourly. The first few engagements may take longer than you’ve allowed for in your flat-fee pricing and it may take some time to properly price engagements, especially if you’ve worked with a financial planner in the past who relies on commissions or AUM fees, claiming to do the planning for free.
If your firm is made up of smaller clients where proactive and holistic planning isn’t needed, consider a less robust offering. I say this with some hesitation in that all clients, regardless of size, may benefit from some of the more detailed PFP services. You’ll need systems and processes to efficiently complete these smaller engagements and it can definitely add value for your clients and the relationship with your practice. But for the firms whose clients are larger and need attention to the many moving parts of their financial life, financial planning is a natural fit.
Somewhere along the spectrum of PFP services, from nothing up to proactive and holistic, your firm needs to decide what business they are in.
At this point in the discussion, one partner always brings up the topic of other firms that they’ve done business with over the years. Yes, it’s true, most CPA firms share some outstanding clients with other professional service firms. In many cases, you share the clients because the financial services firm sent them to you, and they continue to introduce great traditional accounting clients to your firm. The way to deal with this is openly and honestly. Let them know that your firm will not compete with them with regard to the clients that they’ve sent and may continue to send to your tax and accounting world.
Depending on the exact nature of the services provided by that other professional services firm, it is still possible that you can assume the role of financial planner because you can see that the i’s haven’t been dotted and the t’s haven’t been crossed. Easy evidence may be investment accounts in joint name or old beneficiary elections on their retirement accounts managed by that firm. Once you start looking for evidence of holistic and proactive planning in your clients’ financial lives, you shouldn’t be surprised by how little you find. Therein lies the opportunity.
After you pick your path, think about how you may capitalize that business. For smaller practitioners, it is likely to be with your time. You’re either going to work more, or begin to take hours from traditional CPA work and devote the time to PFP.
Larger firms should consider devoting the resources to do this right. If you had an accounting client who came to you with an idea for a new vision, what would you tell them? You’re going to tell them to have a well-thought-out plan that is properly capitalized. Do the same for your firm. This isn’t CPA rocket science, this is Business 101. Because most firms are so busy with the time-and-billing world, they simply don’t seem to make the time in their hectic schedule to approach their PFP division as they’d counsel a client to operate a new division.
You should select a leader who is charged with the success of the PFP offering. Make this a real commitment and don’t keep hounding that partner for traditional billable hours as the business is properly built. Once there is a practice leader, the business will develop and you need to make sure that there is staff ready and capable to do the work. This can be outsourced with an affiliate or joint-venture partner, but understand that this may have other ramifications that can confuse your client or cause a problem if your outsourced partner changes firms themselves. Perhaps you can find a firm who will get you off the ground, build momentum, and build your staff so that you are eventually housing a self-contained planning team. Most midsized firms can devote the capital to building the department, as there should be enough client interest so that the firm should shortly have the revenue to run a self-sustaining department.
If you decide to build a PFP practice or materially grow a fledgling startup, pay attention to training and marketing. Training is twofold: First, for your staff with respect to issue recognition, and then for the partners to learn how to have PFP conversations that will not offend anyone and tastefully find out which clients may benefit most from a discussion with the PFP department. If they can check their ego at the door and relearn how to have effective conversations, they’ll soon realize how big the need is for holistic and proactive advice. They’ll also learn that doing a great job at PFP will become one of the best business development tools for traditional accounting and tax work.