Many CPA firms have taken a sojourn into financial services with mixed results. Some financial planning departments have been successful, but others struggle for identity and recognition even from their own partners.

It takes a partner with a strong interest and commitment to specialize in personal financial services. This may come from family members with questions about investments, social security, retirement and the like that many people see as part of every CPA’s knowledge base.

Sometimes it comes from the realization that personal financial and investment consulting is an entirely different business from the typical commercially based services CPAs provide.

Offering new services to existing clients always causes concern. Partners worry about losing stock brokerage and insurance agency clients because the financial services department competes with them.

Also, there is the pervasive reluctance common in almost all CPA firms to turn clients over to a new department in the firm.

A firm-wide survey of the number and quality of all referrals received from stock brokers, financial planners, money managers, and insurance agents will quantify the risk and can go a long way to quelling partners’ fears. One firm found that only a handful of 1040 clients had been referred and that the revenues were insignificant compared to the referrals the CPA firm had sent to outside financial professionals. None of these clients has left the firm and the financial service contacts continue to send referrals.

Today, this CPA firm manages about $80 million in assets and the potential is virtually unlimited. The revenues from the financial services division, when measured in terms of hourly billings, at least three times any other service offered by the firm.

Another fear is that the accountants will not be able to compete with the large brokerage companies and that the clients may perceive the investment houses to be more competent in managing their assets.

In reality, however, CPA firms have access to equivalent money managers through their custodial relationships. In fact, some large brokerage houses use money managers with whom they can make special deals, so the service offered by the CPA firm is more independent. The perception that the large brokerage houses offer more products is simply not accurate. CPA firms acting through their financial services affiliates use the services of major brokerage houses and, therefore, can provide all the products they can provide.

There are strategic reasons for entering the financial services business that offset the fears and concerns and are persuasive to most partners. Chief among them is the phenomenon that offering more services to clients ties them to the firm more strongly. Firms can partially achieve this objective by outsourcing the financial services functions, but the tradeoff is loss of control (and revenue). Also, when a firm refers a client to an outsider, it can never be certain that the objectives set with the client will be fulfilled. For example, the client may be sold a different type or amount of life insurance than planned.
 

There is also the perceived possibility of conflicts of interest, particularly when the Sarbanes-Oxley Act and other recent developments are considered. Each firm must determine which clients are appropriate for personal financial services. Of course, financial services are not offered to attest clients, but should they be offered to the individual owners of these clients? If the firm will be managing investment accounts, what disclosures and disclaimers must be in place for the mutual protection of client and firm? In practice, each advisor must clearly define the scope and limits of the services offered and provided. For example, clients may be advised as to the type and amount of life insurance they should have, and are told they can purchase it anywhere. The client then determines whether to engage his insurance provider, implement through a CPA firm affiliate, or use the agent recommended by the CPA financial advisor.

CPA firms usually do not have securities and insurance license holders directly associated with the firm. This is because CPAs are most comfortable with fees and, in their heart of hearts, consider commission-based compensation as somewhat self-serving and unsavory. Debating the validity of this point of view is outside the scope of this article.

When offering financial services, it is vital to disclose how the firm, its employees, and affiliates are compensated and if that mode of compensation may give rise to any conflicts of interest.
 

The potential liabilities in financial services include the loss of clients because of bad investment advice.

Many firms use outside money managers through major brokerage houses and take the position that they manage the managers. They will suggest which managers should be engaged, monitor the managers’ performance, and make recommendations as to which managers should be retained and which should be replaced. This process puts the CPA on the same side of the table as the client. Therefore, it should minimize client attrition simply for poor investment performance, if applied conscientiously.

There is also the liability, expense, and additional compliance and reporting, including an annual audit by independent accountants, required when a firm takes possession of the client’s securities. Therefore, it is unusual for asset managers and advisors to actually have physical control of securities, known as custody. Most use an independent custodian (usually a major brokerage house or trust company) and do not handle securities directly, so that liability does not exist for them. All transactions are handled with these outside securities firms.
 

Clients are happy to get this kind of service from the people they trust, but clients’ expectations of service levels leave some upset when they do not always get return calls right away or when they are asked for additional fees for special personal project work.

A clear definition of the scope and limits of the engagement can go a long way in resolving possible disputes over fees, particularly when the fees are a flat amount or asset based. Upfront client agreement to the ground rules is important.

Also important is communication of procedures and billing within the financial services division and other groups and partners within the firm. Initially, the partner in charge of the client typically serves as liaison with the financial services department. All contact goes through that partner and the partner may bill for his or her time on an hourly basis.

 This process can be ineffective and leave the clients feeling they are paying twice for the personal financial services. Communications are obscured and much is lost in translation among the parties. Direct contact with the personal financial advisor is far better and probably cheaper. Client meetings are handled by the financial services personnel with the partner in attendance when it is appropriate. Some partners turn over their clients and walk away. Others, particularly the rainmakers, stay involved, attend all the meetings, and receive periodic reports and updates on activities. Clients are pleased with this collaborative effort and are comfortable when the partner’s time is billed separately, if that has been agreed in advance.

In one firm we have worked with, the only complaint from clients was that they would like to have had the service earlier because it would have helped them manage their personal financial lives in the same manner as their businesses and improve their peace of mind that their affairs were in order and being properly monitored.
 

When most CPA firms start to develop a personal financial planning division, they quickly determine that the clients are resistant to their traditional hourly fee model and that the model is unprofitable. They then will often adapt the compensation model used by investment managers, that is, a percentage of assets under management.

Historically, CPA firms begin managing assets for the pension plans (401(k) and profit sharing) of business clients and the personal investments of the owners and management. Managing assets for corporate pension plans where the corporation is an attest client may become a problem given recent developments regarding separation of the attest function and other services. Conversely, the firm’s third-party administration service for pension planning can grow because assets can be managed as well and pension administration personnel are very successful in generating financial services clients. In one case, twenty-five percent of the firm’s asset management business was attributable to it.

Most CPA firm financial advisors operate as registered investment advisors and are registered with their individual states of operation and/or with the SEC, depending on the level of assets under management. Generally, firms that manage over $25 million register federally, with ancillary informational compliance at the state level.

No securities licenses are necessary, because the firm is compensated through fees, not commissions. The firm also does not handle variable life or annuity products, because these are considered securities and would require a different licensing configuration. Therefore, if variable insurance or other securities are considered appropriate, the CPA firm refers them to an agent or broker for implementation.

Insurance products are referred to agencies with whom the firm has an agreement. The agent handles the applications and illustrations, and the fees can be split depending on the particular state insurance regulations. Firms typically use only agents who broker for many insurance companies, rather than “captive agents” who usually only work for one or two companies.

This policy adds to the firm’s comfort that the client is receiving the best implementation and that the insurance broker is acting objectively and in the best interest of the client.

All investment and plan progress tracking and performance-reporting is done in-house. Clients also receive transaction reports from the brokerage houses that handle the securities, but the analytical reports come from the firm. Asset allocation services are handled in-house and money management services are provided by outside managers through custodial firms like Charles Schwab. Financial services division personnel interpret these plan and performance analyses for the client and make suggestions for changes. They coordinate and act as liaisons with the custodian, the client’s attorney, tax accountant, business interests, insurance advisors, and money managers to form a cohesive and complete package of services.

Initially firms generally solicit financial services business only from existing clients. During a stock market downturn, business may be easier to get as people are open to solicitations from entities they perceive as conservative and trustworthy, i.e., CPAs. During a bull market, clients’ brokers call them frequently, but when the market turns down the clients may be ignored. The clients will naturally look for other options and may be pleased to learn of CPAs providing personal financial services.

The next level of marketing is simply to ask existing satisfied clients for referrals. For firms who wish to be even more proactive, seminars with joint sponsorship by money managers, insurance company home offices, and attorneys present ideas and information about specific products and strategies to clients eager to learn more about their options. This educational approach is a professional and soft way to gain new clients and expand services to existing clients.

The preceding presents an overview of current practices of CPAs offering personal planning and investment services. This field is a natural for CPAs because of their analytical abilities and training, conservative bent, and client-centered services. However, a fair amount of strategic consideration, time, and expense must be committed before a lucrative advisory division becomes a reality.

Financial services is truly a separate business and must be approached as such by the firm. It can be very profitable, can enhance the firm’s relationship with clients, and be highly satisfying work; but the commitment must be complete on the part of all partners to realize the potential rewards of the new undertaking.

Because the financial service business is complex and requires many outside relationships, e.g., licensed financial advisors, custodial agents, money  managers, insurance agents, software providers, etc., a significant investment of time and money is required to develop the service. Therefore, some firms have chosen to align themselves with one of the several organizations that provide turnkey programs to facilitate the firm’s entry into the business and to provide ongoing services that alleviate many burdens on the firm.