There are many models and many ways for a CPA firm to effectively offer wealth management services. Clearly, I have my favorites. But let me say that any of the methods can work; it just depends on how serious you are and whether you are looking to make more money or elevate the experience for your clients.
For openers, let’s talk about why the wealth management division inside a CPA firm may need fixing. The first telling sign is the materiality of your wealth management division. If your wealth management revenues do not equal or exceed your firm’s tax season revenues, you are doing something wrong. Please note that “something wrong” is all relative, but I approach this from what would be the highest and best use of your hours to deliver the most elevated experience possible to your clients. Imagine if your dentist only did a few root canals per year … would you want to be next in the chair as the doc sharpens their skills on you? My advice to moonlighters is to either be in the business or don’t be in the business.
It will likely take at least a few years of concentrated effort to make your wealth management division more material than tax season. But look at the reality: Wealth management is a year-round endeavor with many moving subject-matter areas. There is no way that you can do wealth management in fewer hours per year than a tax return — so on a client-by-client basis alone, your billable hours will expand dramatically. Of course, there are only so many hours in a week, so to do this properly you have a few options. Eliminate some tax clients or hire staff to help with taxes and/or wealth management.
Who owns the business?
Another sign that your wealth management division needs fixing is the type of relationship that you may have with a third-party provider of services. Many firms have created joint ventures with established wealth management firms to deliver the services. My concern about the joint-venture method starts with who owns the client relationship. Many of the joint ventures established were done somewhat loosely without a good written agreement between the parties.
You may have an agreement that stipulates the revenue sharing and work responsibility parts, but who actually owns the enterprise value? If your JV is with a large Wall Street firm, it is likely that the large Wall Street firm believes that they own the client relationship and therefore the enterprise value that it creates. If you are OK with that, then I’m OK with that. But why in the day of diminishing values for CPA firms would you allow what should be your most valuable asset to be owned by another person or entity?
If the client-planner relationship is built with someone who is not an owner of the CPA firm, and bound by whatever employment, non-disclosure or non-solicitation agreement that the firm would ordinarily have with its partners, you are vulnerable.
What happens to you if one day your outsourced JV partner tells you that she is leaving for another firm? Do the clients then go with that advisor? What if that firm has a different view of how to structure joint ventures with CPAs? Do you really want your clients to be a part of that advisor’s mission and to have to go through the process of transferring accounts and other details that would accompany a change of firms? Having heard this song before, I can tell you that this scenario rarely works out as well for the CPA firm as it does for the advisor who decides to change firms in the middle of your relationship.
In your CPA firm, you control the work product and perform your own quality reviews. When you outsource/JV the wealth management service, you control little. You may influence the actions of your JV partner, but ultimately it would be your partner who controls and calls the shots. While this may feel good to you when everything is working OK, it will ultimately fall back on you when the calls made were not good calls. Furthermore, your partner may have further limitations or restrictions imposed by their firm that you may never realize until you get more active.
Another question from this line of thinking is what service model would you like to offer? Common still is the lip-service model — a term to describe those advisors who do a great job reciting the wealth management pitch, but a horrible job at executing.
A few years back, I was interviewing a partner in a large regional accounting firm. We were meeting to talk about wealth management, and as I described where I think the puck is going with respect to the service model, this partner quickly responded, “That’s too much work for me. I just want to sell a lot of insurance because that is where the big money is.” Not wanting to toss up my lunch, I gave him the benefit of the doubt and then asked if he at least reviews lots of different companies and if he approaches it with a fiduciary eye. His answer made me even sicker: “I have nothing to do with the selection and sometimes don’t even know what is going on until I see my commission check.”
I respect his candor, but this well-respected partner sent shivers up my spine and I couldn’t wait to leave the meeting. Especially because I know firsthand that his outsourced partner is an agent with a specific insurance company who receives more than 90 percent of his income from one specific insurance company. That is not how a fiduciary acts.
On your own
The last of the fixing that I’d like to address is directed to those who have decided to do it on their own, without a JV partner. Over the long haul, this is probably the cleanest way to do it. In this case, a firm would affiliate with a registered investment advisor or create their own, but would keep most of the servicing and client work to members of the firm. Some may also affiliate with a broker-dealer under this model. But that is another issue entirely.
For those keeping it all in-house, realize that your entity is not likely to be profitable until it reaches some scale. You will need to hire and train staff, and someone from the accounting side will either work a whole lot more or experience a significant reduction in billable hours as the practice gets established.
When you’ve kept the entire wealth management practice in-house, some of the telling signs that it needs help may be linked to client longevity and firm growth. Many firms grow quickly out of the gate and then hit a plateau. Most that have differentiated themselves from product-pushing advisors or lip-service advisors have experienced growth like never before. That is because your service and dedication to client needs sets you apart from what most clients have experienced in the past, and word does eventually travel fast.
Client longevity is another telling sign. If you are not keeping the vast majority of your clients for life, then something is wrong. Why would they change to another firm if you were delivering a proactive and holistic version of wealth management?
