CPAs and Wealth ManagementThe Critical Path to the Optimal Financial Services FirmUpdated and Modified: November 2011     ...
Table of ContentsIntroduction................................................................................................
IntroductionOver the last 15 years, CPA firms have become increasingly involved in the management of wealth for their clie...
Chaos is often the beginning of every evolution, and there are many challenges for partners and managers of advisorysubsid...
•	 Client Demands: The moment a CPA firm enters into the advisory business, it changes the dynamics of the client        r...
It is important to acknowledge there is a difference between the concept of “optimizing” and “maximizing.” This distinctio...
Wealth management                                                   The evolution begins with the model most firms adopt i...
The depth of the client-advisor relationship and the level of technical wealth expertise are primary indicators of where a...
The Three Client DimensionsBasically, a client’s decision process to work with a particularfirm is tied to the following t...
team model holds true across all channels (banks, independent firms, CPA firms, insurance, etc.).Naturally, few practition...
the financial needs of clients. Regardless of the method for delivering wealth management services, whether internal orthr...
2.	 Level of Investment: The resource commitments of time and money must be treated as investments. From a         financi...
the importance of partnering with other professionals and sees his role as “being qualified to understand all of theclient...
The challenges are well-known, but most firms struggle to address them and find a solution. The solution starts with aclea...
Client ServiceAs it relates to the client, the success of a wealth management practice within a CPA firm is dependent upon...
The financial advisor and CPA roles are complementary contributors to the overall client experience, and each enhancesthe ...
CPAs need to know:                                CPAs may want to know:             CPAs do not need to know:   •	 Client...
Organizational StructureThe individual working relationship between the advisor and CPA needs structure and so does the or...
There is no need to replicate every position if the firm is smaller; rather, there is a need to ensure that someone isresp...
Business DevelopmentIn the definition and division of roles and responsibilities, firms often neglect the burden of busine...
Example Business Development Goals                                 Start                    Stage 1                   Stag...
Although the underlying assumption of the wealth management practice within a CPA firm is to target the existingclients of...
4.	 Compensation for advisors varies from firm to firm depending on whether it chooses a variable compensation         met...
Ensemble Firms Optimal Income Statement Ensemble Firms                                              Stage 1              S...
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
Moss Adams Whitepaper: CPAs & Wealth Management (2011)
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The Critical Path to the Optimal Financial Services Firm

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Moss Adams Whitepaper: CPAs & Wealth Management (2011)

  1. 1. CPAs and Wealth ManagementThe Critical Path to the Optimal Financial Services FirmUpdated and Modified: November 2011 ©2011 1st Global
  2. 2. Table of ContentsIntroduction.............................................................................................................3 . The Premise About the Business...........................................................................................4 Definition of Success.............................................................................................................5The Case for Wealth Management...........................................................................6 Specialization and Expertise..................................................................................................8Building the Capacity................................................................................................10 The Role of the Advisor.........................................................................................................12The Optimal Ensemble Practice. ..............................................................................13 . Client Service.........................................................................................................................15 Organizational Structure. ......................................................................................................18 . Business Development..........................................................................................................20 Financial Performance...........................................................................................................22The Optimal Solo Practice........................................................................................29 Client Service Model. ............................................................................................................29 . Organizational Structure. ......................................................................................................29 . Financial Performance...........................................................................................................30From Diagnosis to Action.........................................................................................35Wealth Management Services Growth Timeline .....................................................42Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 2 ©2011 1st Global
  3. 3. IntroductionOver the last 15 years, CPA firms have become increasingly involved in the management of wealth for their clients,covering all three stages: wealth accumulation, wealth protection and distribution, and wealth transfer. As these firmsadded financial services to their CPA practices, many found themselves facing both new opportunities and challenges.The goal of this paper is to address the needs and questions of CPA firms in the practice of offering financial advice.More specifically, the intent is to provide a framework for solo (single partner/owner) and ensemble (multi-partner)firms to design the best model for their practices. The focus is on answering these questions: • What is the optimal business model for CPA firms pursuing wealth management services? • What is the evolutionary path to creating a successful wealth management practice?This paper was commissioned by 1st Global, the leading independent broker/dealer for CPA, tax and accounting firms,and written by Moss Adams LLP, the 11th largest CPA firm in the United States. The paper captures the experience of themost successful firms in the 1st Global network, the expertise of the Moss Adams consulting team and data from varioussources. Critical to the paper were the contributions of 15 1st Global-affiliated firms that shared their stories with MossAdams professionals in telephone interviews. Many of their anecdotal insights are included within the report.Andrew Carnegie said, “Wealth is the business of the world.” His writing in Wealth and Its Uses, published in 1907, is oneof the earliest works on wealth management. Carnegie marveled at the process of wealth creation and the roles playedby invention, initiative and enterprise. If these are the factors that drive the creation of wealth, the business of wealthmanagement is no different. Recognizing opportunities, inventing new ways of addressing needs and taking initiative alsocreate the wealth of organizations, including those that manage the wealth of others.Over the last eight years, “wealth management” has become an increasingly popular term used to describe thefinancial services provided by banks, brokerage firms, trust companies and independent advisory firms. In the 2010InvestmentNews/Moss Adams Financial Performance Study of Advisory Firms, 61 percent of all respondents describedthemselves as “wealth managers.” Yet in a study of more than 2,000 leading financial advisors conducted by CEGWorldwide, just 6.6 percent use a true wealth management model. So why are so many firms looking to positionthemselves as involved in “the business of the world” as Carnegie called it, yet so few have been successful in building awealth management organization? What does a wealth management organization look like, what does it deliver and whoare the people who create and enable it?The first step toward wealth management is the desire to control and direct the client experience related to investmentsolutions. It is this foundation that has caused many CPA firms to cease the process of referring clients to otherprofessionals and instead capture that relationship themselves. Beyond that, the elements of creating a successfulwealth management practice are a dynamic combination of vision for client service, strategy for achieving the vision, theskills of the people within the organization, and the systems and processes deployed to make it operational. Therefore,the creation of a successful organization consists of three concurrent processes of development and improvement: 1. The Evolution of Client Service: Most CPA firms start their financial advisory services with a basic model of access to financial and investment products and over time add specialization, complexity and integration to arrive at a wealth management model. 2. The Evolution of People and Organizational Structure: From the single practitioner splitting time between tax and advisory work to the large multi-department firms, there is a clear path of growth and incremental additions that firms can follow as they grow. 3. The Evolution of Financial Results: As the client service and organizational structures evolve, the financial results of the practice change and gradually move, first toward critical mass, then to optimal economics that create value for firm partners.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 3 ©2011 1st Global
  4. 4. Chaos is often the beginning of every evolution, and there are many challenges for partners and managers of advisorysubsidiaries. This paper is intended to provide a road map to the ultimate destination and a clear, practical path to follow.At the same time, as Mario Andretti, former IndyCar, Daytona 500 and Formula 1 champion, said, “If everything seemsunder control, you’re just not going fast enough.”The Premise About the BusinessFor CPA firms, the decision whether to offer a financial services solution is first predicated on what is happening inthe advisory profession in general, and in one’s locale in particular. Most successful CPA firms have recognized anever-changing business environment that presents unique opportunities: 1. The Market: Statistics from multiple sources show that even in the current environment, there continues to be a growing population of wealthy people in the United States. And maybe even more importantly, the wealthy continue to amass even greater sums of wealth. “Further, the recent bear market of 2007-2009, the second since 2000, resulted in the last 10 years being termed the lost decade for investors,” creating a large demand of baby boomers who need help preparing for the road to retirement. Today, there is an oversupply of clients who seek professional guidance in their financial decisions relative to the number of firms that have earned reputations that they can securely guide clients to achieve their goals. 2. The Competition: The recent financial crisis has resulted in four important changes to the competition in the industry. According to recent statistics from InvestmentNews and The Wall Street Journal, thousands of licensed financial advisors have disappeared from the industry over the past few years. Second, several financial services firms that offered financial advice have disappeared from the landscape altogether, such as Lehman Brothers and Washington Mutual. Third, many of the remaining firms have been absorbed or morphed into new versions, for example the merger of Merrill Lynch with Bank of America. Finally, the surviving firms are now extremely focused on profitability, often at the expense of the clients. These firms are so focused on production minimums and commission and fee minimums, that most retail advisors are only interested in working with the “ultra affluent” in order to remain profitable and meet their goals. The affluent and emerging affluent, typical “A” clients of most CPA firms, are being abandoned by their traditional advisors. All of these changes give CPA firms a tremendous opportunity to fill a gap in the marketplace with their own clients while simultaneously strengthening those existing relationships. 3. The Capabilities of Most CPA Firms: Most accounting firms bring a unique perspective to their clients’ situations that other providers cannot match. This advantage is a compelling strength when combined with the capabilities of tax planning, a strict adherence to a code of conduct, a commitment to continuing education and a discipline for how clients are served. The CPA “brand” carries a reputation for competency, ethics and financial success that provides unique value.Corporate finance theory suggests there is no value to shareholders in a strategy that seeks to diversify the businessinto products or services where the company has no competitive advantage. The only reason for a company to enterinto a new business is its ability to achieve and sustain better performance than the industry based on a competitiveadvantage. The competitive advantage for CPA firms lies in their existing client base and the trust that those clients havein their CPA. A CPA firm entering the financial advisory business does not have to start “from scratch,” but has a captiveclient base upon which to build. It is those client relationships that provide the competitive advantage for CPA firms.Even though CPA firms are in a unique position to capitalize on the opportunity, they are still confronted with thechallenges of: • Margin Pressure: Moving from an hours-times-rate environment to selling value-based services on either a percentage of assets or commission is a difficult leap for many. What are the costs in delivering the service? How is value communicated, and what will the market bear? • Time Constraints: There is a physical limit to the number of active client relationships any one advisor can maintain. If that person also has a full-time accounting practice, there is a limit to growth unless the practice successfully adds capacity.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 4 ©2011 1st Global
  5. 5. • Client Demands: The moment a CPA firm enters into the advisory business, it changes the dynamics of the client relationship. This shift can prove challenging as clients demand more attention and have greater expectations. • Regulatory Requirements: CPAs add at least one new regulatory body into their lives, and in many cases, three or four: FINRA, SEC, state securities and insurance commissions, plus their own state boards. Many state boards have strict rules about how accountants practice in the advisory arena. • Knowledge Conditions: Just because CPAs deal with numbers does not automatically mean they understand the nuances of personal financial planning, investment advice or risk management. Clients are often more informed. This fact stimulates many accountants to develop deeper knowledge in the area of personal financial advice. • Partner Support: In larger CPA practices, there is a probability there will be a lack of consensus regarding the firm pursuing the advisory business. Even if partners do give lip service to the initiation, the real test lies in the flow of client referrals.Recognizing these challenges may help CPAs develop a comprehensive strategy and approach to business that anticipatesthe hurdles and designs tactics to overcome them.Definition of SuccessThe importance of articulating goals for a wealth management practice cannot be underestimated. Firms need toconsider how they define success in the financial advisory business, as success can only be measured within the contextof clear objectives. Financial viability and monetary reward are obvious objectives to some degree for every business,but the non-financial characteristics and motivations will drive the vision and guide the direction of the practice.Each firm will define their objectives differently, but following are examples of how firms may define success: • Superior client service and impact on clients’ financial lives. • Profitability and maximum income to partners. • Superior reputation and expertise. • Personal satisfaction and enjoyment of work.Consider the long-term outlook of the business. How does the firm envision the practice will look five or 10 years fromnow? Unfortunately, many firms have suffered due to failure to build a coherent vision and set clear expectations.Wasted resources, misunderstood objectives, divided leadership and diluted efforts are often the result of undefinedobjectives for the practice. Firm leadership must agree upon and be able to articulate answers to the following questions: • How do we define success in the financial advisory business? • What role are the services going to play in the firm? • How do we integrate the services with the CPA firm? • Which services do our clients need and want? • Which clients do we want to target? • Can we make a profit providing those services to those clients? • What professional staffing do we need to deliver the services? • What specific financial results would satisfy us? • What do we want to be known for in our market?Responses to the above questions provide the foundation for the firm’s wealth management strategy, as well as definethe desired outcome for the practice. They will shape the path to the firm’s optimal practice model. While it is truethat there are many routes for any financial advisory practice, the best path should be tied to each firm’s unique vision.Achieving the optimal wealth management practice is predicated upon articulating the unique vision of the firm andunderstanding the best course of action to realize it.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 5 ©2011 1st Global
  6. 6. It is important to acknowledge there is a difference between the concept of “optimizing” and “maximizing.” This distinctionmust be considered when defining and measuring the success of a practice. The premise of optimizing (or creating theoptimal practice) is relative to the goals of the firm, its definition of success and its unique perspective, whereas the ideaof maximizing is based on the assumption of pursuing maximum return without regard to any other objectives. The keyto achieving an optimal model is to define the firm’s unique objectives and select the best path to achieve them.Although the definitions of success will vary greatly among firms, there is a certain level of science inherent to buildingthe optimal model. For most in the financial advisory business, a firm is successful in building the optimal practice modelwhen it is: • Responding to the needs of its optimal clients. • Operating at an optimal level of profitability. • Functioning at an optimal level of efficiency. • Working at an optimal level of productivity.Because of the complex pressures and variety of demands on the profession today, the optimal model for advisory firmsis based on the team concept: a team of professionals working together in harmony to achieve the optimal results interms of revenue, profit, efficiency and meeting clients’ needs.The Case for Wealth ManagementNo matter what channel (CPA firms or independent advisors), the comprehensive approach to financial services hasproven to be the most successful. The financial services industry has experienced a revolution of service sophistication,increased competition and a greater desire to meet more wide-ranging client needs. All of these have contributed tothe development of a comprehensive model for financial services. This type of service philosophy, referred to as wealthmanagement, focuses on a holistic approach to a client’s financial affairs and emphasizes the benefits of financialplanning and strategy combined with best implementation. Without implementation, any planning becomes a mereacademic exercise. Without planning, even the best implementation will achieve the client’s goal only by accidentrather than design. The exact definition of wealth management has been elusive in the industry. Wealth management does Wealth management is characterized by: not refer to a service or product, but a method for delivering a suite of services and a philosophy for • A business model built around target managing client relationships. Wealth management clients’ needs addresses all areas of a client’s financial life in a customized way, without emphasis on specific products • A comprehensive service approach and implementation vehicles. The process is one of advice, customized solutions, implementation and • An emphasis on advice, not product regular review. • Sophistication of solutions The unique relationship between the CPA and the • Independence and objectivity client offers a perfect foundation on which to build comprehensive financial services. Therefore, the joining • The benefit of planning of CPA services and financial advice has an inherent • The ability to deal with complex issues competitive advantage in the industry. However, many CPAs have struggled to implement a true wealth • A proactive approach to client solutions management model within their firms. Most firms fall somewhere between serving as a basic product provider and acting as a true wealth manager.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 6 ©2011 1st Global
  7. 7. Wealth management The evolution begins with the model most firms adopt in the early days of their financial advisory effort, the “broker/agent” servicedoes not refer to model. As the practice evolves, the increasing sophistication of the professional(s) and the increasing depth of client relationshipsa service or product, drive the practice to its ultimate destination of wealth manager. The evolution to wealth management for a firm can be measuredbut a method for delivering in the following ways:a suite of services and • Depth and Breadth of Client Solutions: An increased level of technical competency and expertisea philosophy for managing • Client Engagement Process: A more sophisticated systemclient relationships. for engaging clients and explaining opportunities • Structure of the Practice: The sufficient capacity and capabilities through staffing and/or resource partnerships Broker/Agent Facilitates access to financial products. Responds to client-initiated opportunities. Little or no planning. Basic Advice Provides simple investment advice. Begins to have a discovery process to uncover client needs. No comprehensive planning. Planner/Strategist Emphasizes planning and strategies to meet goals. Uses the client relationship to explore multiple opportunities. Better competence, but limited capacity. Wealth Manager Integrates goals and strategies into a complete holistic service. Has step-by-step process to walk client through all elements and considerations. Has competence and capacity Employs or involves other professionals.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 7 ©2011 1st Global
  8. 8. The depth of the client-advisor relationship and the level of technical wealth expertise are primary indicators of where afirm falls on the ladder of development. Typical client services in a wealth management firm include: • Tax planning • Investment planning • Retirement planning • Insurance planning • Income protection and • Estate planning asset preservation • Education planning • Business planning • Special situations • Debt management Depending on the size of the firm and its strategy regarding specializations, the methods of delivery vary. Regardless, theoptimal wealth management practice is able to effectively deliver all elements of comprehensive wealth managementthrough a mix of internal capacity and carefully structured resource partnerships.Specialization and ExpertiseThe comprehensive nature of wealth management services creates an immediate challenge with respect to delivery: thehigher the number of services, the more difficult it is to position one professional as an “expert” in all areas of financialadvice. Considering the complexity of financial planning, taxation, investments, estate planning, trusts, insurance, etc.,it is difficult for a single professional to be an expert in all these fields of knowledge and effectively craft solutions forclients. It is true most financial advisors have knowledge of all these topics, but knowledge is only the first step towardexpertise. The delivery of a wide range of solutions by a single advisor becomes even more challenging as the averagesize of the client relationship grows. Given the typical client of a CPA is affluent (more than $500,000 in investableassets), complex issues face CPA firms from the very start. Creating or leveraging specialized delivery resources in orderto deliver true “expert” advice and implementation is one key to success for CPAs.Unfortunately, many firms in the industry (both CPA and other advisors) have taken the approach of trying to create a“jack-of-all-trades” practice where one person poses as an expert in all areas of financial advice and implementation.Building a solo practice is a perfectly viable business model, but it is not realistic to think one professional can have thenecessary knowledge and expertise in every area of wealth management. In this case, the role of resource partnershipsand outsourcing relationships is particularly important. The fundamental premise must be to provide the client withqualified experts, whether the advisor provides that expertise directly or draws from an external source. One of thebiggest threats to the client relationship is a perceived lack of credibility, so it is critical to ensure the appropriate level ofexpertise is visible, clearly communicated and readily available. The actual or perceived lack of CPAs in financial services is a significantThe fundamental premise threat to the success of those CPA firms in the business. A 2007 study conducted by the American Institute of Certified Publicmust be to provide the Accountants (AICPA) and Moss Adams found the most critical challenge facing CPA firms is the lack of awareness among clients that financialclient with qualified experts, planning/advisory capabilities exist within the firm. In addition, the Journal of Accountancy interviewed 1,500 affluent clients of CPA firmswhether the advisor and found that “lack of expertise” is the leading correctible reason for lost wealth management opportunities. In the survey, 61 percent ofprovides that expertise clients who did not use their CPA as a financial advisor said they diddirectly or draws from an not need an advisor, 36 percent said they see the advisor as lacking expertise, and 3 percent perceived a conflict of interest. There may notexternal source. be much the firm can do about clients who do not see the need for an advisor, but it can clearly improve on the clients who do not recognize the CPA’s expertise.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 8 ©2011 1st Global
  9. 9. The Three Client DimensionsBasically, a client’s decision process to work with a particularfirm is tied to the following three dimensions: zation 1. The service and its convenience price speciali 2. The price & 3. The ability to handle specialized and complex issues xitySpecialization is the most commonly overlooked element complethat contributes to a client’s decision to choose an advisor. service & convenienceAdvisors frequently recognize the importance of service andpricing, but many firms underestimate the complexity in theirclients’ financial lives and the need to handle that complexitythrough specialized professionals.Clients want to work with advisors who have expertise in theirspecific areas of need and who have experience working with complex financial situations. Complexity is commonplaceamong the clients of a CPA practice. For example, business owners face the complicated issue of illiquid wealth, oftenhaving to guarantee business loans with personal assets and owning a business that is directly tied to their personalfinancing. Their need to integrate the demands of their personal finances with their business requirements does not lenditself easily to generic and simplistic solutions.Clients want to work with The complexity and specialization dimension becomes increasingly critical as the size of the client’s wealth increases. Before dismissing the wealthiestadvisors who have expertise in clients as perhaps being too demanding, consider the following statistics. According to a 2011 report by the Economic Policy Institute, the top 20their specific areas of need and percent of American households hold 87.2 percent of the nation’s wealth, with the other 80 percent accounting for just 12.8 percent of all wealth.who have experience working Reviewing the table below, it becomes clear that if assets define the revenue opportunity for wealth management, then the focus really mustwith complex financial situations. be on those with the highest net worth. Distribution of Income and Wealth, 2009 DISTRIBUTION OF: HOUSEHOLD INCOME NET WORTH NET FINANCIAL ASSETS All 100.0% 100.0% 100.0% Top 1% 21.3% 34.6% 42.7% Next 9% 25.9% 38.5% 40.2% Bottom 90% 52.8% 26.9% 17.1% Source: Wolff (2010)In addition to shaping the client’s perception and meeting complex client needs, the financial results from utilizingexperts are superior. Practices that deliver comprehensive services through a team of experts rather than a single“generalist” advisor tend to be larger and significantly more profitable. (While revenue and profitability are not the onlypriorities, it is inherently a valuable way to measure the accomplishment of a firm.) The Financial Planning Association(FPA) conducts an annual survey of all members in its industry association. The results point to the distinction betweenfirms that provide client service through a “team of experts approach” versus firms that rely on professionals notspecializing in any distinct area, but acting as “generalists.” The study indicates practices that utilize a “team approach”achieve significantly higher revenue than advisors who try to position themselves as “generalists.” The superiority of theSecurities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 9 ©2011 1st Global
  10. 10. team model holds true across all channels (banks, independent firms, CPA firms, insurance, etc.).Naturally, few practitioners and firms begin as true wealth managers. Instead, at both the professional and the firm level,the practice undergoes a growth process over time, increasing its ability to generate revenue and service clients in moresophisticated and holistic fashions. The diagram below illustrates that correlation between client service and complexityof solutions (the client perspective) and financial rewards (the profitability perspective). The profitability perspectiveshould be measured as total pre-tax income per owner, including salaries and profit distributions. The client perspectivecan be measured in terms of revenue, wallet share, number of services provided per client, and the revenue per serviceor client satisfaction scores. As indicated, the client perspective correlates strongly with the financial perspective.As client relationships deepen and more complex solutions are provided, the financial results also expand. Client Service to Profitability Correlation breadth & depth of client services Wealth Manager Planner/ Strategist Basic Advice Broker/Agent profit per ownerThe advantage of CPA firms lies in the fact they do not have to start from the bottom of the curve. A mature clientbase and demonstrated expertise allows CPA firms to enter financial services in the elevated areas, from both a clientperspective and the profitability dimension. Therefore, the most successful practices recognize their clients’ need forspecialized knowledge and areas of expertise, and seek to establish their ability to deliver this expertise early on.The question is not “if” but “how” best to build expertise and capability.Building the CapacityWhen it comes to building the expertise and capacity of a wealth management practice, CPA firms need to determinewhich functions and capabilities to build internally, which to acquire and which to access through resource partnerships.The ideal method for building capacity varies among firms, although outsourcing is a fundamental part of every optimalmodel. The decisions surrounding outsourcing should be based on where the firm can find the best available expertiseand create the most favorable economic partnerships.It is important to clarify the role resource partnerships or outsourcing plays in the firm. Using an external solution providershould not be viewed by firm partners as a way to lessen the commitment of the firm leaders. Unfortunately, firmshave confused the decision to outsource certain services with a lower level of commitment. The decision to outsourcea service should not be driven by reluctance to commit to providing a particular service. If there is an absence ofconsensus that a specific service is a valued offering for clients, then the firm should not be involved. It is important torecognize the fundamental premise behind a firm adding any wealth management service is a commitment to meetingSecurities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 10 ©2011 1st Global
  11. 11. the financial needs of clients. Regardless of the method for delivering wealth management services, whether internal orthrough resource partnerships, there must be a dedication to seeing that clients’ needs are met. Without that commitment,any service will fail or deliver half-hearted results (from a half-hearted effort).After a firm’s partners pledge their commitment, they must decide how to acquire the necessary capacity and expertiseto deliver the services (i.e., whether to build the capabilities internally or acquire them through resource partnerships).When evaluating whether to hire internally for a specific function or expertise, an external relationship should also beseriously considered.The first and obvious choice for resource partnerships is the broker/dealer relationship. A broker/dealer of the practicealready has a deep understanding of the firm, has the same financial goals and, more importantly, has the economiesof scale to effectively build capacity. Additionally, there is a significant efficiency for the firm in working with a singleresource partner rather than committing to the expected cost of integrating multiple providers.The value brought by the resource partner (broker/dealer) can be found in the following areas, and each area ultimatelyhas a financial impact as well as a client service impact: • Most practices are not efficient enough to perform all functions on their own. The resource partner supplies economies of scale that make operations efficient, ultimately lowering the cost of each function while also minimizing the chance of client service errors. • The resource partner supplies technology and operational leadership. Most practices are not in a position to evaluate new technologies, test, implement and monitor them. The more technology permeates the advisory business, the more important this role will become. • The resource partner can supply the outreach and reputation of a large organization. Many broker/dealers have created nationwide alliances with other industry players, something that is simply not possible for smaller, local practices. • The combined volume of aggregate business gives the resource partner buying power to make significant price improvements. • In the ever-expanding world of investment and financial products, the resource partner acts like the research department for advisors. The broker/dealer can provide guidance, methodology and training to advisors and help them keep up to date. • One advisory practice can be very limited in its exposure to management, organizational and compensation practices and, as a result, may be reinventing the wheel. A resource partner observes a large number of firms and has the ability to crystallize and distribute the knowledge to the entire network. • For those firms that recognize the value of utilizing a full-time advisor and have the critical mass to do so, the resource partner can facilitate the sourcing, placement, training and management of this valuable resource.Each firm will (and should) inevitably outsource a number of capabilities and continue to re-evaluate the outsourcingdecisions throughout the lifespan of the business. The degree to which a firm leverages resource partnerships to buildcapacity and expertise will be influenced by a number of factors: 1. Business Strategy: Firms need to clearly define their vision. The more that investment and financial advisory services are seen as an integral part of the business, the more appropriate it is for the firm to build capabilities internally. Many firms have taken the path of developing an investment practice without the intention of making it a core service within the firm, and most of those firms have felt dissatisfied with the return on their investment. Again, all firms should leverage their practices through resource partnerships, but the level of such outsourcing will vary depending on the business strategy. If financial services are seen as an “accommodation to clients” or as a way to get a bit more revenue in the tax off-season, then maintaining a list of preferred outside vendors is perhaps adequate. Those firms seeking to drive growth will adopt proven resource partnerships.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 11 ©2011 1st Global
  12. 12. 2. Level of Investment: The resource commitments of time and money must be treated as investments. From a financial perspective, the firm must assess the amount of financial resources available and how much it is willing to commit. Resource partnerships may require low initial cash investment but to be successful they will demand a significant time investment. From the perspective of time commitment, Ron Pittman of Pittman & Murdough Financial Advisors Inc. in Arizona emphasized the importance of dedicating the necessary time: “The CPA firm’s investment in dedicating my time to develop the financial services practice has been a definitive contributor to our success.” 3. Risk/Return Trade-Off: Firms have frequently felt dissatisfied by the financial returns, or uncomfortable with the level of risk, although they have failed to establish an expectation or agreement around acceptable levels of risk and return. Assessing the acceptable level of risk and the desired rate of return from the business are important elements to consider, regardless of the route a firm takes. 4. Level of Control: In terms of control over the client relationship and the services, the firm needs to assess its comfort level when involving a professional who is not an employee of the firm. Generally a firm is able to exercise a greater amount of control over a direct employee, although issues of control can exist in either scenario. 5. Size of the Opportunity: Firms should evaluate the size of the opportunity in terms of the client base, local demographics and the competition in the marketplace. If only limited opportunities appear to exist, then a resource partnership may be the best solution because it will be difficult to achieve critical mass for an internal-only solution. The critical mass needed for an internal practice can be thought of in two ways: • Moss Adams research suggests an advisory firm only achieves optimal economics when it reaches $1 million in revenue. Firms that do not see a clear path to achieving this scale of revenue should consider relying on a resource partner approach rather than living with inferior profitability. • Moss Adams estimates the initial investment in forming an internal subsidiary ranges between $100,000 and $300,000. These costs include regulatory and registration fees, professional and legal help for setup, initial investment in software and other operational resources, time needed to set up operations, investment in creating compliance processes and finally the early salaries of professionals in the subsidiary prior to the point in which these positions become fully productive. Utilizing a resource partner and leveraging its economies of scale can help firms manage their initial investment costs. Resource partners can also provide proven processes for efficiently setting up operations, compliance and other key business systems.The overall business outlook for the firm and the goals of the individual CPA partners dictate the degree to which afirm builds through internal capacity or resource partnerships. The extent to which a firm leverages through resourcepartnerships varies, although it is indisputable successful firms have learned the value of doing so. Neil Schmerling inPennsylvania created successful resource partnerships with specialists in insurance, estate planning and elder care, andsees “leveraging off of others will be the key to growthfor The Schmerling Group.” ClientThe Role of the AdvisorAs firms develop areas of expertise (whether Relationship Manager/Primary Advisorinternally or through resource partnerships), the • Develops and maintains the client relationship.role of the primary advisor evolves. The concept • Identifies and prioritizes client needs.of the relationship manager becomes a critical • Has primary responsibility for client work.function of the advisor’s role. The primary advisor • Involves other experts to serve specialized needs.not only provides most of the client services, butis also the “quarterback” for the client, ensuringall areas of wealth management are delivered by Insurance Specialist Estate Planning Expertthe appropriate experts. Art Husami of Husami &Associates in California has a strong philosophy about Business Planning Expert Retirement Plan Specialistleveraging specialists in his practice. He emphasizedSecurities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 12 ©2011 1st Global
  13. 13. the importance of partnering with other professionals and sees his role as “being qualified to understand all of theclient’s needs and then assess and discuss the solutions with the client to find the right person to utilize.” The role of therelationship manager is illustrated on the bottom of page 12.This model emphasizes the concept of an integrated team of specialists to serve the client. The engagement processfeels seamless to the client as long as the relationship manager remains involved at all times, drawing the necessaryprofessionals into the relationship. Whether the experts are other advisors within the practice or outside professionals,the experience for the client should be the same.Keep in mind an advisor will go through an evolutionary process, just as the firm does. Professionals experiencea career progression that is more like a pyramid than a linear path. The foundation begins with technical competence,then adds the capability of managing client relationships and builds in the ability to identify new business opportunities.As advisors develop, they may find themselves delegating some of these roles or continuing to perform each of theroles themselves: 1. The Role of the Technician: To possess the necessary technical skills and knowledge to practice as an advisor. At a more focused and advanced level, the advisor may develop into a specialist. 2. The Role of the Relationship Manager: To manage client relationships and coordinate the necessary resources to service a client fully. 3. The Role of the Business Developer: To understand client needs, propose solutions and “close the deal” by implementing new business.So far this paper has discussed the importance of specialization and the considerations in developing the necessaryexpertise, capacity and capabilities. The actual organization capable of implementing these capabilities and turning theminto a thriving business is the focus of the next section.The Optimal Ensemble PracticeThe paths of larger firms with more resources differ from the solo practitioner path (i.e., CPA firms with only onepartner). Therefore, there will be a separate section that focuses on the solo model. Still, some of the solo firms oftoday may be the large firms of tomorrow, so there is a benefit to solo practitioners in familiarizing themselves with theconcepts of leverage and organizational design that apply to larger, multi-partner (ensemble) firms.Larger CPA firms have the advantage of having more resources to invest in a wealth management practice, as well asmore clients to reach critical mass. This advantage, however, presents a challenge in designing an effective organizationalstructure and integrating and coordinating the CPA and financial services practices. The most common challengesensemble firms face are: • Partner Buy-In: The greater the number of CPA partners, the more of a challenge it is to achieve 100 percent buy-in to the wealth management practice. Although there are varying degrees of participation by partners in the firm, it is imperative all partners form a consensus. If the partners cannot reach consensus that the firm should offer wealth management services, the chances of ultimate success are quite limited. • Cultural Integration: The process of incorporating financial advisors into an established CPA firm frequently proves challenging. Differing perspectives and tendencies of CPAs and financial advisors can create obstacles to building effective relationships. This is particularly true when advisors are hired from outside the firm and brought in without a pre-existing professional relationship. A failure to understand each other’s professions also contributes to challenges with cultural integration. • Operational Integration: Firms frequently lack an effective process or realistic timeline for integrating CPAs with advisors in terms of client relationships, business development and cross-utilization of expertise. Although the optimal strategy is to create an integrated structure, the reality in achieving the goal takes time. Recognizing that, it is important to set appropriate expectations and to prioritize the goals during each stage of development.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 13 ©2011 1st Global
  14. 14. The challenges are well-known, but most firms struggle to address them and find a solution. The solution starts with aclear vision of what the ultimate destination should be (i.e., the firm’s definition of success,) and then carefully definingeach step required to realize the vision. Based on interviews with the most successful 1st Global firms and Moss Adams’experience consulting with CPA firms, there are four stages or steps toward the vision. The Four Stages to Defining the Ultimate Vision for Wealth Management Start Stage 1 Stage 2 Stage 3 Stage 4 Buy-In and Awareness and Active Results and Complete Planning Education Business Accountability Integration Ensure partner Focus on increasing Increase advisor Highly involve advisors Clients fully acceptance and partner knowledge and involvement in in client meetings with understand and expect commitment to the education. client meetings with partners. the multiple service wealth management partners. specialties. practice. Begin client awareness Formalize goals and through general Expect 50 percent expectations for Professional career Define strategy and marketing and targeted of partners to make partner referrals. goals and path reflect business philosophy. marketing. wealth management wealth management. referrals. Create commonly Identify and engage Include introduction to understood Financial success dedicated financial wealth management in Add wealth expectations for and strong client advisor. new client meetings. management questions the roles and relationships create to tax interview forms. responsibilities of all transferability of the Establish financial Begin making professionals. practice. budgets and introductions through Establish system expectations. “early adopter” to track client data partners. related to uncovering Gain understanding wealth management of clients’ needs and Establish credibility of opportunities. develop strategy for advisors in the firm. building expertise. Create incentive system for all members of the firm to uncover opportunities.** Securities licensing is required for all incentive programs.The business plan that takes a firm through the process of complete integration must tackle the following one by one: 1. Client Service: Identify clients’ needs and determine how best to meet them. 2. Organizational Structure: To facilitate effective client services, the firm needs to define the internal organizational structure to determine who does what, when and how, and assign goals and responsibility for the outcomes. 3. Financial Performance: The organizational structure largely defines the economics and provides a framework for what metrics to track and what the expectations should be.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 14 ©2011 1st Global
  15. 15. Client ServiceAs it relates to the client, the success of a wealth management practice within a CPA firm is dependent upon its ability todo three things: 1. Identify client opportunities and properly capitalize on them. 2. Offer services the client needs and is willing to pay for. 3. Structure an effective relationship between the CPA, advisor and client.The first two objectives really relate to designing a compelling Value Proposition to “sell” to clients and defining theappropriate clients for the firm. There is a natural tendency to pursue as many client opportunities as possible and to“be all things to all people.” However, such lack of focus stunts the ability of the firm to gain the traction that fostersprofitable growth. High-performing firms learn to say “no” to clients who do not fit within their core competency,conform to their financial philosophy or fall within their target client profile. The wealth management practice ofGPP Wealth Management, LLC in Texas has taken a disciplined approach to targeting clients and has a strict clientacceptance philosophy centered on its particular niches. As David Shill said, “We define our target financial servicesclients to match the segmentation of our CPA client base. Although it is challenging to stick to the principle that we onlyaccept clients who fall into our target, we work hard to maintain that focus.”Similarly, offering products and services that do not match the needs of the ideal client drains resources. As theintegration of the wealth management practice evolves, so will the client service offering. The Integration of Wealth Management Services Stage 1 Stage 2 Stage 3 Stage 4 Increased Sophistication in Increased Knowledge of The Foundation Increased Specialization Financial Planning Investment Options Investment advice. Financial planning. Deeper application of Increased complexity of investment planning client issues. Turnkey investment solutions Tax planning. solutions, tax-advantaged utilizing asset allocation and and alternative investments. Comprehensive service managed account strategies. offering. Meaningful integration of tax Insurance capability through advice and financial planning. Advanced areas of expertise, outsourcing. such as complex insurance or unified managed accounts with tax management.Many firms have set the initial expectation the practice would be “up and running” with comprehensive services fromthe beginning, and this may be unrealistic. Firms in the beginning years should focus on building a solid foundation offinancial planning and then increasing sophistication and adding specialization over time. Leveraged models, however,can typically provide highly sophisticated wealth management solutions from day one of implementation.After defining target clients and deciding which services to offer, firms must build an effective relationship structure.As the diagram on page 16 indicates, the advisor’s relationship to the client should not be seen as “subordinate” to thatof the CPA, as CPAs often assume. Many firms make the mistake of seeing the advisor role as “below” the CPA role inthe relative importance of the client relationship. As Doug Hatcher of Olson & Hatcher Financial Advisors, LLC in Arizonaexpressed, “CPAs often see financial services as an incidental add-on to their accounting and tax work. However, financialservices should be viewed as a major component of a firm’s comprehensive wealth management and consulting services.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 15 ©2011 1st Global
  16. 16. The financial advisor and CPA roles are complementary contributors to the overall client experience, and each enhancesthe value of the client relationship.” The advisor and CPA should be seen as peers within the client service team, andtheir respective strengths equally recognized. The Client Relationship Framework Individual Client CPA Advisor Importance: Importance: • Has an established • Provides value-added relationship with client. client service. • Is recognized as credible. • Responds to client • Has knowledge of client. needs. • Deepens firm’s Constraints: relationship with client. • Compliance-driven relationship. Constraints: • Limited service • Needs CPA for access opportunities; unless to client. client is a business • Needs firm structure to owner, the relationship properly capitalize on has narrow scope. opportunity.Mike Carroll of Beall Barlcay Wealth Management, LLC in Arkansas, emphasized the significance of the “trianglerelationship” between the CPA, advisor and client. The combination is valuable because “the CPA is able to maintaina viewpoint or perspective, while at the same time transferring credibility to the advisor by nature of the trustedrelationship with the client.” However, many CPAs fear losing control of the client relationship when adding an advisorto the equation. To mitigate this fear, the roles of the advisor and the CPA should be defined within the context of theclient relationship. It needs to be clear what involvement the CPA will have in the wealth management relationship.Similarly, the protocol for sharing information between the advisor and the CPA on client relationships needs to bedefined within the firm. It is a good idea to consider the communication plan in terms of the degree to which the CPAneeds to know or wants to know information. You can think of communications between the advisor and CPA in thefollowing terms: • Client services • Business development • Organizational structure • Financial performanceSecurities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 16 ©2011 1st Global
  17. 17. CPAs need to know: CPAs may want to know: CPAs do not need to know: • Client feedback and complaints. • Copies of performance reports. • Details of implementation. • Significant events. • Significant changes in account • New services provided to client. positions or vendors. • Potential tax or business issues.Despite the best efforts to define the roles and maintain an effective communication plan, CPAs can expect some lossof influence and control if the advisor’s relationship with the client is a success. CPA partners must overcome thisdiscomfort and recognize the added value of the wealth management relationship, as follows: • Increased revenue to the firm: »» The partner needs to share in the additional revenue through compensation. »» Securities licensing is required to share in the securities compensation. • Deeper relationship with the client: »» The firm is able to respond to the client’s complex needs. »» The relationship is no longer based solely on compliance and tax preparation. • Opportunity for additional client work: »» Additional opportunities may include comprehensive tax planning, trust and estate taxes, and personal financial statements. • Improved value for succession: »» The added cash flow and enterprise value improves the transferability of the practice.The natural instinct to “protect” the client relationship is often called “the gatekeeper syndrome” and is one of themost difficult obstacles in the CPA environment. Why is there a lack of fluidity in the client-sharing process in the firm?The reason is most likely a combination of: • Lack of familiarity (or poor introductions and poor communication): »» CPAs are not really sure what financial advisors do. »» CPAs have not made the acquaintance of the individuals who will be providing the advice. »» CPAs face time pressures preventing knowledge and action that would otherwise result in sharing clients. • Lack of an institutionalized process (or no easy steps to follow to get from CPA to advisor): »» The steps for introducing a client to the available services and the financial advisor are not simple, clear, practical, documented, shared and reinforced. »» In the absence of an institutionalized process for making referrals, the path of least resistance is to avoid the topic when speaking with clients. • Lack of vision of the potential (no grasp of the financial implications of making wealth management work): »» This mindset is probably the most detrimental of all impediments to the financial success of the relationship, because making that relationship work will inevitably involve some effort and short-term sacrifice.One cannot underestimate the importance of CPAs buying into the wealth management business and having a strongpartnership between the advisor and the CPAs. Terry Scroggin of S & P Wealth Management in Oregon agreed “financialservices must be a collaborative, comprehensive effort within the firm—not something autonomous among thepartners.” Without effective teamwork between the two practices, it is extremely difficult to leverage existing CPA clients.Creating an internal structure and culture that fosters this relationship is critical.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 17 ©2011 1st Global
  18. 18. Organizational StructureThe individual working relationship between the advisor and CPA needs structure and so does the organization as awhole. Frequently, the design of the organization and delegation of responsibilities occur in a haphazard fashion, moreby coincidence than design. As the foundation, the following principles should be reflected by the structure: • Effectively connects the wealth management practice and the CPA firm. • Creates an efficient workflow and leverages all resources to maximize profitability. • Creates a support infrastructure that enhances the professional’s ability to serve clients. • Provides for appropriate leadership at the wealth management and CPA level.Considering the leadership of the organizations, there must be designated persons from both the CPA firm and thewealth management practice who are responsible for the results and success of the operation. These leaders needto carry the momentum of the practice, provide accountability for results and communicate to all employees andstakeholders. Without this, firms will likely experience frustration over the CPA partner’s lack of responsibility andinvolvement.The role of the CPA firm’s executive management is critical to the success of the wealth management business. If theventure is to succeed, it will do so only with the active participation of the CPA leadership. As Dave Bremer of BoulayFinancial Advisors, LLC in Minnesota reiterated, “There must be a champion for building the practice within the firm.”As Dave gradually transitioned his tax clients to other partners, he became this champion and is the leader of what isnow a large and sophisticated wealth management subsidiary.Multi-office firms bring an additional dynamic to the reporting structure of the wealth management practice. For example,JCCS Wealth Advisors, LLC in Montana has a wealth management planner in each of their six offices. Their firm hasexperienced the value of designating financial services partners within each of the offices, as well treating each officeas an independent profit center. Bruce Lahti explained, “Each of our six offices reports its respective wealth managementpractice revenue and is responsible for its share of the costs. Implementing this kind of accountability has proven to becritical to success.”To accomplish these objectives, the following organizational chart is suggested: CPA Liason Executive CPA Firm Committee/Board of Directors Wealth Management CEO Advisor Advisor Advisor Advisor Support Staff Operations ManagerSecurities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 18 ©2011 1st Global
  19. 19. There is no need to replicate every position if the firm is smaller; rather, there is a need to ensure that someone isresponsible for each item. For example, smaller firms will have more “hybrid” positions where one person acts as bothan advisor and Wealth Management CEO. The roles of each position includes:Executive Committee/Board of Directors • Provides strategic direction and decision-making at CPA firm level. • Defines the role of wealth management for the firm. • Selects leadership for wealth management. • Approves hiring decisions. • Holds partners accountable. • Authorizes spending decisions. • Is lead by a managing partner or wealth management champion. • Is accountable to the partners for wealth management results.CPA Liaison • Provides communication to the CPA partners regarding wealth management practice. • Is either managing partner or wealth management champion.Wealth Management CEO • Provides strategic leadership and executive management to the wealth management practice. • Defines the direction of the wealth management practice. • Takes responsibility for results of the wealth management practice. • Reports to executive committee/board of directors. • Is an active advisor or full-time executive, depending on size of organization.Advisor/s • Develop/s business through the initiation of new client relationships. • Retain/s existing clients and promotes long-term relationships. • Deliver/s advice to clients with whom they have relationships. • Introduce/s and integrates service specialists when appropriate. • Maintain/s communication system with CPAs regarding client issues.Support Staff • Provides support to advisors through administrative and paraprofessional duties. • It is important all support staff are shared by all advisors. A structure that provides for dedicated relationships between advisors and support staff can contribute to inefficiencies and internal divisions that threaten the integration of the group.Operations Manager • Ensures overall office operations and coordination of client service.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 19 ©2011 1st Global
  20. 20. Business DevelopmentIn the definition and division of roles and responsibilities, firms often neglect the burden of business development.Who has ultimate responsibility for developing business within the practice? Who leads clients to financial services?Is it the advisors or the CPAs? The firm must assign the respective roles of the professionals in generating new business.Many firms have experienced frustration due to this lack of focused responsibility, with both parties ultimately “pointingthe finger” at one other. As important as this function is in the success or failure of the wealth management practice,client development must be clearly defined, but should not be done without appropriate consideration. Firms mustconsider where the control and access to the client exists, and determine the motivation that can drive each group.How responsible should the CPA partners be for providing referrals? How does the firm motivate partners for takingbusiness development responsibility? The practice of Bentley Wealth Advisors, LLC in Rhode Island recognized access to the existing client base lies in the CPA-client CPA Partners relationships. For that reason, the CPA firm partners are tasked with recognizing new business opportunities. As Skip • Expectations should be established for Briggs explained, “The CPA partners have responsibility for making qualified referrals. identifying new wealth management opportunities within their client base. The advisor’s role is first to assist the partner • Accountability should be enforced to in securing the business, then to service those clients and to achieve those referral expectations. further cultivate the financial services relationship.” • Compensation should not only reward Alternatively, many firms have found it most effective to place for achieving referral goals, but should the business development responsibility on the shoulders of penalize if expectations are not met. the advisors. The dynamics and structure of the firm influence how this responsibility should be divided, although certain • Securities licensing is required for guidelines have generally proven effective as shown to the left. incentives. Designating the respective roles of all professionals in the development of new business is step one; the next step Advisors is establishing goals for growth. Many firms experience frustration due to unrealistic expectations for effectively • Expectations should include developing penetrating the client base and preconceived notions of relationships with CPA partners. rapid growth. Firms must establish expectations for the volume of referrals by the CPAs and for the realization of • Accountability should be enforced business by the advisors, recognizing the desired rate of for securing business with qualified growth over a specified period of time may not be realistic. In a 2007 AICPA/Moss Adams Personal Financial Planning referrals. Practice Study, firms who set goals for growth and business • Compensation should be tied to the development were far more successful than firms who did generation of new business. not. Similarly, firms struggle to decide when to hire additional advisors or staff. The chart on the following page outlines the framework for a practice with five partners and 3,000 household clients:Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 20 ©2011 1st Global
  21. 21. Example Business Development Goals Start Stage 1 Stage 2 Stage 3 Stage 4 Consider an • ctively contact A Establish 120- At this stage, At this stage, example firm with 100-150 clients. 150 total wealth the firm should the firm should 3,000 individual management have wealth have wealth Client clients. • arket to all M clients. management management Opportunity clients. relationships relationships with more than with 25 percent • stablish 50 E 20 percent of the or more of the new wealth qualified client qualified client management opportunities. opportunities. clients. Qualified Typically, 80 percent of the clients will be qualified prospects for wealth management, and as many as Opportunity 30 percent can be converted successfully. Target Number of Clients 50 150 250 300+ (Based on 3,000 CPA Clients) Target Revenue $1,600 $2,200 $3,000 $5,000 per ClientThe size of the opportunity for wealth management is defined by the number and type of clients the firm has. For mostfirms, this will be the number of clients for which the firm prepares individual tax returns; business owners wherethe client is the business; professionals and executives; and, potentially, clients referred from specialized services likevaluations, estate planning, etc. The example firm above has 3,000 tax clients. A firm with this many individual clients willgenerally have five or six partners and generate more than $3 million in total revenue, with 42.5 percent coming fromtaxes, based on data from the PCPS National Management of Accounting Practices Survey.Typically, 80 percent of the clients of such a practice will be qualified opportunities for wealth management services, andtypically up to 30 percent of those clients can be converted to wealth management clients. Starting with a total clientbase of 3,000, the firm should set a target of 720 wealth management clients.Over time, as services broaden, the revenue size Revenue Growth Through the Four Stagesof the client relationships should also expand. $2,000,000The 2007 AICPA/Moss Adams Personal FinancialPlanning Practice Study indicated financial planningmodel firms have revenue of $970 per client,whereas wealth management firms attain on $1,500,000average $2,800 in revenue per client. Tracing theevolution of the service models previously defined,and increasing the amounts for high performance,firm revenue should grow through each stage to $1,000,000ultimately target $5,000 in revenue per clientrelationship. The progress can be seen on thegraph to the right. $500,000The combined penetration into the clientopportunity and the increase in revenue per clientas a result of more comprehensive services should $0ultimately result in an exponential growth in Stage 1 Stage 2 Stage 3 Stage 4revenues. Under these assumptions, a firm with Based on a practice with five partners and 3,000 clients3,000 clients should be able to reach $1,500,000 in For illustrative purposes only. The results of your firm’s financialgross revenue in Stage 4. services practice will vary.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 21 ©2011 1st Global
  22. 22. Although the underlying assumption of the wealth management practice within a CPA firm is to target the existingclients of the firm, the firm may have growth goals that exceed the ability of the current client base. Recognizing thislimitation is important. As Kevin Sweeney from Sweeney Kovar Financial Advisors, Inc. in California indicated, “We havegoals for the financial services business to grow to a certain level of assets, a level which may not be supported by theclients of the CPA practice. Therefore, we recognize the importance of capitalizing on outside referrals.” This realizationunderscores the importance of assessing the capacity for growth within the CPA client base and setting expectationsappropriately.Financial PerformanceDetermining suitable financial expectations and tracking actual performance has been a challenge for CPA firms withfinancial advisory subsidiaries. This failure is, in part, due to ineffective methods for tracking the financial performanceof their subsidiary. As ironic as it seems, accounting firms have struggled to determine the best way to accountfor the wealth management business. First of all, the practice needs to be treated as a “fully costed” profit center.All attributable expenses and revenue should be accounted for to arrive at true profitability. Professional compensationmust be treated as a direct expense against revenue to arrive at gross profit, from which overhead expenses will besubtracted. The allocation of overhead expenses or shared expenses with the CPA firm is a common source of frustration.As a general rule, allocating shared expenses based on professional full-time employee (FTE) count is effective.Having already modeled the revenue side of the income statement, it is now time to define the cost structure behind thedramatic growth. Firms can use the following model: 1. Start with the total number of clients (1040 clients, business owners, etc.) and then consider the qualified opportunities. Typically, up to 30 percent of the qualified clients can be converted to wealth management. 2. Most successful wealth management firms use the services of resource partners such as broker/dealers, turnkey asset management providers, insurance agencies, custodians and other service vendors through which they obtain substantial creative, technical, compliance and productivity leverage at costs that are significantly lower than the costs that would be incurred if the wealth management firm internally installed these same capabilities. Resource partners vary in the depth and breadth of their services and support capabilities to wealth management firms. Most resource partners use a progressive compensation grid where the highest-revenue-generating wealth management firms and their licensed producers should be paying between 10 percent to 20 percent of gross revenues to the resource partners, depending on the nature of the services provided and the degree to which the wealth management firm has internally installed its needed capabilities. 3. The decision of adding new advisors to the practice has to do with the number of clients serviced by current advisors and the revenue per advisor. Firms should target between 120 clients per advisor in the early stages of development to 75 clients per advisor in the wealth management stage. Cross-reference the number of clients per advisor with the revenue per advisor—generally, the higher the revenue per client the lower the number of clients an advisor can manage. The average revenue per advisor in the 2007 AICPA/Moss Adams Personal Financial Planning Practice Study was $100,000 for financial planning, $154,272 for advisory and $193,619 for wealth management. Expectations for revenue per client are increased in this paper since high-performance ensemble firms had revenue per advisor more than three times the numbers above. Note a portion of the gross revenue is shared with the broker/dealer. The cost of the broker/dealer relationship is in turn offset by lower cost of compliance, software and support, administrative support, etc.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 22 ©2011 1st Global
  23. 23. 4. Compensation for advisors varies from firm to firm depending on whether it chooses a variable compensation method (paid out of revenue) or defines a compensation plan based on salary. Since compensation for advisors is a complex issue that deserves a separate report, the following guidelines are recommended: a. The 2009 Moss Adams/InvestmentNews Adviser Compensation and Staffing Study indicates that non-owner compensation for advisors ranges between $56,000 and $107,000 for service advisors and $96,000 and $239,000 for lead advisors. There are many advisors in the industry whose compensation exceeds these numbers, but generally the extra compensation is based on performance rather than salary. b. Compensation should not exceed 40 percent of total revenue, whether it is variable (payout) or fixed (salary). With more than 40 percent of revenues devoted to professional compensation, it is difficult to achieve profitability considering that overhead typically accounts for around 40 percent or more of revenue. 5. Overhead expenses for an advisory firm should ideally be between 30 and 40 percent. In the 2010 InvestmentNews/Moss Adams Financial Performance Study, early ensemble firms had overhead of 44.9 percent, mature ensembles had 46.3 percent and top ensemble firms, the market dominators, had 40.7 percent of revenue in overhead. These numbers, however, were taken just following the recent market recession and should decrease as the market recovers. In addition, these are statistics derived from all advisory firms, and overhead expenses for CPA-centric advisory firms are typically lower. Additional details on overhead can be found in the table on page 25. 6. In staffing the advisory subsidiary with administrative staff, it is useful to think of a ratio of 2-to-1 for advisors to administrative FTEs. The actual ratios in the 2007 AICPA/Moss Adams Personal Financial Planning Practice Study were between 1.5-to-.5 and 3-to-1.Under the assumptions and industry statistics described above, the optimal income statement for an ensemble firmshould evolve as shown on the following page.Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 23 ©2011 1st Global
  24. 24. Ensemble Firms Optimal Income Statement Ensemble Firms Stage 1 Stage 2 Stage 3 Stage 4 Total Number of CPA Clients 3,000 3,210 3,435 3,675 Qualified Opportunities 80% 80% 80% 80% Can Be Converted 30% 30% 30% 30% Qualified Prospects for Wealth 720 770 824 882 Management Percent Penetration (of Qualified) 7% 19% 30% 34% Number of Clients 50 150 250 300 Potential Revenue per Client $1,600 $2,200 $3,000 $5000 Gross Revenue $80,000 $330,000 $750,000 $1,500,000 Resource Partner Service $16,000 $49,500 $90,000 $150,000 Retention Net Revenue to Advisor/Firm $64,000 $280,000 $660,000 $1,350,000 # of Advisors 1 2 3 4 Total Compensation per Advisor 40% of Revenue 40% of Revenue 40% of Revenue 40% of Revenue $25,600 $112,200 $264,000 $540,000 Gross Profit $38,400 $168,300 $396,000 $810,000 Gross Profit Margin 48% 51% 53% 54% 35% 35% 35% Overhead Expenses $30,000 $98,175 $231,000 $472,500 Operating Income $8,400 $70,125 $165,000 $337,500 # of Clients 50 150 250 300 Revenue per Client $1,600 $2,200 $3,000 $5,000 Operating Profit per Client $168 $468 $660 $1,125 AUM per Client $160,000 $220,000 $300,000 $500,000 # of Advisors 1 2 3 4 # of Support and Administrative 1.0 1.0 1.5 2.0 Staff Revenue per Advisor $80,000 $165,000 $250,000 $375,000 Clients per Professional 50 75 83 75 Clients per Professional and Support 25 50 56 50 Note: This is for illustration purposes only. Payment of securities commissions must be conducted in accordance with 1st Global, Inc. 2001 SEC No-Act. Lexis 557 (May 7, 2005).Securities offered through 1st Global Capital Corp., Member FINRA, SIPCInvestment advisory services offered through 1st Global Advisors, Inc. 24 ©2011 1st Global

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