Last year, the average firm in this study generated $460,000 of gross revenues, which is the revenue of a good-size solo practitioner, but not of a truly leveraged practice that is typically the business model of an accounting firm. Of course, there are behemoths in the CPA advisory space, such as the two Michigan firms Rehmann Financial and Plante Moran Financial Advisors, which have done a much better job than most of leveraging oft-cited data that suggests accountants are "the most trusted advisors" by integrating financial advice into their overall accounting practices.
According to the AICPA and Moss Adams study, there were four ingredients that resulted in a recipe for success for the most profitable CPA advisory firms:
- Develop a plan and goals;
- Develop a process for monitoring the performance of the planning and advisory service offering;
- Formalize the compensation system;
- Devote time and resources to marketing.
These steps seem intuitively obvious and fundamental to any good business. But sometimes the obvious is too hard to see amid the struggles of making sure clients are served well while adapting to a culture that sometimes seems in conflict with rendering personal financial advice. For example, many CPA firms have not resolved whether their advisory practices should be integrated into the accounting practice's overall client experience, operated as a standalone entity, or treated somewhat at arm's length as a referral partner.
The survey also exposes issues for the wider advisory profession, especially as more accounting firms are looking at personal financial planning and investment advice as potential offerings. But the challenge is not just within accounting firms. More and more independent advisors are merging their practices into other entities, such as banks, credit unions, law firms, trust companies, and other financial advisory businesses, and are finding that each has a different way of viewing the world. The misunderstandings around the value of personal financial planning and a systematic approach to investing also has implications for those advisors who continue to see CPAs as centers of influence and sources of referral for clients.
The Challenge of Integration
The study cites a number of integration challenges for CPA financial advisory firms. Among the top challenges (see table on page 107) are allocation of resources, gaining access to clients, and general lack of support among CPA firm partners. In my experience, I often found it remarkable how infrequently these issues are addressed prior to merging or joining a firm that does not have a history of supporting a new business concept. Language, culture, values, and approach present consistent barriers to success when introducing a "nontraditional" practice into a structured business organization like a CPA firm or bank.
For some bewildering reason, CPA partners are often wary and unaccepting of the interloper yet become quite irritated when the new advisor in their midst fails to contribute sufficient revenue and profits. Without strong leadership by a cadre of CPA partners, the venture into personal financial advice is doomed to fail. Further, an overreliance on the managing partner of an accounting firm as the sole sponsor of the advisory business will result in this practice fading into the sunset as soon as that partner leaves.
Like most service businesses, CPA partners can be grouped into three categories: the Early Adapters, the Wait-and-Sees, and the Never Wills. An extraordinary amount of effort is exerted by the financial advisor trying to convert the Never Wills, but like a supernova, these financial advisors have a brief explosion of light that outshines the entire galaxy of other partners only to collapse into a black hole within a short period of time.
The tragedy of this is that if all CPA partners understood the potential for the advisory business and its natural relationship to the tax, business succession, and estate planning practices of their firms, they could exert constructive energy to produce a truly dominant advisory practice in their communities. According to the AICPA and Moss Adams study, it seems that CPA financial planning firms already are experiencing greater profitability than the average independent advisor even with the cultural challenges and overhead allocations.
What's Holding Them Back?
So what beliefs are stopping accountants from embracing their own financial advisory businesses? Often, it comes down to one of four:
- If they introduce someone else into a client relationship, only one thing can happen--and it's bad.
- They are already doing "financial planning" for their clients, so why do they need to bring in somebody else?
- The financial planner is going to "sell" their client some product, and if the client must be persuaded to buy, it cannot possibly be in the client's best interest.
- They are not adequately compensated for the referral, so why take the risk?
This is where the first recommendation of the report comes into play--develop a plan and a goal. Advisors and accountants must agree on the rules of engagement up front and define success. Reservations about involving advisors in client relationships should be aired early and often, so that they can be addressed, or so the advisor can move on to a more accepting organization. Passive-aggressive behavior towards an advisor who joins an accounting firm, but who discovers that he or she is mistrusted and not respected as another professional, is unfair treatment of a business partner and certainly an act of bad faith. When a company makes a strategic commitment to a line of business, it is imperative that the company's partners actively demonstrate support for the new line of business.
On the notion that some CPAs feel they are already doing financial planning for their clients, there is a high probability in most firms that they are doing this poorly or superficially. In many cases, accountants are devising some kind of "drive-by" financial plan with an eye on the tax or estate implications, but often without an understanding of the financial markets or risk and reward relationships of investing. The most egregious perpetrators of malpractice in this area will somehow insert themselves into the investment decisions of a client even though this may not be their training or expertise. It is interesting how a profession that is so governed by protocols around tax returns and audits can tolerate such a casual approach to personal financial planning and investment advice by members who have not been properly trained. Of course, this is an area that the AICPA has attempted to address with its personal financial planning (PFP) designation, but that does not stop many CPAs from wandering into an area of advice without a proper foundation.
As for product sales, it is sadly true that some accounting firms have strategic partnerships or associates who are insurance or investment product purveyors that do not take a holistic client approach and the solutions they recommend may not always be appropriate. But that is easy for CPAs to solve by being careful about who they engage for this service in the first place and what expectations they have around professionalism. Done properly, investment and risk management recommendations are delivered in the context of the overall financial plan. Further, if an advisor is paid on a fee basis, his or her interests are aligned with the client and the way in which CPA firms normally practice. But to mitigate the risk, CPA advisory firms should introduce a process of quality control and review to ensure that advice and recommendations are delivered consistently and professionally, just as tax and audit practitioners are expected to perform.
The "compensation" question is the biggest quagmire for CPA advisory practices, but this is often because the accounting firm's own policies around compensation are not well conceived or properly executed. Both parties must agree on a compensation philosophy and approach that will reinforce the right behaviors. For example, a CPA firm must resolve whether the advisory business is an investment on which they will get a distribution of profits, an alliance for which they will get a cut of all new business, or a professional relationship for which they will be rewarded as they currently do for the audit and tax business they may generate. To achieve complete integration, it would be prudent to make compensation on advisory business consistent with how it applies to all services delivered by the accounting firm.
A venture into new business lines for any firm brings with it natural conflicts in culture and approach. When the players only view the relationship in financial terms, then implosions are likely to occur.
The AICPA/Moss Adams study validates that financial planning and advice can be a terrific business for accounting firms because of its elegant connection to the rest of what CPAs do for individuals and business owners. But the absence of vision, planning, and practical thought with which many firms have embarked in order to generate incremental revenues from investments and insurance sales will undermine the confidence of CPA partners over the long term and potentially put a firm at risk for practicing in areas they know nothing about.