If investment advisors are the quarterbacks of their clients’ financial planning squad, accountants are often important skill players on that team, performing essential duties that the advisor can’t. Moreover, advisors and accountants, especially CPAs, will often provide referrals for each other, since each has a unique set of competencies. While both of these dynamics continue to be important in the advisory business today, another trend has emerged. More and more, advisors who began their careers as accountants are transitioning into financial planning and are incorporating both sets of skills into their practices.
Brad Wasserman of fee-only WHLS Financial Advisors, LLC, in Southfield, Michigan, is one of those advisors. At age 41, Wasserman entered the financial planning industry only two years ago but has been a practicing CPA for 20 years.
“CPAs are becoming more involved in investing and financial planning,” he explains. “Maybe not to the extent that some have predicted, but for those that commit the time and training that is required, it is a win-win situation for clients and us as advisors.”
When Wasserman and his partners in their accounting firm, Woronoff Hyman Levenson & Sweet PC, launched an RIA business in 2003, it was the culmination of years of exploration and research on Wasserman’s part, prompted by the frustration he experienced working with his accounting clients over the years. “Clients would send me their brokerage statements, and I saw that people were making basic mistakes, even before the late ’90s,” he recalls, including many who were not following the rules of asset allocation. “We were making recommendations to fix those problems,” Wasserman says, “but didn’t have the ability to implement them.”
A solution has arisen, however, with the development of WHLS’s financial advisory branch. As Wasserman’s clients rely upon him as a trusted investment advisor, “more of our CPA clients and people in the community will look to us for their investment services” as well.
Wasserman sees all of his client relationships as long-term, close relationships, not unlike a family. Wasserman’s own family is pretty tied up in the business, too. “My father-in-law is my senior partner and my brother-in-law also works here,” he says. “There are some family relationships in our business that carry over to our clients.” Family ties in the firm have allowed Wasserman and his partners to commit to building an investment practice alongside the CPA firm, he says. “We all get along very well, both in and out of the firm. Having them here is a definite positive for me.”
CPA vs. RIA
While independent advisors often pride themselves on their disciplined approach to investing, Wasserman believes his CPA background gives him and his partners even more discipline.
“Clients realize that as CPAs, we are using a very rational approach to investing,” he explains. “All too often in the past, clients or their advisors placed the emphasis on [trying to figure out] ‘Which is the best fund?’ or ‘Which stock will do well?’ Instead, we listen to our clients, ask about their objectives, and then develop a long-term plan.”
This plan, embodied in an investment policy statement, is more academic than reactionary or predictive, Wasserman continues, since “No one can predict the future direction of the markets.”
For example, Wasserman recalls that one of his firm’s accounting clients had a broker who often moved the client’s money from one money manager to the next, usually with disappointing results. The broker was trying to predict which particular sector would perform best, but was not being successful.
Another accounting client didn’t need a broker to make him chase the hottest sector, Wasserman says, but repeatedly selected money managers himself based on their track records. “As CPAs, we track [portfolio] performance for our clients, and know how few money managers and mutual funds are able to consistently beat the market benchmarks, especially when you factor in fees, taxes, and trading costs,” he says. “We explain these facts to clients. We want them to understand the rationale of our approach.”
Wasserman and the two other advisors in his firm focus on minimizing taxes by using tax-managed funds, resulting in higher after-tax returns. “If someone has the same 10% return, but their actively managed fund had large taxable distributions,” he says, “their after-tax return would be much lower than 10%.”
“I was at a seminar recently where a gentleman [planner] stood up and said he does 200 to 300 conference calls a year listening to money managers,” he recalls. “We [instead] focus our energies on working with clients and helping them understand and meet their goals, while letting the markets do their job.”
WHLS is a member of the BAM Advisor Service network (https://bamweb.bamservices.com), a company based in St. Louis that helps CPA firms build RIA practices. All of Wasserman’s investment research is outsourced, ennabling him to spend the majority of his time with clients, something he sees as a benefit few in the business get to experience. “We have outsourced the reporting and the trading,” he says. That leaves more time to spend on compliance matters, other research, and one-on-one service.
Serving about 40 clients with an average portfolio size of around $900,000, Wasserman works primarily but not exclusively with his firm’s existing CPA clients. They tend to be small business owners, physicians, dentists, or recently divorced folks. The average size of the account is not by accident, notes Wasserman, arguing that a certain amount of assets is necessary to successfully build a practice and to provide the proper level of service to clients.
WHLS follows a passive investment strategy, primarily using the enhanced index funds from the Dimensional Fund Advisors family for his clients’ investments. “We are very strong believers in the importance of diversification,” Wasserman says. As a result, his clients’ portfolios are not limited to one asset class but are instead exposed to all classes globally. However, these investments are not actively managed mutual funds, but rather passive vehicles similar to index funds.
“Compared to buying a manager who picks the top 50 stocks in large caps and promises he’s going to beat the index,” Wasserman argues, “we feel that over time the asset class will [be successful], and by buying the asset class for each category, we will end up with a lower-cost, more tax-efficient” investment for clients.
The passive investing approach employing DFA funds, and using the back-office and business development services of BAM, make his investment advisory practice possible, says Wasserman. “If we were out there picking actively managed mutual funds, I don’t think I could be doing both the CPA part of it as well as the mutual fund part of it–I couldn’t do both jobs at once.” In addition to the practice-building benefits of the approach, there are other benefits, he says. “I also think we’re providing a better model for our clients.”
Time for Client Screening
Before beginning to build a new portfolio for clients, Wasserman first follows a strict client screening process. “We have multiple client meetings before any investments are implemented,” he says. “We meet with the potential clients to understand their needs, goals, and most important, their risk tolerances.” If the client appears to be a fit, Wasserman then prepares an investment policy statement (IPS) that explains how he will assist the client in reaching his goals.
The IPS includes all asset allocation decisions, Wasserman explains, and lays out a disciplined investment plan the client agrees to stick to in both good and bad markets.
“I was just working with a client who recently divorced and is coming into a lot of money,” he says. First he began educating her on investing, his investment policy, and what she could expect from the markets. “Now she has a better understanding of how things work and will be more disciplined and patient over time.” Wasserman believes that spending extra time with clients up front helps him maintain strong client relationships.
Once an investment plan is in place, each client’s portfolio is reviewed quarterly and rebalanced if necessary.
“If a client’s portfolio has changed from the IPS allocation, we rebalance,” Wasserman says. “For example, if small value was preset at 15% of the portfolio and is now 21% of the portfolio, we would sell off to rebalance back to 15%.” He would then purchase another asset class that had not performed as well. “We want the clients to buy low and sell high,” he says. “That adds an element of discipline and removes the guesswork. For someone who is buying individual stocks, they never know when to buy and when to sell at the right time.” By contrast, Wasserman says “we don’t invest based on emotion. We are never predicting which sector of the market is going to do the best or is not going to do well. We want to have exposure across many different asset classes, both in the U.S. and internationally.”
Wasserman’s ability to spend so much time with his clients doesn’t preclude him from recruiting new clients. He encourages existing CPA clients to meet with any of his firm’s three advisors to discuss their investment options. “We let current clients know about the new service as well as get the word out in the community,” he says. One of the most effective marketing strategies he employs is to provide basic portfolio analysis.
“We suggest a [potential] client give us a copy of her existing portfolio,” he says. “We then prepare some graphic and numeric information that shows what her actual asset allocation is, and determine whether or not she’s truly diversified. In most cases, they are not.” He then shows the potential client any hidden costs and the investing vehicle’s expense ratios, which he says is often an “an-eye opening experience.” This process of education has been very successful, he says, and most new clients are receptive. “They discover they weren’t as diversified as they might have thought, and finally understand the fees they were paying.”
Though Wasserman is content with his career, he says it can be demanding serving his clients as both an investment advisor and a CPA. “I have to prioritize tasks and manage my time,” he says. “I have been able to successfully transition some CPA clients to others in my office, which has allowed me to spend more time building and servicing the investment practice.”
One benefit of forming an advisory business out of a CPA firm is to leverage existing staff, which gives Wasserman more time to focus on client meetings, planning, and on the investment policy aspects of the practice.
“I am gradually diminishing my accounting role,” he says, though he also thinks he’ll always retain the CPA part of his business. “I will work on my client’s 1040s wearing my CPA hat and then work on investment matters as [their RIA].” But the two subjects are never discussed in the same meeting. “Usually when we are meeting with investment clients, it’s a team approach and there are a couple of us in the room. When it comes to being a CPA, I work one-on-one.”
Wasserman does more CPA work in tax season, and spends most of the rest of the year focusing on his investment clients.
But his advisory work has also paid unexpected dividends. After working as a CPA for more than 20 years, including a stint at PriceWaterhouseCoopers, Wasserman decided he wanted to be more involved in charitable activities and to be closer to home. “I am now 20 minutes from home and I have the flexibility to attend all of my kids’ events when I want to,” he says. “That is something that everyone in our office can do. If I need to attend a school play at 2 p.m. on a Tuesday, then that is a priority.”
“I really enjoy what I do,” Wasserman says. “Helping clients understand [their past investments], why things have gone well and why things have gone bad, and working with them so they will be prepared in the future for any situation is what keeps me motivated.”
Megan L. Fowler is a freelance business journalist in Fairbanks, Alaska. She can be reached at [email protected]