Many financial advisors understand that in order to expand their practices it’s increasingly important to acquire another business, be acquired, or affiliate with other professionals in order to gain clients. One obvious choice is to work with CPAs since both groups share similar client bases. Undoubtedly, affiliations between financial advisors and CPAs can be mutually beneficial. Many CPAs are eager to create referral relationships with financial advisors as well. But for all the incentive to form referral relationships, such pacts are complicated, and often unsuccessful. It is therefore imperative to go through the proper steps to make sure such an alliance is mutually beneficial.
First, both parties must follow some rather complicated investment compliance and regulatory restrictions if advisors wish to compensate the CPA for referrals. In his new book, Making Referral Relationships Pay: A Complete Guide to Revenue-Sharing for Financial Advisors and CPAs, author Thomas J. Grady walks readers through this process. Grady, who is a partner and chief compliance officer at St. Louis-based Trinity Wealth Advisors, believes it’s important to compensate CPAs for referrals. “Paying the CPA firm helps minimize the possibility that the stream of referrals will dry up because of imbalance,” he writes. “Even if the investment advisor sends no clients through the mutual gate to the CPA firm, sending money is tantamount to the same action.” Grady also writes that the greater responsibility for assuring investment compliance rests with the registered representative or RIA.
Grady explores the two methods of investment compensation–commissions and fees. “They are distinctly different,” he writes, noting that the first is regulated by the Securities Act of 1934 and the second by the Investment Advisers Act of 1940. The book details the pros and cons of both scenarios, noting that key factors in the decision include how private the alliance partners want the nature of the compensation to be; what licenses the CPA attains; and how simple or complex the alliance is.
Grady also looks into key alliance concerns such as whether the CPA firm should become a registered rep with the same brokerage firm as the investment advisor, an investment advisor registered with the investment advisor’s RIA or an owner of the RIA itself. And he looks at the revenue-sharing rate: Should it be a single percentage applicable to all revenues generated by the referrals or should there be an incentive structure to encourage more business? Grady goes on to discuss the tax implications of such agreements and offers some eye-opening case studies.
For instance, he writes about Freddy Withers, a sole proprietor CPA in Minneapolis with a “fiercely loyal client base.” Many of these trusting clients sought investment help and wanted his guidance. In 1997, Freddy became an independent broker with Raymond James, passing the Series 7 while his assistant passed the Series 11 test, authorizing her to execute client trades upon Freddy’s cue. Three years later, they regretted their decision. He did not anticipate that his clients would refer other investors to Freddy, “most of whom were too small to be profitable and none of whom Freddy could decline without alienating the referrers, his precious CPA clients.” Eventually, he seized the opportunity to combine forces with Sharon, an investment advisor whose office was a few blocks away; they agreed to share office space and clients. Freddy would attend initial meetings, and Sharon handed over 60 percent of all commissions and fees on revenue generated by the clients he sent to her. It ended up being a happy ending for all parties involved.
This helpful book focuses on financial planners getting client referrals from CPAs. Grady’s thorough and comprehensive study of all that is involved will make readers realize that it’s a complicated arrangement. Yet, for those that are looking for potential CPA referral relationships, Making Referral Relationships Pay will prove invaluable.
Mary Scott is the co-author of Companies with a Conscience and can be reached at firstname.lastname@example.org.