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Study Likes CPAs' Chances as Financial Advisors

It's a subject with a long history; what's different now?

David J. Drucker, 08/21/2008

The AICPA's April 28, 2008, news release starts out with, "CPA financial planning and investment advisory practices are enjoying significant revenue growth and are expanding at a faster rate than their non-CPA competitors, according to a study released today by the American Institute of Certified Public Accountants and Moss Adams LLP."

"Faster than non-CPA competitors"... can this be true? To find out, I talked with two Moss Adams employees connected with the study--Ken Evans, an on-staff consultant who headed up the AICPA planner benchmarking survey, and Dan Inveen, Moss Adams' senior research manager, who's overseen the last couple of annual advisory firm studies by Moss Adams.

Based on a study of 431 CPA firms or CPA-affiliated firms between 2004 and 2006, Evans told me that these firms have been enjoying revenue growth, on average, of 35% on the financial planning portion of their businesses (which averages about 30% of respondents' total revenues).

"Things have changed over the last four or five years; revenue growth has been good," Evans said. Of course, these results vary by business model. Evans said that they distinguish between solo practitioners, multi-partner firms, stand-alone business units (like Moss Adams Wealth Advisors), or separate business units within the accounting firm, complete advisory firms under common ownership with the accounting firm, and joint ventures between accounting firms and third party advisors. The 35% growth statistic can be as high as 41% for solo practitioners, he adds.

Are these CPA planners offering the same services as their non-CPA counterparts?

"The leading services CPA planners offer to better than half their client bases include income tax planning and prep, retirement planning, estate planning, and the development of a financial plan," Evans said.

Are CPA planner revenues constituted similarly to those of non-CPA planners?

"We don't find CPA planners to be more or less commission-reliant than other kinds of advisors," Inveen said. "This year's data for the Moss Adams study of non-CPA planners shows 78% of revenues correlated with asset management, while similar studies of CPA planners clock the number at 79%." The remainder, he speculated, represents hourly fees, retainer fees and commissions, which puts CPA planners roughly in line with the overall universe of advisory firms.

James Metzler, AICPA vice president of small-firm interests, said of the study, "The information gathered through this survey provides a road map for CPA firms of all sizes ... both firms that are contemplating entering this niche area and those with more established practices."

"The study was similar to those conducted for financial planners," Evans said. "We like to gather financial data for these firms, see who's performing better than others, highlight the top performers and then understand what they're doing differently."

It's perhaps amazing that the CPA study numbers come in as closely as they do to non-CPA study results because, as Evans noted, these firms have some challenges very different from those of most non-CPA advisory firms.

"They have the normal challenges of growing and managing a financial-planning firm, but many also must work [within the confines of] a parent company," he said.

"Compliance is an example," Evans said. "It constitutes a new environment for many firms as they learn what they can and can't do within the regulatory framework."

Advisory firms operating within an accounting firm may have it the toughest, though, when it comes to solving another common dilemma: how to get clients. One would think there would be all kinds of opportunities for cross-referrals within an accounting firm, and there are, but it doesn't happen as readily as one might think. Back in the late 1980s when my business partner and I had had our advisory firm open for only a few short years, several local, forward-thinking accounting firms courted us as merger candidates. They cautioned, however, that just because one partner was championing the purchase of our firm, it didn't mean the other partners would fall in line. Why, I wondered? Because, explained the partner making us an offer, the partners don't all understand financial planning and they have their own client relationships to protect.

Interestingly, Evans and Inveen said, things haven't changed much over the last two decades.

"It can be tough getting access to the firm's clients when another CPA is the gatekeeper of the relationship," Evans said. "We often see a lack of support by partners for the financial planning unit within these firms. Earning their trust is a challenge requiring the planner to educate the partners and to be persistent in their efforts."

"Marketing to non-financial planning partners is a big part of developing a financial planning practice within a CPA firm," Inveen said. "And it helps to show them how the firm will benefit from the financial planning business."

But marketing doesn't stop there, he said, suggesting CPA planners market to the firm's clients and make them aware of the value financial planning can add. "Also, they can stress the benefit of one provider handling both taxes and investments," Inveen added.PAGEBREAK

"I think partner mistrust has persisted over the years," Evans said, "because, to a large extent, it's just human nature. If we think about the business model, a CPA firm partner has worked within the firm a number of years, focused on gaining technical knowledge and expertise, has developed and now oversees other staff ... things are going well for him. Then you throw a new business offering into the mix and, unless there's an incentive for him to change what he's doing, he's either too busy or doesn't have enough time to understand the new offering and to recommend it to his clients. The partner is more likely to see the downside--client loss--than to embrace the potential upside--a new business that benefits everyone."

What the partners often don't stop and realize, Inveen said, is that a client availing themselves of more services is a client with whom the firm has a stickier relationship. Inveen says partners also fail to realize referrals can work the other way, too.

"Compensation can also [be persuasive]," Inveen said. "Although incentive-based compensation is foreign to many CPAs, it can be helpful in incentivizing partners to make referrals. Incentives for referrals to the financial planning unit within the firm can be tied to benchmarks other than just referrals, like client retention, new assets generated from existing clients, client satisfaction based on surveys of clients, and new revenue/business/clients won."

Which were the most profitable firms according to the Moss Adams study?

"When we looked at all the business models," Evans said. "We found the most profitable had more sophisticated marketing and business development systems, they usually have a Web site to disseminate information about their financial planning offering, and they're actively seeking referrals from clients."

Inveen added, "These firms are more likely to have service goals for their partners, and each partner has a business development plan. There's a greater tendency to set firmwide goals."

Another impediment to widespread financial planning by CPAs, I opined, was their skill set vis-a-vis that of the progressive non-CPA financial advisor. The financial planning industry, I noted, has for the last decade begun to embrace a more holistic approach to client communication and information discovery as evidenced by the life planning movement. This movement demands that practitioners take a more consultative approach, digging deeper for more personal information than has been asked of clients in the past. I questioned Evans and Inveen about CPAs' ability to adapt to these new requirements inasmuch as CPAs are typically thought of more as number crunchers than hand holders.PAGEBREAK

Said Evans, "I think certainly there are CPAs who can easily make the transition to the counseling role, but your characterization is fairly accurate based on what we've seen. It's not impossible, but most CPAs' tendencies aren't necessarily towards that consultative relationship. CPA backgrounds are technical in nature and the accounting profession gives them clear rules to follow. Yet on the planning side, there's a lot more back and forth with clients and possibly a deeper and more intimate relationship as goals, hopes and dreams are discussed. All in all, there are a lot of softer issues CPAs need to be able to address."

"All of that said," Inveen added, "let's think about the #1 factor from the client's standpoint as they evaluate any financial advisor, and that's trust. Surveys we've all seen over the years show that CPAs have the greatest amount of trust with clients, so that's working in their favor."

Will we ever see CPAs acquiring life-planning skills?

"That may be a few years down the road," Inveen said. "CPAs are still positioning themselves with clients as professionals who can also help clients with their investments."

So, if CPAs must conquer partners' hesitancy to refer clients, as well as the need by some to beef up interpersonal skills, how is it that they've fared so well according to Moss Adams?

"Average practice sizes are a little smaller than for non-CPA advisory firms," Evans said. "Which causes the growth numbers to look higher."

And, as the AICPA states in its news release, "Client demand for objective advice is one of the primary factors contributing to the growth of CPA financial planning and advisory practices."

Are the study's claims of "faster growth" accurate? Maybe the answer is, "Who cares?"

Evans said, "Our message is that models [for CPA financial planning practices] that have emerged over the last decade or two seem to be taking off now. If a CPA is reading the study, then she's learning that financial planning is a practice area worth considering, and if she's already offering financial planning services, the study will show her how her peers are operating." And for non-CPA advisors, Evans said, the study provides some intelligence on the competition.

"Firms are clearly trying to work out how to integrate the two services of financial planning and accounting," Inveen said. "And they need to figure out how to get everyone on the same page in promoting the service and referring clients, but there are lots of benefits still to be realized."

For more information on the AICPA/Moss Adams study, go here.

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