It seemed like a guaranteed homerun. Eight years ago, Janet Stanzak joined forces with a nearby accounting firm in Minneapolis to launch and run a new wealth-management arm. The firm's eight partners referred clients to the new division, and all of them — including Stanzak, who was made partner in the new practice — shared in the revenues.
But soon enough complications began. For starters, because one of the accounting partners was already doing financial planning for his clients, Stanzak could only provide financial-planning services to clients she drummed up herself. As for already existing clients of the accounting firm, she could only provide them with investment management. Then there was the vision thing. “The partners wanted the [wealth-management division] to be all things to all people — 401(k) plans, financial-planning workshops for executives, the works,” says Stanzak. “I argued we had to be more targeted in the beginning, and add services as we got bigger.” Five years later, after assets at the wealth-management arm had grown to $70 million, Stanzak left to start her own independent RIA. The new firm, which is based in Bloomington, Minn., has about $25 million in assets under management. She named it Financial Empowerment.
These days, the Holy Grail for financial advisors is to form an official bond with a reputable accounting firm. Simply cultivating a few CPAs willing to send you the occasional client no longer cuts it. You're much better off, the thinking goes, to carve out a formal business relationship with a firm (much like Stanzak did). Before you know it, the referrals — and the money — start to pour in.
But the reality is significantly trickier. Just because you're part of an accounting firm doesn't mean the partners will automatically send you referrals. You may also find that the more entrepreneurial culture of the typical advisory outfit doesn't jibe with that of the average accounting firm. Plus, the accountants are likely to control the show. “The CPA is in the driver's seat,” says Charles (Chip) Roame, managing principal of Tiburon Strategic Advisors in Tiburon, Calif. As a result, it's imperative that you understand the lay of the land: the best way to structure the arrangement, the problems you'll probably encounter and how to deal with them.
The appeal, of course, is pretty obvious. CPAs have famously strong and long-lived relationships with their clients. They often serve as that much coveted contact, the “most trusted advisor.” Mark Jaeger, for example, recalls what happened after he sold his advisory practice to Seattle-based accounting, tax and consulting firm Moss Adams in 2000. In a meeting with a Moss Adams accountant and a Moss Adams client worth $20 million, the client decided to give Jaeger his business practically on the spot. “He leaned over and asked the accountant, who was with us, if the move made sense. When the accountant replied that it did, the man immediately decided to give us his business, ” he says. “The influence a CPA has with a client is profound.”
What's more, CPAs know every nook and cranny of a client's finances. So they're in a good position to recommend that, say, a client doing business with four different brokers might want to seek out a professional who can help sort things out. What's more, they may work with a lot of small business owners who are likely to sell their businesses some time down the line, and as a result will need an advisor to handle their newfound wealth.
Making It Happen
If you decide the prize is worth the fight, your first consideration is the form the arrangement will take. Keep in mind that with practically every other advisor knocking on the same CPA doors, you probably won't have a lot of control over that decision. One possibility is a joint venture, in which the accounting and advisory firms form a separate, jointly-owned entity. Another is the tack taken by Stanzak, in which you start a wealth-management arm from scratch. More common — and usually considerably more successful — is an arrangement in which the accounting firm buys a stake in your practice and turns it into a separate, limited-liability corporation. In most cases, you'll keep your old identity. At other times, however, you might decide to go all the way and completely re-brand yourself.
Take Jaeger. Seven years ago, he and his four partners were looking for a way to boost their book of business, and so they sold a controlling interest to Moss Adams. Shortly afterward, however, Jaeger decided to sell the remaining interest to the firm, and changed the name to Moss Adams Wealth Advisors. “We were a small, boutique business no one had ever heard of,” he says. “By merging we had instant name recognition.” Assets are now $850 million.
But there are a myriad of other issues to consider as well. First, there's the matter of revenue distribution. Generally, accountants are allowed to share in revenues from non-commission-based work, excluding direct compensation for referrals. Sharing commission-based revenue is more complicated, because only those accountants who have a Series 7 license are typically eligible to receive commissions, and there are generally more rules governing these kinds of arrangements, according to James Edelman, general counsel for Commonwealth Financial.
That said, teasing out your particular revenue-sharing arrangement will probably be a highly complex undertaking. First, it will depend in part on whether the accounting firm itself has a stake in the wealth-management arm, or whether the individual partners do. In Stanzak's case, all partners shared in the revenues, but exactly how much they got depended on a convoluted formula that took into account everything from whether they referred the client to how involved they were in managing the business. “They knew how to get compensated for their work as accountants,” she says. “But this was something different — and it took a lot to figure it all out.” In addition, the typical owner of an advisory firm makes more than the average CPA, so there may be some disagreement about how to divvy things up.
Seeing Eye To Eye
But the best way to ensure your alliance is worth it is by making sure your accounting partners have embraced the concept. Without that buy-in, after all, you won't bring in much revenue. In fact, the norm for many, if not most, of the partners is that they are squeamish about sending their clients to you at first. That's especially true if there's anything more than financial planning involved. After all, markets are volatile, and if a referred client's portfolio drops significantly in value it can reflect poorly on the accountant. “They get very protective of their clients,” says Michael Di Girolemo, managing director in the Investment Advisors division of Raymond James. “They don't want to jeopardize that trusted relationship.”
In addition, some may have their own long-time referral sources outside the company whom they don't want to lose. Or they may work with clients in certain industries, like banks, who would be displeased to be referred to a potential competitor. Plus, audit partners will be less likely to send referrals than tax specialists.
The challenge, then, is to win the partners over — a process that can typically take up to two years, say advisors who have tried it. “When advisors affiliated with CPA firms get together in taverns in the dark, what they talk about is how do you get the CPAs to refer,” says Barry Kohler, who sold a majority stake in his four-year-old practice to Berry, Dunn, McNeil & Parker, a long-established accounting firm in Portland, Maine six years ago.
Kohler's experience is pretty typical. When he merged the firm, “two or three” of the firm's 30 partners took the lead in pushing the deal through and acted as his champions. For the rest of the partners, one-third were gung-ho, one third were reluctant, and the rest were undecided. So Kohler embarked on an aggressive plan to woo them, taking CPAs to lunch, sending emails to the firm about success stories, and finding as many other ways as possible to keep them continually informed about his business accomplishments. Now, almost all the partners refer at least some business to him.
You're likely to experience the most reluctance if you do any type of commission business, for obvious reasons. “They feel they're compromising their relationship with the client if there's a product involved,” says Kohler. He, for example, has had few referrals for the insurance side of the business, and many more for financial planning. Still, most of his firm's total revenue comes from accountant referrals, which tend to be more affluent than his other clients.
Gregory Sorce took another route. He and his two partners merged their six-year-old firm with Boardman, Ohio-based Hill Barth and King in 2001 to form HBK Sorce Financial. “There wasn't a flood gate of referrals,” he says. About one-third of the 36 partners were true believers initially, but the rest had to be convinced. To win over skeptics, he made a point of doing financial planning for some of the partners, “so they could see the process and how we worked,” he says. Some partners also invited advisors to attend client meetings, so that they could observe the newcomers in action. By the third year, at least another third of the partners were cooperating. Now, about 35 percent of new annual revenue for the advisory business comes from CPA referrals. Assets are at about $1 billion, up from $300 million six years ago
The Dirty Details
Moving your physical office is another important step. Sorce, for example, has placed at least one of his 25 financial advisors into 12 of HBK's 15 offices “The partners and financial advisors talk all the time,” he says. “It helps a lot.” He visits HBK's Pittsburgh office once a week for one to two days at a time, in addition to placing an advisor and support staff employee there permanently. Those advisors who don't work directly out of an HBK office are in easy driving distance to one.
You also need an effective way to make decisions. That generally requires setting up a governing committee with partners from both sides of the house. It's best if the CPAs on this committee include your champions “so you're on the same page,” says Sorce. At HBK Sorce, there's a seven-person operations committee that meets about four times a year to discuss long-term strategic issues. Although only three of the members are from the financial-advisory arm, according to Sorce, “our focus has been pretty united,” thanks largely to the fact that the CPAs on the committee are all his strongest advocates, and also work in the financial-advisory business.
Joint ventures, largely out of favor, present their own special challenges. In 1999, Roger Hewins, who heads Hewins Financial in Foster City, Calif., formed a 50-50 venture with Wiplfi, a Wausau, Wis.-based accounting firm. The plan: A staff of eight advisors would operate out of the accounting firm's offices in Minnesota and Wisconsin, and Hewins Financial would provide back-office support from its California headquarters, while an advisory board with partners from both firms would make long-term strategic decisions. Over time, however, the venture, called Wipfli Hewins Investment Advisors, has reviewed its practices concerning everything from how revenue is shared to how business is developed.
The biggest sticking points for Hewins have been what he calls the “cultural” differences between the two firms, stemming largely from billing practices. “For CPAs, hourly billing calls for tight control and efficiency,” he says. “But, with an RIA, you don't get paid for your efforts right away, and you tend to be more marketing and business-development oriented.” Still, though the business hasn't met Hewins original expectations, assets managed by the joint venture are now about $600 million. The bottom line: Forming the wealth-management arm of an accounting firm can pay off. Just don't expect an overnight success.