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CPAs Are Here

The stereotypical CPA is trustworthy, conservative, knowledgeable about taxes and good with numbers. Sounds like the qualities needed in a good investment adviser. Clients think so. They have been demanding investment advice from their accountants and now they are getting it.The door for CPAs opened when a 1990 Federal Trade Commission order forced the American Institute of Certified Public Accountants

The stereotypical CPA is trustworthy, conservative, knowledgeable about taxes and good with numbers. Sounds like the qualities needed in a good investment adviser. Clients think so. They have been demanding investment advice from their accountants and now they are getting it.

The door for CPAs opened when a 1990 Federal Trade Commission order forced the American Institute of Certified Public Accountants (AICPA) to lift its ban on CPAs accepting commissions. Thus far, 42 states allow CPAs to accept commissions, including California, which changed its regulations just this past year.

CPAs are moving into the business more rapidly than ever. About 3,000 accountants have been awarded the AICPA's Personal Financial Specialist (PFS) credential, according to Phyllis Bernstein, director of Personal Financial Planning for the New York-based group.

"In 1999, 250 earned it--100 percent more than 1998," Bernstein says. Three years ago, there were only 1,700 accountants with PFS credentials.

Of CFP licensees, 15.7 percent, or 5,400, are CPAs. However, the numbers of accountants who are also registered investment advisers (RIAs) and registered reps are difficult to track, Bernstein says. Some put the figure around 12,000.

Numbers aside, interest is keen. "All the Big Eight and regional firms are involved in investment consulting," says Jeff Barefoot, a CPA and president of financial planning firm Midwest Continental in Perrysburg, Ohio. "I know of no CPAs who are not in it, launching it or getting involved."

Truth is, there are more ways than ever to get involved. A CPA entering the financial advisory world can get securities-licensed through a specialized broker/dealer, select a turnkey asset management provider, form an RIA or forge an alliance with a brokerage firm.

Broker/Dealers Serving CPAs Several broker/dealers cater to CPAs by guiding them through licensing, training them and providing back office services. H.D. Vest Financial Services in Irving, Texas, has the most developed operation.

About 8,500 tax professionals (70 percent of them CPAs) are affiliated with H.D. Vest, according to Roger Ochs, the firm's president. In 1998 alone, the company recruited 2,900 new accountants. Vest reps are still mainly in the tax business (the firm has no minimum production requirement).

The firm is getting more creative in attracting clients as well. Starting in November, H.D. Vest will offer free tax returns on its Web site. "And if they need investment advice, we'll provide one of our 8,500 advisers," Ochs says. He says the Internet service won't compete with reps' tax business because it targets do-it-yourselfers.

Another CPA-oriented broker/dealer is 1st Global in Dallas. The former president of H.D. Vest Advisory Services, Stephen Batman, started the firm in 1992. The firm has more than 1,000 affiliates including 150 accounting firms. The firm did not respond to requests for an interview, but a May article in Accounting Today describes the firm as a higher-end version of H.D. Vest.

Broker/dealer Hochman & Baker in Northbrook, Ill., also caters to accountants. Vice President Joel Hochman and President Glenn Baker were financial planners when they started the firm in 1986, which now has 500 accountants/affiliates. Hochman says the firm targets accountants, not enrolled agents, and wants to offer more personalized support than the larger firms.

Asset Managers Serving CPAs Some CPAs who developed money management practices have extended their services to other accountants. One example is Chas P. Smith & Associates in Lakeland, Fla. This CPA firm started offering financial planning in the '80s and registered as an investment adviser in 1989.

"We began discretionary trading in 1992," says James Luffman, CPA and shareholder in the firm. When Florida CPAs were allowed to accept commissions in 1997, mutual fund and stock selection was added, he says.

In July 1994, the firm introduced its CPA Alliance program. "We've had 75 firms go through the training program," Luffman says. In addition to learning about the firm's investment philosophy, accountants also learn about how to register as an RIA, how to market to clients and how to set up an office. In five years, the firm and its affiliates have accumulated 250 million dollars in assets under management.

Buckingham Asset Management, an RIA firm in St. Louis, launched another asset management program for CPAs, BAM Advisor Services, in 1997. "Our firm is for those who want to do fee-only investment advice and want to be passive rather than active," says Stuart Zimmerman, CPA and principal of BAM. "Much of the money is in Dimensional Fund Advisors, a large, institutional fund manager." BAM has signed on 60 CPA firms and manages 250 million dollars in assets.

Wirehouses Cozy Up Brokerage firms are keenly aware that competitive pressures have pushed CPAs into the investment advisory arena. Some firms have responded by creating strategic alliance programs in which CPAs refer clients and share in revenues.

The idea sounds good, but the alliances have been slow to get off the ground. That may be one reason brokerage firms are hesitant to talk about the results of these professional alliance programs.

Salomon Smith Barney was first on the block with its Professional Alliance program, unveiled in September 1997. Pam Parker, director of the Professional Alliance Group, says it's available in 40 states.

"We sign a contract with their firm or LLC," Parker says. "The financial consultants and CPAs work together. We take full responsibility for the investment advice." The CPA's job is to solicit and refer, she adds.

Fees are shared--25 percent to the CPA and 75 percent to the rep and firm. The program involves SSB's fee-based products.

"We have received applications from more than 600 CPA firms," Parker says, declining to say how many are actually in the program. "What drives it is that our agreement is nonexclusive. And the fee-based approach is comfortable for the CPA."

Merrill Lynch introduced the CPA portion of its Professional Alliance Program this past February in five states. By September, it had expanded to 41 states, says John Coscia, director of Merrill's Professional Alliance Group.

The alliance program includes Merrill's managed money products. Coscia would not disclose the fee sharing arrangement with CPAs but says it's competitive.

"Financial consultants have embraced the program," Coscia says. "We have shown the CPA we can combine two professionals with an end result that's extremely favorable."

Merrill's alliance focus goes beyond CPAs. "We're looking at professionals in general," Coscia says. "If the [American Bar Association] decides to allow its members to participate, we'll add attorneys to the program."

PaineWebber launched its CPA referral program, AdviceLink, in July 1999. "It's available in 40 states that allow securities firms to share revenue from investment management fees with CPAs," says Paul Thomas, a PaineWebber spokesperson.

Twenty CPA firms are under contract, Thomas says. To participate in AdviceLink, CPAs must register as investment advisers. "Every state has different requirements, so there is no one single application process for registering," he says.

Marketed through financial advisers, the program is tied to PaineWebber's managed account program. "Investment management fees [for the CPA] vary depending on the type of account and what is agreed upon among PaineWebber, the financial adviser and the CPA." It ranges from 25 to 50 basis points.

Prudential Securities' referral program for CPAs and other professionals, called Prudential Alliance, was introduced in 1998, but the firm relaunched it in October, says Nathan Crair, director of financial services for Prudential Securities. "The rules have changed across many states."

Crair would not reveal the exact fee split. "However, there's small room for negotiation, and the client is well aware of it," he says.

One unique element of Prudential's program is that it doesn't have to involve managed money. "With Prudential Advisor, which is 24 dollars and 95 cents per trade, we are the only [alliance] program on the Street that allows an individual investor to direct trades," Crair says. "The CPA can share in the [fee] revenue of client-directed investments in an individual account."


* CPAs have built-in clients. "They have the trust and confidence of the client already," says Beth Gamel, CPA, executive vice president of Pillar Financial Services in Lexington, Mass., who has been doing financial planning for 15 years.

* Accounting and investing are complementary fields. "The businesses feed off each other," says Jack Oujo, CPA, who runs Pierson & Oujo, an H.D. Vest firm in Wall, N.J., with partner Brendon Pierson.

* CPAs offer one-stop shopping. "Clients love that we coordinate retirement, insurance, investments, education funding, estate and tax planning," Pierson says. "Each affects the other and mitigates implications."

* CPAs have the financial scoop on clients via years of tax returns. "A CPA is the one person in the loop who has all the information on what the client is doing," says Irv Rothenberg, a CPA who heads Wealth Management Consultants, an RIA firm in Santa Rosa, Calif. "CPAs see the client has three brokerage accounts, a rental property, a business."


* CPAs worry about losing clients. "The classic relationship with a tax client is to analyze an issue and give a solution," says Steven Levey, CPA, director of Denver CPA firm Gelfond Hochstadt Pangburn and its advisory unit, GHP Investment Advisors. "With an investment, we thought if it didn't do well, we might lose them as a tax client."

* Clients typecast CPAs. "They're known as accountants, and they have to become known as [investment] advisers," says Phyllis Bernstein, director of Personal Financial Planning for the American Institute of Certified Public Accountants in New York.

* CPAs might not be comfortable with future projections. "Some would rather record history than give advice on transactions," Bernstein says. "They don't want to deal with uncertainties in the markets for 40 or 60 years."

* The transition from CPA to investment adviser is not quick or easy. "It takes quite a long time to build the business, and you have costs--like buying software and building alliances," Gamel says. "It may be a long time until you have enough money under management to pay for the infrastructure."

Five years ago, CPA Irv Rothenberg talked his partners into creating an investment advisory practice. Wealth Management Consultants now handles 150 million dollars for 100 clients.

About 10 years ago, CPA Irv Rothenberg signed on with Santa Rosa, Calif.-based accounting firm Pisenti & Brinker to build a financial planning arm with an emphasis on retirement planning and wealth succession. Clients were billed a hard dollar fee, and the implementation work was sent elsewhere.

When Rothenberg wanted to form an investment advisory firm and capture the investment business, his CPA partners required some convincing. "One of the ways I solved it was to say, 'I will be the partner in charge of it and take my compensation from it.'" He negotiated a 50-50 ownership arrangement with the CPA firm and founded Wealth Management Consultants five years ago.

Rothenberg developed the business largely through referrals and also conducted weekend financial planning workshops for 10 couples at a time. "We charged 250 dollars for it," he says. "We didn't want people coming just because it was free. It paid off through public relations. A lot of them became clients."

The investment advisory business has grown to 150 million dollars in assets under management, representing about 100 clients, and financial planning for another 100. Half of the firm's clients are from the accounting firm and half from other sources, Rothenberg says.

"They're all over the board in age from young to retired," but all have money--the average client has 750,000 dollars to 1.5 million dollars in investable net worth, he says.

Rothenberg limits investment options to mutual funds. "We found institutional-level mutual funds with low turnover and low costs," he says.

Eight employees serve the needs of Wealth Management's growing client base. Three employees are Personal Financial Specialists or CFPs. Another CFP staff member acts as financial analyst, two others provide client service, another heads up technology and an attorney performs estate tax planning (legal work is sent out).

One of Rothenberg's pet peeves is CPAs taking commissions. "I think it's a bad move," he says. "The relationship we have with a client is based on pure independence." In fact, Rothenberg recently acquired a client who switched from another CPA because the client didn't like the concept of his CPA taking commissions.

CPA Robert Doyle's clients were clamoring for investment advisory services. Investments fit like "fingers in a glove" with his accounting practice.

Client demand drove CPA firm partners Robert Doyle and Gordon Spoor to enter the investment field two years ago. "Our clients were clamoring for this," Doyle says. "They made it clear that if we did not provide this service, they would go elsewhere." So the accountants formed Doyle Riley & Spoor, a registered investment advisory in St. Petersburg, Fla.

Doyle is certified as a Personal Financial Specialist (PFS) by the American Institute of Certified Public Accountants and serves on its PFS subcommittee. He provides full financial planning services and a complete product mix of stocks, bonds and funds.

It sounds like what a full-service broker offers, but accountants like Doyle beg to differ. He sees himself as more objective and independent--the sales mentality just isn't there. Consider the way he markets: Only his high-net-worth clients are offered financial advice.

"Ninety percent of our clients don't even know we provide these [financial planning] services," he says.

After 18 months, the firm has 9 million dollars in assets under management. "Three or four clients account for 40 percent of that," Doyle says. In addition, the firm serves as trustee for 6 million dollars.

Financial planning and investment management is something Doyle sees as an extra service for clients. He doesn't even have a marketing plan for his advisory services. It's complementary to the traditional CPA practice, he says. "It fits like fingers in a glove."

First and foremost, Doyle aims to provide peace of mind. "We're making sure clients sleep well at night," he says. "They're looking for trust, and we've already got one foot in that door."

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