moss adams whitepaper: cpas & wealth management (2011)

CPAs and Wealth ManagementThe Critical Path to the Optimal Financial Services Firm

Updated and Modified: November 2011

©2011 1st Global

2Securities offered through 1st Global Capital Corp., Member FINRA, SIPC Investment advisory services offered through 1st Global Advisors, Inc. ©2011 1st Global

Table of Contents

Introduction .............................................................................................................3

The Premise About the Business ..........................................................................................4

Definition of Success ............................................................................................................5

The Case for Wealth Management ..........................................................................6

Specialization and Expertise .................................................................................................8

Building the Capacity ...............................................................................................10

The Role of the Advisor ........................................................................................................12

The Optimal Ensemble Practice ...............................................................................13

Client Service ........................................................................................................................15

Organizational Structure .......................................................................................................18

Business Development .........................................................................................................20

Financial Performance ..........................................................................................................22

The Optimal Solo Practice .......................................................................................29

Client Service Model .............................................................................................................29

Organizational Structure .......................................................................................................29

Financial Performance ..........................................................................................................30

From Diagnosis to Action ........................................................................................35

Wealth Management Services Growth Timeline ....................................................42


Introduction

Over the last 15 years, CPA firms have become increasingly involved in the management of wealth for their clients, covering all three stages: wealth accumulation, wealth protection and distribution, and wealth transfer. As these firms added financial services to their CPA practices, many found themselves facing both new opportunities and challenges. The goal of this paper is to address the needs and questions of CPA firms in the practice of offering financial advice. More specifically, the intent is to provide a framework for solo (single partner/owner) and ensemble (multi-partner) firms to design the best model for their practices. The focus is on answering these questions:

• What is the optimal business model for CPA firms pursuing wealth management services?

• What is the evolutionary path to creating a successful wealth management practice?

This paper was commissioned by 1st Global, the leading independent broker/dealer for CPA, tax and accounting firms, and written by Moss Adams LLP, the 11th largest CPA firm in the United States. The paper captures the experience of the most successful firms in the 1st Global network, the expertise of the Moss Adams consulting team and data from various sources. Critical to the paper were the contributions of 15 1st Global-affiliated firms that shared their stories with Moss Adams professionals in telephone interviews. Many of their anecdotal insights are included within the report.

Andrew Carnegie said, “Wealth is the business of the world.” His writing in Wealth and Its Uses, published in 1907, is one of the earliest works on wealth management. Carnegie marveled at the process of wealth creation and the roles played by invention, initiative and enterprise. If these are the factors that drive the creation of wealth, the business of wealth management is no different. Recognizing opportunities, inventing new ways of addressing needs and taking initiative also create the wealth of organizations, including those that manage the wealth of others.

Over the last eight years, “wealth management” has become an increasingly popular term used to describe the financial services provided by banks, brokerage firms, trust companies and independent advisory firms. In the 2010 InvestmentNews/Moss Adams Financial Performance Study of Advisory Firms, 61 percent of all respondents described themselves as “wealth managers.” Yet in a study of more than 2,000 leading financial advisors conducted by CEG Worldwide, just 6.6 percent use a true wealth management model. So why are so many firms looking to position themselves as involved in “the business of the world” as Carnegie called it, yet so few have been successful in building a wealth management organization? What does a wealth management organization look like, what does it deliver and who are the people who create and enable it?

The first step toward wealth management is the desire to control and direct the client experience related to investment solutions. It is this foundation that has caused many CPA firms to cease the process of referring clients to other professionals and instead capture that relationship themselves. Beyond that, the elements of creating a successful wealth management practice are a dynamic combination of vision for client service, strategy for achieving the vision, the skills of the people within the organization, and the systems and processes deployed to make it operational. Therefore, the creation of a successful organization consists of three concurrent processes of development and improvement:

1. The Evolution of Client Service: Most CPA firms start their financial advisory services with a basic model of access to financial and investment products and over time add specialization, complexity and integration to arrive at a wealth management model.

2. The Evolution of People and Organizational Structure: From the single practitioner splitting time between tax and advisory work to the large multi-department firms, there is a clear path of growth and incremental additions that firms can follow as they grow.

3. The Evolution of Financial Results: As the client service and organizational structures evolve, the financial results of the practice change and gradually move, first toward critical mass, then to optimal economics that create value for firm partners.


Chaos is often the beginning of every evolution, and there are many challenges for partners and managers of advisory subsidiaries. This paper is intended to provide a road map to the ultimate destination and a clear, practical path to follow. At the same time, as Mario Andretti, former IndyCar, Daytona 500 and Formula 1 champion, said, “If everything seems under control, you’re just not going fast enough.”

The Premise About the Business

For CPA firms, the decision whether to offer a financial services solution is first predicated on what is happening in the advisory profession in general, and in one’s locale in particular. Most successful CPA firms have recognized an ever-changing business environment that presents unique opportunities:

1. The Market: Statistics from multiple sources show that even in the current environment, there continues to be a growing population of wealthy people in the United States. And maybe even more importantly, the wealthy continue to amass even greater sums of wealth. “Further, the recent bear market of 2007-2009, the second since 2000, resulted in the last 10 years being termed the lost decade for investors,” creating a large demand of baby boomers who need help preparing for the road to retirement. Today, there is an oversupply of clients who seek professional guidance in their financial decisions relative to the number of firms that have earned reputations that they can securely guide clients to achieve their goals.

2. The Competition: The recent financial crisis has resulted in four important changes to the competition in the industry. According to recent statistics from InvestmentNews and The Wall Street Journal, thousands of licensed financial advisors have disappeared from the industry over the past few years. Second, several financial services firms that offered financial advice have disappeared from the landscape altogether, such as Lehman Brothers and Washington Mutual. Third, many of the remaining firms have been absorbed or morphed into new versions, for example the merger of Merrill Lynch with Bank of America. Finally, the surviving firms are now extremely focused on profitability, often at the expense of the clients. These firms are so focused on production minimums and commission and fee minimums, that most retail advisors are only interested in working with the “ultra affluent” in order to remain profitable and meet their goals. The affluent and emerging affluent, typical “A” clients of most CPA firms, are being abandoned by their traditional advisors. All of these changes give CPA firms a tremendous opportunity to fill a gap in the marketplace with their own clients while simultaneously strengthening those existing relationships.

3. The Capabilities of Most CPA Firms: Most accounting firms bring a unique perspective to their clients’ situations that other providers cannot match. This advantage is a compelling strength when combined with the capabilities of tax planning, a strict adherence to a code of conduct, a commitment to continuing education and a discipline for how clients are served. The CPA “brand” carries a reputation for competency, ethics and financial success that provides unique value.

Corporate finance theory suggests there is no value to shareholders in a strategy that seeks to diversify the business into products or services where the company has no competitive advantage. The only reason for a company to enter into a new business is its ability to achieve and sustain better performance than the industry based on a competitive advantage. The competitive advantage for CPA firms lies in their existing client base and the trust that those clients have in their CPA. A CPA firm entering the financial advisory business does not have to start “from scratch,” but has a captive client base upon which to build. It is those client relationships that provide the competitive advantage for CPA firms.

Even though CPA firms are in a unique position to capitalize on the opportunity, they are still confronted with the challenges of:

• Margin Pressure: Moving from an hours-times-rate environment to selling value-based services on either a percentage of assets or commission is a difficult leap for many. What are the costs in delivering the service? How is value communicated, and what will the market bear?

• Time Constraints: There is a physical limit to the number of active client relationships any one advisor can maintain. If that person also has a full-time accounting practice, there is a limit to growth unless the practice successfully adds capacity.


• Client Demands: The moment a CPA firm enters into the advisory business, it changes the dynamics of the client relationship. This shift can prove challenging as clients demand more attention and have greater expectations.

• Regulatory Requirements: CPAs add at least one new regulatory body into their lives, and in many cases, three or four: FINRA, SEC, state securities and insurance commissions, plus their own state boards. Many state boards have strict rules about how accountants practice in the advisory arena.

• Knowledge Conditions: Just because CPAs deal with numbers does not automatically mean they understand the nuances of personal financial planning, investment advice or risk management. Clients are often more informed. This fact stimulates many accountants to develop deeper knowledge in the area of personal financial advice.

• Partner Support: In larger CPA practices, there is a probability there will be a lack of consensus regarding the firm pursuing the advisory business. Even if partners do give lip service to the initiation, the real test lies in the flow of client referrals.

Recognizing these challenges may help CPAs develop a comprehensive strategy and approach to business that anticipates the hurdles and designs tactics to overcome them.

Definition of Success

The importance of articulating goals for a wealth management practice cannot be underestimated. Firms need to consider how they define success in the financial advisory business, as success can only be measured within the context of clear objectives. Financial viability and monetary reward are obvious objectives to some degree for every business, but the non-financial characteristics and motivations will drive the vision and guide the direction of the practice. Each firm will define their objectives differently, but following are examples of how firms may define success:

• Superior client service and impact on clients’ financial lives.

• Profitability and maximum income to partners.

• Superior reputation and expertise.

• Personal satisfaction and enjoyment of work.

Consider the long-term outlook of the business. How does the firm envision the practice will look five or 10 years from now? Unfortunately, many firms have suffered due to failure to build a coherent vision and set clear expectations. Wasted resources, misunderstood objectives, divided leadership and diluted efforts are often the result of undefined objectives for the practice. Firm leadership must agree upon and be able to articulate answers to the following questions:

• How do we define success in the financial advisory business?• What role are the services going to play in the firm?• How do we integrate the services with the CPA firm?• Which services do our clients need and want?• Which clients do we want to target?• Can we make a profit providing those services to those clients?• What professional staffing do we need to deliver the services?• What specific financial results would satisfy us?• What do we want to be known for in our market?

Responses to the above questions provide the foundation for the firm’s wealth management strategy, as well as define the desired outcome for the practice. They will shape the path to the firm’s optimal practice model. While it is true that there are many routes for any financial advisory practice, the best path should be tied to each firm’s unique vision. Achieving the optimal wealth management practice is predicated upon articulating the unique vision of the firm and understanding the best course of action to realize it.


It is important to acknowledge there is a difference between the concept of “optimizing” and “maximizing.” This distinction must be considered when defining and measuring the success of a practice. The premise of optimizing (or creating the optimal practice) is relative to the goals of the firm, its definition of success and its unique perspective, whereas the idea of maximizing is based on the assumption of pursuing maximum return without regard to any other objectives. The key to achieving an optimal model is to define the firm’s unique objectives and select the best path to achieve them.

Although the definitions of success will vary greatly among firms, there is a certain level of science inherent to building the optimal model. For most in the financial advisory business, a firm is successful in building the optimal practice model when it is:

• Responding to the needs of its optimal clients.

• Operating at an optimal level of profitability.

• Functioning at an optimal level of efficiency.

• Working at an optimal level of productivity.

Because of the complex pressures and variety of demands on the profession today, the optimal model for advisory firms is based on the team concept: a team of professionals working together in harmony to achieve the optimal results in terms of revenue, profit, efficiency and meeting clients’ needs.

The Case for Wealth Management

No matter what channel (CPA firms or independent advisors), the comprehensive approach to financial services has proven to be the most successful. The financial services industry has experienced a revolution of service sophistication, increased competition and a greater desire to meet more wide-ranging client needs. All of these have contributed to the development of a comprehensive model for financial services. This type of service philosophy, referred to as wealth management, focuses on a holistic approach to a client’s financial affairs and emphasizes the benefits of financial planning and strategy combined with best implementation. Without implementation, any planning becomes a mere academic exercise. Without planning, even the best implementation will achieve the client’s goal only by accident rather than design.

Wealth management is characterized by:

• A business model built around target clients’ needs

• A comprehensive service approach

• An emphasis on advice, not product

• Sophistication of solutions

• Independence and objectivity

• The benefit of planning

• The ability to deal with complex issues

• A proactive approach to client solutions

The exact definition of wealth management has been elusive in the industry. Wealth management does not refer to a service or product, but a method for delivering a suite of services and a philosophy for managing client relationships. Wealth management addresses all areas of a client’s financial life in a customized way, without emphasis on specific products and implementation vehicles. The process is one of advice, customized solutions, implementation and regular review.

The unique relationship between the CPA and the client offers a perfect foundation on which to build comprehensive financial services. Therefore, the joining of CPA services and financial advice has an inherent competitive advantage in the industry. However, many CPAs have struggled to implement a true wealth management model within their firms. Most firms fall somewhere between serving as a basic product provider and acting as a true wealth manager.


The evolution begins with the model most firms adopt in the early days of their financial advisory effort, the “broker/agent” service model. As the practice evolves, the increasing sophistication of the professional(s) and the increasing depth of client relationships drive the practice to its ultimate destination of wealth manager. The evolution to wealth management for a firm can be measured in the following ways:

• Depth and Breadth of Client Solutions: An increased level of technical competency and expertise

• Client Engagement Process: A more sophisticated system for engaging clients and explaining opportunities

• Structure of the Practice: The sufficient capacity and capabilities through staffing and/or resource partnerships

Wealth management

does not refer to

a service or product,

but a method for delivering

a suite of services and

a philosophy for managing

client relationships.

Broker/Agent

Facilitates access to financial products.

Responds to client-initiated opportunities.

Little or no planning.

Basic Advice

Provides simple investment advice.

Begins to have a discovery process to uncover client needs.

No comprehensive planning.

Planner/StrategistEmphasizes planning and strategies to meet goals.

Uses the client relationship to explore multiple opportunities.

Better competence, but limited capacity.

Wealth ManagerIntegrates goals and strategies into

a complete holistic service.

Has step-by-step process to walk client through all elements and

considerations.

Has competence and capacity

Employs or involves other professionals.


The depth of the client-advisor relationship and the level of technical wealth expertise are primary indicators of where a firm falls on the ladder of development. Typical client services in a wealth management firm include:

• Tax planning

• Retirement planning

• Income protection and asset preservation

• Business planning

• Debt management

• Investment planning

• Insurance planning

• Estate planning

• Education planning

• Special situations

Depending on the size of the firm and its strategy regarding specializations, the methods of delivery vary. Regardless, the optimal wealth management practice is able to effectively deliver all elements of comprehensive wealth management through a mix of internal capacity and carefully structured resource partnerships.

Specialization and Expertise

The comprehensive nature of wealth management services creates an immediate challenge with respect to delivery: the higher the number of services, the more difficult it is to position one professional as an “expert” in all areas of financial advice. Considering the complexity of financial planning, taxation, investments, estate planning, trusts, insurance, etc., it is difficult for a single professional to be an expert in all these fields of knowledge and effectively craft solutions for clients. It is true most financial advisors have knowledge of all these topics, but knowledge is only the first step toward expertise. The delivery of a wide range of solutions by a single advisor becomes even more challenging as the average size of the client relationship grows. Given the typical client of a CPA is affluent (more than $500,000 in investable assets), complex issues face CPA firms from the very start. Creating or leveraging specialized delivery resources in order to deliver true “expert” advice and implementation is one key to success for CPAs.

Unfortunately, many firms in the industry (both CPA and other advisors) have taken the approach of trying to create a “jack-of-all-trades” practice where one person poses as an expert in all areas of financial advice and implementation. Building a solo practice is a perfectly viable business model, but it is not realistic to think one professional can have the necessary knowledge and expertise in every area of wealth management. In this case, the role of resource partnerships and outsourcing relationships is particularly important. The fundamental premise must be to provide the client with qualified experts, whether the advisor provides that expertise directly or draws from an external source. One of the biggest threats to the client relationship is a perceived lack of credibility, so it is critical to ensure the appropriate level of expertise is visible, clearly communicated and readily available.

The actual or perceived lack of CPAs in financial services is a significant threat to the success of those CPA firms in the business. A 2007 study conducted by the American Institute of Certified Public Accountants (AICPA) and Moss Adams found the most critical challenge facing CPA firms is the lack of awareness among clients that financial planning/advisory capabilities exist within the firm. In addition, the Journal of Accountancy interviewed 1,500 affluent clients of CPA firms and found that “lack of expertise” is the leading correctible reason for lost wealth management opportunities. In the survey, 61 percent of clients who did not use their CPA as a financial advisor said they did not need an advisor, 36 percent said they see the advisor as lacking expertise, and 3 percent perceived a conflict of interest. There may not be much the firm can do about clients who do not see the need for an advisor, but it can clearly improve on the clients who do not recognize the CPA’s expertise.

The fundamental premise

must be to provide the

client with qualified experts,

whether the advisor

provides that expertise

directly or draws from an

external source.


Basically, a client’s decision process to work with a particular firm is tied to the following three dimensions:

1. The service and its convenience

2. The price

3. The ability to handle specialized and complex issues

Specialization is the most commonly overlooked element that contributes to a client’s decision to choose an advisor. Advisors frequently recognize the importance of service and pricing, but many firms underestimate the complexity in their clients’ financial lives and the need to handle that complexity through specialized professionals.

Clients want to work with advisors who have expertise in their specific areas of need and who have experience working with complex financial situations. Complexity is commonplace among the clients of a CPA practice. For example, business owners face the complicated issue of illiquid wealth, often having to guarantee business loans with personal assets and owning a business that is directly tied to their personal financing. Their need to integrate the demands of their personal finances with their business requirements does not lend itself easily to generic and simplistic solutions.

The complexity and specialization dimension becomes increasingly critical as the size of the client’s wealth increases. Before dismissing the wealthiest clients as perhaps being too demanding, consider the following statistics. According to a 2011 report by the Economic Policy Institute, the top 20 percent of American households hold 87.2 percent of the nation’s wealth, with the other 80 percent accounting for just 12.8 percent of all wealth. Reviewing the table below, it becomes clear that if assets define the revenue opportunity for wealth management, then the focus really must be on those with the highest net worth.

Distribution of Income and Wealth, 2009

DISTRIBUTION OF: HOUSEHOLD INCOME NET WORTH NET FINANCIAL ASSETS

All 100.0% 100.0% 100.0%

Top 1% 21.3% 34.6% 42.7%

Next 9% 25.9% 38.5% 40.2%

Bottom 90% 52.8% 26.9% 17.1%Source: Wolff (2010)

In addition to shaping the client’s perception and meeting complex client needs, the financial results from utilizing experts are superior. Practices that deliver comprehensive services through a team of experts rather than a single “generalist” advisor tend to be larger and significantly more profitable. (While revenue and profitability are not the only priorities, it is inherently a valuable way to measure the accomplishment of a firm.) The Financial Planning Association (FPA) conducts an annual survey of all members in its industry association. The results point to the distinction between firms that provide client service through a “team of experts approach” versus firms that rely on professionals not specializing in any distinct area, but acting as “generalists.” The study indicates practices that utilize a “team approach” achieve significantly higher revenue than advisors who try to position themselves as “generalists.” The superiority of the

Clients want to work with

advisors who have expertise in

their specific areas of need and

who have experience working

with complex financial situations.

SERvICE & CONvENIENCE

The Three Client Dimensions

COMPLE

xITY & SP

ECIALIz

ATION

PRIC

E


team model holds true across all channels (banks, independent firms, CPA firms, insurance, etc.).

Naturally, few practitioners and firms begin as true wealth managers. Instead, at both the professional and the firm level, the practice undergoes a growth process over time, increasing its ability to generate revenue and service clients in more sophisticated and holistic fashions. The diagram below illustrates that correlation between client service and complexity of solutions (the client perspective) and financial rewards (the profitability perspective). The profitability perspective should be measured as total pre-tax income per owner, including salaries and profit distributions. The client perspective can be measured in terms of revenue, wallet share, number of services provided per client, and the revenue per service or client satisfaction scores. As indicated, the client perspective correlates strongly with the financial perspective. As client relationships deepen and more complex solutions are provided, the financial results also expand.

The advantage of CPA firms lies in the fact they do not have to start from the bottom of the curve. A mature client base and demonstrated expertise allows CPA firms to enter financial services in the elevated areas, from both a client perspective and the profitability dimension. Therefore, the most successful practices recognize their clients’ need for specialized knowledge and areas of expertise, and seek to establish their ability to deliver this expertise early on. The question is not “if” but “how” best to build expertise and capability.

Building the Capacity

When it comes to building the expertise and capacity of a wealth management practice, CPA firms need to determine which functions and capabilities to build internally, which to acquire and which to access through resource partnerships. The ideal method for building capacity varies among firms, although outsourcing is a fundamental part of every optimal model. The decisions surrounding outsourcing should be based on where the firm can find the best available expertise and create the most favorable economic partnerships.

It is important to clarify the role resource partnerships or outsourcing plays in the firm. Using an external solution provider should not be viewed by firm partners as a way to lessen the commitment of the firm leaders. Unfortunately, firms have confused the decision to outsource certain services with a lower level of commitment. The decision to outsource a service should not be driven by reluctance to commit to providing a particular service. If there is an absence of consensus that a specific service is a valued offering for clients, then the firm should not be involved. It is important to recognize the fundamental premise behind a firm adding any wealth management service is a commitment to meeting

Client Service to Profitability Correlation

PROFIT PER OWNER

BREA

DTH

& D

EPTH

OF

CLIE

NT

SERv

ICES

Broker/Agent

Basic Advice

Planner/Strategist

Wealth Manager


the financial needs of clients. Regardless of the method for delivering wealth management services, whether internal or through resource partnerships, there must be a dedication to seeing that clients’ needs are met. Without that commitment, any service will fail or deliver half-hearted results (from a half-hearted effort).

After a firm’s partners pledge their commitment, they must decide how to acquire the necessary capacity and expertise to deliver the services (i.e., whether to build the capabilities internally or acquire them through resource partnerships). When evaluating whether to hire internally for a specific function or expertise, an external relationship should also be seriously considered.

The first and obvious choice for resource partnerships is the broker/dealer relationship. A broker/dealer of the practice already has a deep understanding of the firm, has the same financial goals and, more importantly, has the economies of scale to effectively build capacity. Additionally, there is a significant efficiency for the firm in working with a single resource partner rather than committing to the expected cost of integrating multiple providers.

The value brought by the resource partner (broker/dealer) can be found in the following areas, and each area ultimately has a financial impact as well as a client service impact:

• Most practices are not efficient enough to perform all functions on their own. The resource partner supplies economies of scale that make operations efficient, ultimately lowering the cost of each function while also minimizing the chance of client service errors.

• The resource partner supplies technology and operational leadership. Most practices are not in a position to evaluate new technologies, test, implement and monitor them. The more technology permeates the advisory business, the more important this role will become.

• The resource partner can supply the outreach and reputation of a large organization. Many broker/dealers have created nationwide alliances with other industry players, something that is simply not possible for smaller, local practices.

• The combined volume of aggregate business gives the resource partner buying power to make significant price improvements.

• In the ever-expanding world of investment and financial products, the resource partner acts like the research department for advisors. The broker/dealer can provide guidance, methodology and training to advisors and help them keep up to date.

• One advisory practice can be very limited in its exposure to management, organizational and compensation practices and, as a result, may be reinventing the wheel. A resource partner observes a large number of firms and has the ability to crystallize and distribute the knowledge to the entire network.

• For those firms that recognize the value of utilizing a full-time advisor and have the critical mass to do so, the resource partner can facilitate the sourcing, placement, training and management of this valuable resource.

Each firm will (and should) inevitably outsource a number of capabilities and continue to re-evaluate the outsourcing decisions throughout the lifespan of the business. The degree to which a firm leverages resource partnerships to build capacity and expertise will be influenced by a number of factors:

1. Business Strategy: Firms need to clearly define their vision. The more that investment and financial advisory services are seen as an integral part of the business, the more appropriate it is for the firm to build capabilities internally. Many firms have taken the path of developing an investment practice without the intention of making it a core service within the firm, and most of those firms have felt dissatisfied with the return on their investment. Again, all firms should leverage their practices through resource partnerships, but the level of such outsourcing will vary depending on the business strategy. If financial services are seen as an “accommodation to clients” or as a way to get a bit more revenue in the tax off-season, then maintaining a list of preferred outside vendors is perhaps adequate. Those firms seeking to drive growth will adopt proven resource partnerships.


2. Level of Investment: The resource commitments of time and money must be treated as investments. From a financial perspective, the firm must assess the amount of financial resources available and how much it is willing to commit. Resource partnerships may require low initial cash investment but to be successful they will demand a significant time investment. From the perspective of time commitment, Ron Pittman of Pittman & Murdough Financial Advisors Inc. in Arizona emphasized the importance of dedicating the necessary time: “The CPA firm’s investment in dedicating my time to develop the financial services practice has been a definitive contributor to our success.”

3. Risk/Return Trade-Off: Firms have frequently felt dissatisfied by the financial returns, or uncomfortable with the level of risk, although they have failed to establish an expectation or agreement around acceptable levels of risk and return. Assessing the acceptable level of risk and the desired rate of return from the business are important elements to consider, regardless of the route a firm takes.

4. Level of Control: In terms of control over the client relationship and the services, the firm needs to assess its comfort level when involving a professional who is not an employee of the firm. Generally a firm is able to exercise a greater amount of control over a direct employee, although issues of control can exist in either scenario.

5. Size of the Opportunity: Firms should evaluate the size of the opportunity in terms of the client base, local demographics and the competition in the marketplace. If only limited opportunities appear to exist, then a resource partnership may be the best solution because it will be difficult to achieve critical mass for an internal-only solution. The critical mass needed for an internal practice can be thought of in two ways:

• Moss Adams research suggests an advisory firm only achieves optimal economics when it reaches $1 million in revenue. Firms that do not see a clear path to achieving this scale of revenue should consider relying on a resource partner approach rather than living with inferior profitability.

• Moss Adams estimates the initial investment in forming an internal subsidiary ranges between $100,000 and $300,000. These costs include regulatory and registration fees, professional and legal help for setup, initial investment in software and other operational resources, time needed to set up operations, investment in creating compliance processes and finally the early salaries of professionals in the subsidiary prior to the point in which these positions become fully productive. Utilizing a resource partner and leveraging its economies of scale can help firms manage their initial investment costs. Resource partners can also provide proven processes for efficiently setting up operations, compliance and other key business systems.

The overall business outlook for the firm and the goals of the individual CPA partners dictate the degree to which a firm builds through internal capacity or resource partnerships. The extent to which a firm leverages through resource partnerships varies, although it is indisputable successful firms have learned the value of doing so. Neil Schmerling in Pennsylvania created successful resource partnerships with specialists in insurance, estate planning and elder care, and sees “leveraging off of others will be the key to growth for The Schmerling Group.”

The Role of the Advisor

As firms develop areas of expertise (whether internally or through resource partnerships), the role of the primary advisor evolves. The concept of the relationship manager becomes a critical function of the advisor’s role. The primary advisor not only provides most of the client services, but is also the “quarterback” for the client, ensuring all areas of wealth management are delivered by the appropriate experts. Art Husami of Husami & Associates in California has a strong philosophy about leveraging specialists in his practice. He emphasized

Client

Relationship Manager/Primary Advisor• Develops and maintains the client relationship.• Identifies and prioritizes client needs.• Has primary responsibility for client work.• Involves other experts to serve specialized needs.

Insurance Specialist Estate Planning Expert

Business Planning Expert Retirement Plan Specialist


the importance of partnering with other professionals and sees his role as “being qualified to understand all of the client’s needs and then assess and discuss the solutions with the client to find the right person to utilize.” The role of the relationship manager is illustrated on the bottom of page 12.

This model emphasizes the concept of an integrated team of specialists to serve the client. The engagement process feels seamless to the client as long as the relationship manager remains involved at all times, drawing the necessary professionals into the relationship. Whether the experts are other advisors within the practice or outside professionals, the experience for the client should be the same.

Keep in mind an advisor will go through an evolutionary process, just as the firm does. Professionals experience a career progression that is more like a pyramid than a linear path. The foundation begins with technical competence, then adds the capability of managing client relationships and builds in the ability to identify new business opportunities. As advisors develop, they may find themselves delegating some of these roles or continuing to perform each of the roles themselves:

1. The Role of the Technician: To possess the necessary technical skills and knowledge to practice as an advisor. At a more focused and advanced level, the advisor may develop into a specialist.

2. The Role of the Relationship Manager: To manage client relationships and coordinate the necessary resources to service a client fully.

3. The Role of the Business Developer: To understand client needs, propose solutions and “close the deal” by implementing new business.

So far this paper has discussed the importance of specialization and the considerations in developing the necessary expertise, capacity and capabilities. The actual organization capable of implementing these capabilities and turning them into a thriving business is the focus of the next section.

The Optimal Ensemble Practice

The paths of larger firms with more resources differ from the solo practitioner path (i.e., CPA firms with only one partner). Therefore, there will be a separate section that focuses on the solo model. Still, some of the solo firms of today may be the large firms of tomorrow, so there is a benefit to solo practitioners in familiarizing themselves with the concepts of leverage and organizational design that apply to larger, multi-partner (ensemble) firms.

Larger CPA firms have the advantage of having more resources to invest in a wealth management practice, as well as more clients to reach critical mass. This advantage, however, presents a challenge in designing an effective organizational structure and integrating and coordinating the CPA and financial services practices. The most common challenges ensemble firms face are:

• Partner Buy-In: The greater the number of CPA partners, the more of a challenge it is to achieve 100 percent buy-in to the wealth management practice. Although there are varying degrees of participation by partners in the firm, it is imperative all partners form a consensus. If the partners cannot reach consensus that the firm should offer wealth management services, the chances of ultimate success are quite limited.

• Cultural Integration: The process of incorporating financial advisors into an established CPA firm frequently proves challenging. Differing perspectives and tendencies of CPAs and financial advisors can create obstacles to building effective relationships. This is particularly true when advisors are hired from outside the firm and brought in without a pre-existing professional relationship. A failure to understand each other’s professions also contributes to challenges with cultural integration.

• Operational Integration: Firms frequently lack an effective process or realistic timeline for integrating CPAs with advisors in terms of client relationships, business development and cross-utilization of expertise. Although the optimal strategy is to create an integrated structure, the reality in achieving the goal takes time. Recognizing that, it is important to set appropriate expectations and to prioritize the goals during each stage of development.


The challenges are well-known, but most firms struggle to address them and find a solution. The solution starts with a clear vision of what the ultimate destination should be (i.e., the firm’s definition of success,) and then carefully defining each step required to realize the vision. Based on interviews with the most successful 1st Global firms and Moss Adams’ experience consulting with CPA firms, there are four stages or steps toward the vision.

The Four Stages to Defining the Ultimate vision for Wealth Management

Start Stage 1 Stage 2 Stage 3 Stage 4

Buy-In and Planning

Awareness and Education

Active Business

Results and Accountability

Complete Integration

Ensure partner acceptance and commitment to the wealth management practice.

Define strategy and business philosophy.

Identify and engage dedicated financial advisor.

Establish financial budgets and expectations.

Gain understanding of clients’ needs and develop strategy for building expertise.

Create incentive system for all members of the firm to uncover opportunities.*

Focus on increasing partner knowledge and education.

Begin client awareness through general marketing and targeted marketing.

Include introduction to wealth management in new client meetings.

Begin making introductions through “early adopter” partners.

Establish credibility of advisors in the firm.

Increase advisor involvement in client meetings with partners.

Expect 50 percent of partners to make wealth management referrals.

Add wealth management questions to tax interview forms.

Establish system to track client data related to uncovering wealth management opportunities.

Highly involve advisors in client meetings with partners.

Formalize goals and expectations for partner referrals.

Create commonly understood expectations for the roles and responsibilities of all professionals.

Clients fully understand and expect the multiple service specialties.

Professional career goals and path reflect wealth management.

Financial success and strong client relationships create transferability of the practice.

* Securities licensing is required for all incentive programs.

The business plan that takes a firm through the process of complete integration must tackle the following one by one:

1. Client Service: Identify clients’ needs and determine how best to meet them.

2. Organizational Structure: To facilitate effective client services, the firm needs to define the internal organizational structure to determine who does what, when and how, and assign goals and responsibility for the outcomes.

3. Financial Performance: The organizational structure largely defines the economics and provides a framework for what metrics to track and what the expectations should be.


Client Service

As it relates to the client, the success of a wealth management practice within a CPA firm is dependent upon its ability to do three things:

1. Identify client opportunities and properly capitalize on them.

2. Offer services the client needs and is willing to pay for.

3. Structure an effective relationship between the CPA, advisor and client.

The first two objectives really relate to designing a compelling value Proposition to “sell” to clients and defining the appropriate clients for the firm. There is a natural tendency to pursue as many client opportunities as possible and to “be all things to all people.” However, such lack of focus stunts the ability of the firm to gain the traction that fosters profitable growth. High-performing firms learn to say “no” to clients who do not fit within their core competency, conform to their financial philosophy or fall within their target client profile. The wealth management practice of GPP Wealth Management, LLC in Texas has taken a disciplined approach to targeting clients and has a strict client acceptance philosophy centered on its particular niches. As David Shill said, “We define our target financial services clients to match the segmentation of our CPA client base. Although it is challenging to stick to the principle that we only accept clients who fall into our target, we work hard to maintain that focus.”

Similarly, offering products and services that do not match the needs of the ideal client drains resources. As the integration of the wealth management practice evolves, so will the client service offering.

The Integration of Wealth Management Services

Stage 1 Stage 2 Stage 3 Stage 4

The Foundation Increased Sophistication in

Financial PlanningIncreased Knowledge of

Investment OptionsIncreased Specialization

Investment advice.

Turnkey investment solutions utilizing asset allocation and managed account strategies.

Insurance capability through outsourcing.

Financial planning.

Tax planning.

Deeper application of investment planning solutions, tax-advantaged and alternative investments.

Meaningful integration of tax advice and financial planning.

Increased complexity of client issues.

Comprehensive service offering.

Advanced areas of expertise, such as complex insurance or unified managed accounts with tax management.

Many firms have set the initial expectation the practice would be “up and running” with comprehensive services from the beginning, and this may be unrealistic. Firms in the beginning years should focus on building a solid foundation of financial planning and then increasing sophistication and adding specialization over time. Leveraged models, however, can typically provide highly sophisticated wealth management solutions from day one of implementation.

After defining target clients and deciding which services to offer, firms must build an effective relationship structure. As the diagram on page 16 indicates, the advisor’s relationship to the client should not be seen as “subordinate” to that of the CPA, as CPAs often assume. Many firms make the mistake of seeing the advisor role as “below” the CPA role in the relative importance of the client relationship. As Doug Hatcher of Olson & Hatcher Financial Advisors, LLC in Arizona expressed, “CPAs often see financial services as an incidental add-on to their accounting and tax work. However, financial services should be viewed as a major component of a firm’s comprehensive wealth management and consulting services.


The financial advisor and CPA roles are complementary contributors to the overall client experience, and each enhances the value of the client relationship.” The advisor and CPA should be seen as peers within the client service team, and their respective strengths equally recognized.

The Client Relationship Framework

Individual Client

CPA Advisor

Importance:• Has an established

relationship with client.• Is recognized as credible.• Has knowledge of client.

Constraints:• Compliance-driven

relationship.• Limited service

opportunities; unless client is a business owner, the relationship has narrow scope.

Importance: • Provides value-added

client service.• Responds to client

needs.• Deepens firm’s

relationship with client.

Constraints: • Needs CPA for access

to client.• Needs firm structure to

properly capitalize on opportunity.

Mike Carroll of Beall Barlcay Wealth Management, LLC in Arkansas, emphasized the significance of the “triangle relationship” between the CPA, advisor and client. The combination is valuable because “the CPA is able to maintain a viewpoint or perspective, while at the same time transferring credibility to the advisor by nature of the trusted relationship with the client.” However, many CPAs fear losing control of the client relationship when adding an advisor to the equation. To mitigate this fear, the roles of the advisor and the CPA should be defined within the context of the client relationship. It needs to be clear what involvement the CPA will have in the wealth management relationship. Similarly, the protocol for sharing information between the advisor and the CPA on client relationships needs to be defined within the firm. It is a good idea to consider the communication plan in terms of the degree to which the CPA needs to know or wants to know information. You can think of communications between the advisor and CPA in the following terms:

• Client services

• Organizational structure

• Business development

• Financial performance


CPAs need to know: CPAs may want to know: CPAs do not need to know:• Client feedback and complaints.• Significant events.• New services provided to client. • Potential tax or business issues.

• Copies of performance reports. • Significant changes in account

positions or vendors.

• Details of implementation.

Despite the best efforts to define the roles and maintain an effective communication plan, CPAs can expect some loss of influence and control if the advisor’s relationship with the client is a success. CPA partners must overcome this discomfort and recognize the added value of the wealth management relationship, as follows:

• Increased revenue to the firm:

» The partner needs to share in the additional revenue through compensation.

» Securities licensing is required to share in the securities compensation.

• Deeper relationship with the client:

» The firm is able to respond to the client’s complex needs.

» The relationship is no longer based solely on compliance and tax preparation.

• Opportunity for additional client work:

» Additional opportunities may include comprehensive tax planning, trust and estate taxes, and personal financial statements.

• Improved value for succession:

» The added cash flow and enterprise value improves the transferability of the practice.

The natural instinct to “protect” the client relationship is often called “the gatekeeper syndrome” and is one of the most difficult obstacles in the CPA environment. Why is there a lack of fluidity in the client-sharing process in the firm? The reason is most likely a combination of:

• Lack of familiarity (or poor introductions and poor communication):

» CPAs are not really sure what financial advisors do.

» CPAs have not made the acquaintance of the individuals who will be providing the advice.

» CPAs face time pressures preventing knowledge and action that would otherwise result in sharing clients.

• Lack of an institutionalized process (or no easy steps to follow to get from CPA to advisor):

» The steps for introducing a client to the available services and the financial advisor are not simple, clear, practical, documented, shared and reinforced.

» In the absence of an institutionalized process for making referrals, the path of least resistance is to avoid the topic when speaking with clients.

• Lack of vision of the potential (no grasp of the financial implications of making wealth management work):

» This mindset is probably the most detrimental of all impediments to the financial success of the relationship, because making that relationship work will inevitably involve some effort and short-term sacrifice.

One cannot underestimate the importance of CPAs buying into the wealth management business and having a strong partnership between the advisor and the CPAs. Terry Scroggin of S & P Wealth Management in Oregon agreed “financial services must be a collaborative, comprehensive effort within the firm—not something autonomous among the partners.” Without effective teamwork between the two practices, it is extremely difficult to leverage existing CPA clients. Creating an internal structure and culture that fosters this relationship is critical.


Organizational Structure

The individual working relationship between the advisor and CPA needs structure and so does the organization as a whole. Frequently, the design of the organization and delegation of responsibilities occur in a haphazard fashion, more by coincidence than design. As the foundation, the following principles should be reflected by the structure:

• Effectively connects the wealth management practice and the CPA firm.• Creates an efficient workflow and leverages all resources to maximize profitability.• Creates a support infrastructure that enhances the professional’s ability to serve clients.• Provides for appropriate leadership at the wealth management and CPA level.

Considering the leadership of the organizations, there must be designated persons from both the CPA firm and the wealth management practice who are responsible for the results and success of the operation. These leaders need to carry the momentum of the practice, provide accountability for results and communicate to all employees and stakeholders. Without this, firms will likely experience frustration over the CPA partner’s lack of responsibility and involvement.

The role of the CPA firm’s executive management is critical to the success of the wealth management business. If the venture is to succeed, it will do so only with the active participation of the CPA leadership. As Dave Bremer of Boulay Financial Advisors, LLC in Minnesota reiterated, “There must be a champion for building the practice within the firm.” As Dave gradually transitioned his tax clients to other partners, he became this champion and is the leader of what is now a large and sophisticated wealth management subsidiary.

Multi-office firms bring an additional dynamic to the reporting structure of the wealth management practice. For example, JCCS Wealth Advisors, LLC in Montana has a wealth management planner in each of their six offices. Their firm has experienced the value of designating financial services partners within each of the offices, as well treating each office as an independent profit center. Bruce Lahti explained, “Each of our six offices reports its respective wealth management practice revenue and is responsible for its share of the costs. Implementing this kind of accountability has proven to be critical to success.”

To accomplish these objectives, the following organizational chart is suggested:

CPA Firm CPA Liason Executive Committee/Board

of Directors

Advisor Advisor Advisor Advisor

Wealth Management CEO

Support Staff

Operations Manager


There is no need to replicate every position if the firm is smaller; rather, there is a need to ensure that someone is responsible for each item. For example, smaller firms will have more “hybrid” positions where one person acts as both an advisor and Wealth Management CEO. The roles of each position includes:

Executive Committee/Board of Directors

• Provides strategic direction and decision-making at CPA firm level.

• Defines the role of wealth management for the firm.

• Selects leadership for wealth management.

• Approves hiring decisions.

• Holds partners accountable.

• Authorizes spending decisions.

• Is lead by a managing partner or wealth management champion.

• Is accountable to the partners for wealth management results.

CPA Liaison

• Provides communication to the CPA partners regarding wealth management practice.

• Is either managing partner or wealth management champion.

Wealth Management CEO

• Provides strategic leadership and executive management to the wealth management practice.

• Defines the direction of the wealth management practice.

• Takes responsibility for results of the wealth management practice.

• Reports to executive committee/board of directors.

• Is an active advisor or full-time executive, depending on size of organization.

Advisor/s

• Develop/s business through the initiation of new client relationships.

• Retain/s existing clients and promotes long-term relationships.

• Deliver/s advice to clients with whom they have relationships.

• Introduce/s and integrates service specialists when appropriate.

• Maintain/s communication system with CPAs regarding client issues.

Support Staff

• Provides support to advisors through administrative and paraprofessional duties.

• It is important all support staff are shared by all advisors. A structure that provides for dedicated relationships between advisors and support staff can contribute to inefficiencies and internal divisions that threaten the integration of the group.

Operations Manager

• Ensures overall office operations and coordination of client service.


Business Development

In the definition and division of roles and responsibilities, firms often neglect the burden of business development. Who has ultimate responsibility for developing business within the practice? Who leads clients to financial services? Is it the advisors or the CPAs? The firm must assign the respective roles of the professionals in generating new business. Many firms have experienced frustration due to this lack of focused responsibility, with both parties ultimately “pointing the finger” at one other. As important as this function is in the success or failure of the wealth management practice, client development must be clearly defined, but should not be done without appropriate consideration. Firms must consider where the control and access to the client exists, and determine the motivation that can drive each group. How responsible should the CPA partners be for providing referrals? How does the firm motivate partners for taking business development responsibility?

The practice of Bentley Wealth Advisors, LLC in Rhode Island recognized access to the existing client base lies in the CPA-client relationships. For that reason, the CPA firm partners are tasked with recognizing new business opportunities. As Skip Briggs explained, “The CPA partners have responsibility for identifying new wealth management opportunities within their client base. The advisor’s role is first to assist the partner in securing the business, then to service those clients and to further cultivate the financial services relationship.”

Alternatively, many firms have found it most effective to place the business development responsibility on the shoulders of the advisors. The dynamics and structure of the firm influence how this responsibility should be divided, although certain guidelines have generally proven effective as shown to the left.

Designating the respective roles of all professionals in the development of new business is step one; the next step is establishing goals for growth. Many firms experience frustration due to unrealistic expectations for effectively penetrating the client base and preconceived notions of rapid growth. Firms must establish expectations for the volume of referrals by the CPAs and for the realization of business by the advisors, recognizing the desired rate of growth over a specified period of time may not be realistic. In a 2007 AICPA/Moss Adams Personal Financial Planning Practice Study, firms who set goals for growth and business development were far more successful than firms who did not. Similarly, firms struggle to decide when to hire additional advisors or staff. The chart on the following page outlines the framework for a practice with five partners and 3,000 household clients:

CPA Partners

• Expectations should be established for making qualified referrals.

• Accountability should be enforced to achieve those referral expectations.

• Compensation should not only reward for achieving referral goals, but should penalize if expectations are not met.

• Securities licensing is required for incentives.

Advisors

• Expectations should include developing relationships with CPA partners.

• Accountability should be enforced for securing business with qualified referrals.

• Compensation should be tied to the generation of new business.


Example Business Development Goals

Client Opportunity

Start Stage 1 Stage 2 Stage 3 Stage 4Consider an example firm with 3,000 individual clients.

• Actively contact 100-150 clients.

• Market to all clients.

• Establish 50 new wealth management clients.

Establish 120-150 total wealth management clients.

At this stage, the firm should have wealth management relationships with more than 20 percent of the qualified client opportunities.

At this stage, the firm should have wealth management relationships with 25 percent or more of the qualified client opportunities.

Qualified Opportunity

Typically, 80 percent of the clients will be qualified prospects for wealth management, and as many as 30 percent can be converted successfully.

Target Number of Clients

(Based on 3,000 CPA Clients)

50 150 250 300+

Target Revenue per Client

$1,600 $2,200 $3,000 $5,000

The size of the opportunity for wealth management is defined by the number and type of clients the firm has. For most firms, this will be the number of clients for which the firm prepares individual tax returns; business owners where the client is the business; professionals and executives; and, potentially, clients referred from specialized services like valuations, estate planning, etc. The example firm above has 3,000 tax clients. A firm with this many individual clients will generally have five or six partners and generate more than $3 million in total revenue, with 42.5 percent coming from taxes, based on data from the PCPS National Management of Accounting Practices Survey.

Typically, 80 percent of the clients of such a practice will be qualified opportunities for wealth management services, and typically up to 30 percent of those clients can be converted to wealth management clients. Starting with a total client base of 3,000, the firm should set a target of 720 wealth management clients.

Over time, as services broaden, the revenue size of the client relationships should also expand. The 2007 AICPA/Moss Adams Personal Financial Planning Practice Study indicated financial planning model firms have revenue of $970 per client, whereas wealth management firms attain on average $2,800 in revenue per client. Tracing the evolution of the service models previously defined, and increasing the amounts for high performance, firm revenue should grow through each stage to ultimately target $5,000 in revenue per client relationship. The progress can be seen on the graph to the right. The combined penetration into the client opportunity and the increase in revenue per client as a result of more comprehensive services should ultimately result in an exponential growth in revenues. Under these assumptions, a firm with 3,000 clients should be able to reach $1,500,000 in gross revenue in Stage 4.

Revenue Growth Through the Four Stages

Stage 1

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

Stage 2 Stage 3 Stage 4

Based on a practice with five partners and 3,000 clients For illustrative purposes only. The results of your firm’s financial services practice will vary.


Although the underlying assumption of the wealth management practice within a CPA firm is to target the existing clients of the firm, the firm may have growth goals that exceed the ability of the current client base. Recognizing this limitation is important. As Kevin Sweeney from Sweeney Kovar Financial Advisors, Inc. in California indicated, “We have goals for the financial services business to grow to a certain level of assets, a level which may not be supported by the clients of the CPA practice. Therefore, we recognize the importance of capitalizing on outside referrals.” This realization underscores the importance of assessing the capacity for growth within the CPA client base and setting expectations appropriately.

Financial Performance

Determining suitable financial expectations and tracking actual performance has been a challenge for CPA firms with financial advisory subsidiaries. This failure is, in part, due to ineffective methods for tracking the financial performance of their subsidiary. As ironic as it seems, accounting firms have struggled to determine the best way to account for the wealth management business. First of all, the practice needs to be treated as a “fully costed” profit center. All attributable expenses and revenue should be accounted for to arrive at true profitability. Professional compensation must be treated as a direct expense against revenue to arrive at gross profit, from which overhead expenses will be subtracted. The allocation of overhead expenses or shared expenses with the CPA firm is a common source of frustration. As a general rule, allocating shared expenses based on professional full-time employee (FTE) count is effective.

Having already modeled the revenue side of the income statement, it is now time to define the cost structure behind the dramatic growth. Firms can use the following model:

1. Start with the total number of clients (1040 clients, business owners, etc.) and then consider the qualified opportunities. Typically, up to 30 percent of the qualified clients can be converted to wealth management.

2. Most successful wealth management firms use the services of resource partners such as broker/dealers, turnkey asset management providers, insurance agencies, custodians and other service vendors through which they obtain substantial creative, technical, compliance and productivity leverage at costs that are significantly lower than the costs that would be incurred if the wealth management firm internally installed these same capabilities. Resource partners vary in the depth and breadth of their services and support capabilities to wealth management firms. Most resource partners use a progressive compensation grid where the highest-revenue-generating wealth management firms and their licensed producers should be paying between 10 percent to 20 percent of gross revenues to the resource partners, depending on the nature of the services provided and the degree to which the wealth management firm has internally installed its needed capabilities.

3. The decision of adding new advisors to the practice has to do with the number of clients serviced by current advisors and the revenue per advisor. Firms should target between 120 clients per advisor in the early stages of development to 75 clients per advisor in the wealth management stage. Cross-reference the number of clients per advisor with the revenue per advisor—generally, the higher the revenue per client the lower the number of clients an advisor can manage. The average revenue per advisor in the 2007 AICPA/Moss Adams Personal Financial Planning Practice Study was $100,000 for financial planning, $154,272 for advisory and $193,619 for wealth management. Expectations for revenue per client are increased in this paper since high-performance ensemble firms had revenue per advisor more than three times the numbers above. Note a portion of the gross revenue is shared with the broker/dealer. The cost of the broker/dealer relationship is in turn offset by lower cost of compliance, software and support, administrative support, etc.


4. Compensation for advisors varies from firm to firm depending on whether it chooses a variable compensation method (paid out of revenue) or defines a compensation plan based on salary. Since compensation for advisors is a complex issue that deserves a separate report, the following guidelines are recommended:

a. The 2009 Moss Adams/InvestmentNews Adviser Compensation and Staffing Study indicates that non-owner compensation for advisors ranges between $56,000 and $107,000 for service advisors and $96,000 and $239,000 for lead advisors. There are many advisors in the industry whose compensation exceeds these numbers, but generally the extra compensation is based on performance rather than salary.

b. Compensation should not exceed 40 percent of total revenue, whether it is variable (payout) or fixed (salary). With more than 40 percent of revenues devoted to professional compensation, it is difficult to achieve profitability considering that overhead typically accounts for around 40 percent or more of revenue.

5. Overhead expenses for an advisory firm should ideally be between 30 and 40 percent. In the 2010 InvestmentNews/Moss Adams Financial Performance Study, early ensemble firms had overhead of 44.9 percent, mature ensembles had 46.3 percent and top ensemble firms, the market dominators, had 40.7 percent of revenue in overhead. These numbers, however, were taken just following the recent market recession and should decrease as the market recovers. In addition, these are statistics derived from all advisory firms, and overhead expenses for CPA-centric advisory firms are typically lower. Additional details on overhead can be found in the table on page 25.

6. In staffing the advisory subsidiary with administrative staff, it is useful to think of a ratio of 2-to-1 for advisors to administrative FTEs. The actual ratios in the 2007 AICPA/Moss Adams Personal Financial Planning Practice Study were between 1.5-to-.5 and 3-to-1.

Under the assumptions and industry statistics described above, the optimal income statement for an ensemble firm should evolve as shown on the following page.


Ensemble Firms Optimal Income Statement

Ensemble Firms Stage 1 Stage 2 Stage 3 Stage 4

Total Number of CPA Clients 3,000 3,210 3,435 3,675

Qualified Opportunities 80% 80% 80% 80%

Can Be Converted 30% 30% 30% 30%

Qualified Prospects for Wealth Management

720 770 824 882

Percent Penetration (of Qualified) 7% 19% 30% 34%

Number of Clients 50 150 250 300

Potential Revenue per Client $1,600 $2,200 $3,000 $5000

Gross Revenue $80,000 $330,000 $750,000 $1,500,000

Resource Partner Service Retention

$16,000 $49,500 $90,000 $150,000

Net Revenue to Advisor/Firm $64,000 $280,000 $660,000 $1,350,000

# of Advisors 1 2 3 4

Total Compensation per Advisor 40% of Revenue 40% of Revenue 40% of Revenue 40% of Revenue

$25,600 $112,200 $264,000 $540,000

Gross Profit $38,400 $168,300 $396,000 $810,000

Gross Profit Margin 48% 51% 53% 54%

35% 35% 35%

Overhead Expenses $30,000 $98,175 $231,000 $472,500

Operating Income $8,400 $70,125 $165,000 $337,500

# of Clients 50 150 250 300

Revenue per Client $1,600 $2,200 $3,000 $5,000

Operating Profit per Client $168 $468 $660 $1,125

AUM per Client $160,000 $220,000 $300,000 $500,000


# of Support and Administrative Staff

1.0 1.0 1.5 2.0

Revenue per Advisor $80,000 $165,000 $250,000 $375,000

Clients per Professional 50 75 83 75

Clients per Professional and Support 25 50 56 50

Note: This is for illustration purposes only. Payment of securities commissions must be conducted in accordance with 1st Global, Inc. 2001 SEC No-Act. Lexis 557 (May 7, 2005).


While the numbers in the chart on page 24 represent reasonable expectations, real-world experience offers another perspective.

Although the size of ensemble firms will vary greatly, the following provides some detail of common overhead expenses. The data represents a composite of the average overhead structure of the high-performing ensemble practices that participated in the 2010 InvestmentNews/Moss Adams Financial Performance Study. The numbers can be helpful in comparing for benchmarking overhead expenses and looking for areas of improvement. However, most of the firms used to create the data below are non CPA-centric practices. CPA-centric wealth management models typically have lower overhead expenses since the CPA firm already has many of these fixed costs absorbed into its overhead or the costs are shared equally between the two (CPA and wealth management) businesses. The survey data below corresponds to an ensemble practice generating $3,061,187 in wealth management revenues and represents a top ensemble practice in terms of pre-tax income per owner. For the sake of this illustration, we are assuming approximately $10,600,000 in traditional accounting revenue, which represents reasonable targets for value extraction. Traditional accounting revenue is defined as tax, audit, and accounting revenues, in addition to typical CPA niche practices such as, but not limited to, payroll, consulting, IT, 401(k) administration, etc. Wealth management revenue is strictly limited to fees and commissions from wealth management and financial planning services.

Revenue $3,061,187 100.0%

Direct Compensation Expenses (professional salaries, commissions, bonuses, incentive comp.) $1,269,087 41.5%

Gross Profit $1,792,100 58.5%

Overhead Expenses

Auto Expenses $11,818 0.3%

Business Development and Marketing $46,716 1.5%

Depreciation/Amortization $55,499 1.8%

Equipment Leases, Purchases and Maintenance $16,567 0.5%

Health and Other Employee Insurance Benefits $70,407 2.3%

Information Technology $73,468 2.4%

Insurance, Business-Related (P&C, E&O, etc.) $29,105 0.9%

Office Expenses $35,732 1.2%

Office Rent, Repairs and Maintenance $101,019 3.3%

Outsourcing Services, Excluding IT $41,598 1.4%

Payroll Taxes $81,399 2.7%

Professional Services $54,603 1.8%

Retirement Benefits $51,761 1.7%

Salaries, Admin. and Support/Technical Staff $160,201 5.2%

Salaries, Technical Specialists $55,101 1.8%

Salaries, Dedicated Management Staff $103,875 3.4%

Taxes and Licenses, Excluding Payroll Taxes $9,021 0.3%

Training, CE, Professional Dues/Licensing $17,729 0.6%

Travel $24,271 0.8%

Utilities/Phone/Fax/Online Service $24,609 0.8%

Overhead Expense Allocation $9,401 .3%

All Other Expenses $60,569 2.0%

Total Overhead Expenses $1,134,469 37.1%

Operating Income $657,631 21.5%


Please note the financial rewards for CPA owners amounts to approximately 30 - 35 percent of total revenues. This is composed of approximately 12 - 15 percent of the 41.5 percent Direct Compensation Expenses line on the previous page and the 21.5 percent attributed to Operating Income on the bottom line. The 12 - 15 percent attributed to CPA owners in the Direct Compensation Expenses line is a reward for owner labor for bringing the client into the engagement and for participating in client meetings. The 21.5 percent attributed to Operating Income is owner reward for ownership of the business. This 30 - 35 percent range is in line with earlier studies as well as the most recent 2010 InvestmentNews/Moss Adams Financial Performance Study as total owner reward for building a wealth management business. This range also falls well within the parameters of total compensation enjoyed by leading 1st Global firms.

Profitability of the firm is only part of the value proposition for building a wealth management firm. While a well designed and well run wealth management business can obviously generate 20 percent plus margins after paying for professional manager compensation as shown in the previous section, it can also provide significant enterprise value over time. In fact, many 1st Global firms have built wealth management businesses that have generated enterprise value that is three to seven times more than that generated by the traditional tax and accounting side of the business. 1st Global has built a simple valuation model that estimates enterprise value based on work we have done for our Succession Planning division and with the assistance of Succession Planning Consultants. An example of this enterprise value estimate is included below and corresponds to an ensemble practice generating $3,061,187 in gross wealth management revenue. An interesting side note is that this enterprise value is becoming a key component of the exit strategy for many senior members of the firm.

We have included three scenarios of this model below based on the sample firm survey on page 25. The three examples are based on firm type and the averages between: Market Dominators, those firms generating in excess of $5,000,000 in wealth management revenues; Early Ensembles, those firms that are less than 10 years old and generate less than $2,000,000 in wealth management revenues; and Mature Ensembles, those firms that are older than 10 years and generate between $2,000,000 and $5,000,000 in annual wealth management revenues. The three different scenarios are based on variations of revenue mix between recurring revenue (such as asset management fees) and non-recurring revenue (such as transactional, insurance, and transactional investment solutions) for Market Dominator, Early Ensemble, and Mature Ensemble firms.

Scenario A: 65%/35% Revenue Mix

Amount Rate Notes

Gross Revenue: a $3,061,187

TAMP & Service Expenses: b $417,342

Licensing & Administrative Expenses: c $30,756

Direct Expense: d $240,000 ............ Professional Manager’s Compensation

Gross Operating Profit (a - b - c - d): e $2,373,089

Overhead Expense: f $765,297 ............ Fixed and Variable Expenses, Staff Salaries

Net Operating Profit (e - f): g $1,607,792

Net Revenue Recurring: h $1,989,772 65%

Net Revenue Non-Recurring: i $1,071,415 35%

NOP * Recurring Ratio (g * h): j $1,045,065

NOP * Non-Recurring Ratio (g * i): k $562,727

Recurring NOP * NOP Multiple (j * 7): l $7,315,455 6x - 7x Low for external, high for internal

Non-Recurring NOP * NOP Multiple (k * 4): m $2,250,908 3x - 4x Low for external, high for internal

Foundational Practice Value (l + m): $ 9,566,363

Turnkey Asset Management Platform

This is a hypothetical example used for illustrative purposes only. The results of your firm’s financial services practice will vary.


Scenario B: 75%/25% Revenue Mix

Amount Rate Notes









Net Revenue Non-Recurring: i $765,297 25%




Non-Recurring NOP * NOP Multiple (k * 4): m $1,581,264 3x - 4x Low for external, high for internal



Scenario C: 85%/15% Revenue Mix

Amount Rate Notes









Net Revenue Non-Recurring: i $459,178 15%




Non-Recurring NOP * NOP Multiple (k * 4): m $932,839 3x - 4x Low for external, high for internal



These are hypothetical examples used for illustrative purposes only. The results of your firm’s financial services practice will vary.


Obviously, wealth management practices skewed more toward recurring revenue and less so toward transactional revenue have higher foundational practice values. This higher valuation is derived from the higher multiples on net operating profit (6x-7x) for recurring revenues, than for the net operating profit (3x-4x) on non-recurring revenues. Note that the range of foundational practice values between scenario A (65%/35% revenue mix) and scenario C (86%/14% mix) is not significant. This is due to the fact that any weighting of revenues approximating 75 percent recurring and 25 percent non-recurring is an optimal service model followed by most high performance wealth management firms. These firms have access to all essential products and solutions to serve the wealth management and financial planning needs of the affluent and emerging affluent segments. A high performance, full-service wealth management practice must provide a wide range of products and solutions, some of which can only be provided in a transactional, non-recurring revenue structure.

Note that the terms “value” and “price” are different. While increasing a firm’s recurring revenue increases its valuation, decreasing a firm’s breadth of services decreases the price a buyer would be willing to pay for a practice. Other factors that may influence the price a buyer is willing to pay (differing from valuation) include: concentration of firm revenues with top clients; diversification of services; geographic location; average age of client base; specialty niche practices or knowledge; and existence or lack of institutionalized processes and other variables.


The Optimal Solo Practice

A solo model, where there is a solo owner within the CPA practice that most often acts as the financial advisor, presents a different picture than the ensemble model. Many dynamics of the larger firms, such as partner buy-in and complicated organizational structures, do not exist, but different complexities are present. Capacity and competency constraints are a challenge in any practice; however, solo firms experience the most acute human capital limitations:

• Capacity Limitations: Given a circumstance of restricting the advisory practice to one professional, there is an obvious capacity limitation. To reach an optimal practice, it is important to be selective about how that capacity is attained. The right client/service mix becomes extremely important.

• Competency Limitations: The need to build effective resource partnerships and networks with other professionals is a particular priority for a solo practice. Because solo advisors will reach a limitation in their ability to specialize in a service or niche, there may be a need to identify alternative sources to complement those within the practice.

Client Service Model

The evolution of client services should be a deliberate process. Taking the time to carefully choose the target clients, build client relationships and grow an area of expertise should be prioritized.

To address the issues of capacity, it is particularly important for solo firms to be selective of clients, as there are a finite number of individuals who can be effectively and efficiently served. As Richard Wilson of Wilson Money Management, Inc. in Texas expressed, “Each year I continue to trim my client base of tax-only clients who appear to have no financial planning prospect. I stopped accepting new clients who did not fit with my wealth management focus.” Therefore, the optimal firm takes the following measures:

• Trims client base to eliminate clients who are: » Not wealth management clients. » Not good candidates for wealth management services in the future. » Not profitable or are “high-maintenance.”

• Stops taking tax-only clients.• Limits the number of clients that fall outside of the firm’s defined target.

Firms should also evaluate ancillary CPA services offered and reconsider the use of resources and energy on less-significant client services. Specifically, firms must reduce services that do not contribute to meaningful client services or that are a drain on resources. For example, many firms have eliminated their bookkeeping and payroll services.

Organizational StructureStrategic Partners

CPA

Advisor

Assistant Paraprofessional

The most important elements for a solo practice to consider in its organizational design is the proper utilization of other professionals and leveraging of support staff. The importance of relationships with resource partners is especially critical for a solo practice to provide expertise or experience in areas outside of the advisor’s capacity. Similarly, the advisor should be diligent about delegating tasks to administrative and paraprofessional staff in order to free up time for direct client involvement and technical work.

Jay Wahlin of Wahlin Wealth Management in California credited a qualified assistant as one of the keys to his success. He said, “A critical


factor for me in this business is time management and efficiency—and a good assistant is invaluable to this. It’s something I wish I would have realized sooner.”

Solo practitioners find their responsibilities evolve as the practice grows. With the addition of assistants and paraprofessionals and relationships with resource partners, the advisor is required to spend more time as a manager. Jeff Watson of WealthCare Financial Group LLC in Indiana expressed he “had to reorganize my time and responsibilities. It required me to develop different skills for management and leadership.”

As the wealth management practice of a solo advisor grows, there is a trend toward using a resource partner to perform the traditional tasks of a CPA. In such circumstances, the structure of the wealth management practice would look as follows (and is applicable when the CPA is also acting as the solo advisor) in the chart below.

Financial Performance

Solo firms need to establish realistic performance expectations with the understanding marginal effort will produce marginal results. As with any business, achieving success and the optimal practice within a solo model requires commitment and energy. Following are expectations under such circumstances:

Example Financial Performance Goals

Client Opportunity

Start Stage 1 Stage 2 Stage 3 Stage 4

Consider an example firm with 300 individual clients.

Actively contact 50 clients. Market to all clients. Establish 30 new wealth management clients.

Establish 40-50 total wealth management clients.

At this stage the firm should have wealth management relationships with more than 30 percent of the qualified client opportunities.

At this stage the firm should have wealth management relationships with 50 to 80 percent of the qualified client opportunities.

Qualified Opportunity

Typically 50 percent of the clients of a solo practice qualify as potential clients for wealth management.

Target Number of Clients

(Based on 300 CPA Clients)

30 42 60 107

Target Revenue per Client

$1,600 $2,000 $3,000 $4,500

The size of the opportunity for a solo practice is defined by the number and type of clients. The example on the previous page illustrates a practitioner with 300 tax clients. With a total client base of 300, the practitioner has the opportunity to convert 150 clients to wealth management services. In many solo practices, as the practice matures, the actual number of clients may decline as the practitioner chooses to focus on fewer, but larger, relationships.

While the expectations for revenue per client should be relatively the same for a solo firm as they are for an ensemble firm, solo practitioners should target a higher percentage of conversions of potential qualified clients to financial services clients. Experience has shown solo practitioners have a smaller, more concentrated client base, and through the use of consistent marketing and personal contact, solos practitioners often can obtain a slightly higher conversion rate.


The high conversion rate and careful approach to expanding services through resource partnerships should result in the practitioner exceeding $500,000 in revenues from wealth management in Stage 4, as illustrated in the graph below.

Since the assumptions behind the optimal model and the supporting statistics have already been discussed in the ensemble model, below are a few unique factors for solo firms:

Revenue Growth Through the Four Stages

Stage 1

$0

$500,000

$1,000,000

Stage 2 Stage 3 Stage 4

Based on a solo practicitioner with 300 tax clients For illustrative purposes only. The results of your firm’s financial services practice will vary.

1. Start with the total number of tax clients (1040 clients, business owners, etc.) and then target a 50 percent conversion rate.

2. Most successful wealth management firms use the services of resource partners such as broker/dealers, turnkey asset management providers, insurance agencies, custodians and other service vendors through which they obtain substantial creative, technical, compliance and productivity leverage at costs that are significantly lower than the costs that would be incurred if the wealth management firm internally installed these same capabilities. Resource partners vary in the depth and breadth of their services and support capabilities to wealth management firms. Most resource partners use a progressive compensation grid where the highest-revenue-generating wealth management firms and their licensed producers should be paying between 10 percent to 20 percent of gross revenues to the resource partners, depending on the nature of the services provided and the degree to which the wealth management firm has internally installed its needed capabilities.

3. Even though the CPA/advisor is the only owner and practitioner, it is important to define “normal” compensation for the labor of the practitioner in order to accurately track profitability. An optimal firm should strive for compensation as 40 percent of revenue. Measuring reward for ownership, separate from the reward for labor, becomes important as partners are starting to consider their eventual exit from the firm. The value of the firm is ultimately driven by the reward for ownership and not the compensation for working in the practice. Identifying and measuring the reward for labor (i.e., base compensation) of the partners is the first step toward identifying the free cash flow the partners will one day transition. Moreover, many firms in the industry may have an inflated view of their profitability as they mix and confuse the compensation for labor with the firm profits.

4. Overhead expenses for a solo firm will be a little higher as a percent of revenue. Generally, solo practices have fewer economies of scale and may require additional support to be so highly productive.


Solo Firms Optimal Income Statement

Solo Firms Stage 1 Stage 2 Stage 3 Stage 4

Total Number of CPA Clients 300 321 343 368

Qualified Opportunities 50% 50% 50% 50%

Qualified Prospects for Wealth Management

150 161 172 184

Percent Penetration (of Qualified) 20% 23% 35% 60%

Number of Clients 30 36 60 110

Potential Revenue per Client $1,600 $2,000 $3,000 $4,500

Gross Revenue $48,000 $72,000 $180,000 $495,000

Resource Partner Service Retention

$9,600 $14,400 $27,000 $59,400

Net Revenue to Advisor/Firm $38,400 $57,600 $153,000 $435,600


Total Compensation per Advisor 40% of Revenue 40% of Revenue 40% of Revenue 40% of Revenue

$15,360 $23,040 $61,200 $174,240

Gross Profit $23,040 $34,560 $91,800 $261,360

Gross Profit Margin 48% 48% 51% 53%

35% 35%

Overhead Expenses $30,000 $35,000 $53,550 $152,460

Operating Income ($6,960) ($440) $38,250 $108,900

Pre-Tax Income to Principal (includes direct compensation and profit) $8,400 $22,600 $99,450 $283,140

# of Clients 30 36 60 110

Revenue per Client $1,600 $2,000 $3,000 $4,500

Operating Profit per Client ($232) ($12) $638 $990

AUM per Client $160,000 $220,000 $300,000 $450,000


# of Support and Administrative Staff

1.0 2.0 2.0 2.5

Revenue per Advisor $48,000 $72,000 $180,000 $495,000

Clients per Professional 30 36 60 110

Clients per Professional and Support 15 12 20 31

Note: This is for illustration purposes only. Payment of securities commissions must be conducted in accordance with 1st Global, Inc. 2001 SEC No-Act. Lexis 557 (May 7, 2005).


Under the assumptions and industry statistics described on the previous page, the optimal income statement for a solo practice should evolve as shown on the following page.

Controlling overhead is a critical financial management decision that a solo practice makes. Below is the average overhead structure of the mature solo practices that participated in the 2010 InvestmentNews/Moss Adams Financial Performance Study. The numbers can be helpful in comparing for benchmarking overhead expenses and looking for areas of improvement. However, most of the firms used to create the data below are non CPA-centric practices. CPA-centric wealth management models typically have lower overhead expenses since the CPA firm already has many of these fixed costs absorbed into its overhead or the costs are shared equally between the two (CPA and wealth management) businesses. The survey data below corresponds to a solo practice with approximately $715,000 in traditional accounting revenue and $515,006 in wealth management revenue, and represents the top solo practices in terms of pre-tax income per owner. Traditional accounting revenue is defined as tax, audit, and accounting revenues, in addition to typical CPA niche markets such as, but not limited to, payroll, consulting, IT, 401(k) administration, etc. Wealth management revenue is strictly limited to fees and commissions from wealth management and financial planning services.

Revenue $515,006 100.0%

Direct Compensation Expenses (professional salaries, commissions, bonuses, incentive comp.)

$228,122 44.3%

Gross Profit $286,884 55.7%

Overhead Expenses

Auto Expenses $4,512 0.9%

Business Development/Marketing $8,618 1.7%

Depreciation/Amortization $3,821 0.7%

Employee Benefits & Health $12,015 2.3%

Equipment Leases/Purchases $2,517 0.5%

Insurance $4,400 0.9%

Office Expense $6,778 1.3%

Other Salaries $48,051 9.3%

Outsourcing Services $5,048 1.0%

Payroll Taxes $7,560 1.5%

Professional Services $4,888 0.9%

Rent $24,718 4.8%

Retirement Benefits $6,695 1.3%

Software/Hardware Expense $10,072 2.0%

Tax and Licenses $2,525 0.5%

Training and Continuing Education $3,040 0.6%

Travel and Entertainment $3,651 0.7%

Utilities/Phone/Fax/Online Service $4,389 0.9%

Overhand Expense Allocation $642 0.1%

All Other Expenses $8,859 1.7%

Total Overhead Expenses $172,799 33.6%

Operating Income $114,085 22.2%


Please note the financial rewards for CPA owners amounts to approximately 35 - 40 percent of total revenues. This is composed of approximately 15 - 20 percent of the 44.3 percent Direct Compensation Expenses line above and the 22.2 percent attributed to Operating Income on the bottom line. The 15 - 20 percent attributed to CPA owners in the Direct Compensation Expenses line is a reward for labor for bringing the client into the engagement and for participating in client meetings, and in many cases, leading the meetings. The 22.2 percent attributed to Operating Income is reward for ownership of the business. This 30 - 35 percent range is in line with earlier studies as well as the most recent 2010 InvestmentNews/Moss Adams Financial Performance Study as total owner and labor reward for building a wealth management business. This range also falls well within the parameters of total compensation enjoyed by leading 1st Global firms. Notice that total owner compensation for solos is slightly larger as a percentage of revenues than of that for ensembles. This is due to the fact that solo owners are doing more of the actual work themselves since they cannot always take advantage of the scale that ensemble owners can. Of course, ensemble owners make more on an absolute basis than do solo owners due to the larger revenue absolute numbers, even though the percentage may be slightly lower.

Profitability of the firm is only part of the value proposition for building a wealth management firm. While a well designed and well run wealth management business can obviously generate 20 percent plus margins after paying for professional manager compensation as shown in the previous section, it can also provide significant enterprise value over time. In fact, many 1st Global firms have built wealth management businesses that have generated enterprise value that is three to seven times more than that generated by the traditional tax and accounting side of the business. 1st Global has built a simple valuation model that estimates enterprise value based on work we have done for our Succession Planning division and with the assistance of Succession Planning Consultants. An example of this enterprise value calculation is included below for a solo firm generating approximately $715,000 in traditional accounting revenue (defined above) and $515,006 in wealth management revenue (defined on page 25). An interesting side note is that this enterprise value is becoming a key component of the exit strategy for the firm.

Amount Rate Notes

Gross Revenue: a $515,006

TAMP & Service Expenses: b 92,578

Licensing & Administrative Expenses: c 6,528

Direct Expense: d 120,000 ............ Professional Manager’s Compensation

Gross Operating Profit (a - b - c - d): e 295,900

Overhead Expense: f 128,751 ............ Fixed and Variable Expenses, Staff Salaries

Net Operating Profit (e - f): g 167,149

Net Revenue Recurring: h 386,254 75%

Net Revenue Non-Recurring: i 128,752 25%

NOP * Recurring Ratio (g * h): j 125,362

NOP * Non-Recurring Ratio (g * i): k 41,787

Recurring NOP * NOP Multiple (j * 7): l 877,531 6x - 7x Low for external, high for internal

Non-Recurring NOP * NOP Multiple (k * 4): m 167,150 3x - 4x Low for external, high for internal



This is a hypothetical example used for illustrative purposes only. The results of your firm’s financial services practice will vary.

Note that the terms “value” and “price” are different. While increasing a firm’s recurring revenue increases its valuation, decreasing a firm’s breadth of services decreases the price a buyer would be willing to pay for a practice. Other factors that may influence the price a buyer is willing to pay (differing from valuation) include: concentration of firm revenues with top clients; diversification of services; geographic location; average age of client base; specialty niche practices or knowledge; and existence or lack of institutionalized processes and other variables.


From Diagnosis to Action

So far, this paper has discussed the optimal structure for a CPA wealth management practice and the path toward building such a practice. The next section will establish a clear methodology for applying these tenets for optimal structure to your practice.

Step 1: Identify where you are in the life cycle of your practice:

The key characteristic of the evolution of your firm is the degree to which you are creating and capturing opportunity:

• Level of Integration—What percent of the individual or household clients are also clients of the advisory service? As a guideline, larger firms should seek a penetration of 20 percent in terms of number of clients. Smaller firms that focus more closely on individual clients can achieve 50 percent or greater penetration into the client base.

• Comprehensiveness of Services—Of the wealth management services listed below, how many do you offer and how many of your clients have been introduced to them? Ultimately, the goal is for all advisory clients to be made aware of, not necessarily involved in, all of the services.

» Tax planning

» Retirement planning

» Income protection and asset preservation

» Business planning

» Debt management

» Investment planning

» Insurance planning

» Estate planning

» Education planning

» Special situations

Wealth Management Services:

• Expertise of Advisors—What is the level of expertise of your advisors and what are their core strengths?

The percent penetration in the opportunity will determine your firm’s stage of business-building. You may be ahead in revenue terms because your firm is larger than suggested in the examples. However, if you are still capturing only 3 percent to 5 percent of the opportunity, the steps in front of you are really those described in Stages 3 and 4 on page 21.

Step 2: Assess your current performance against metrics:

• Client profile (wealth and age demographics, source of income, location, occupations, etc.).

• Client revenue (number of services per client, revenue per client, estimated wallet share, etc.).

• Gross margin.

• Advisor capacity.

Take one step at a time in order to control the complex structure. If you are lagging behind the financial metrics for your stage of development, consider what changes are necessary to bring the economics back to “normal.”

The concept of an optimal model evokes in many CEOs and managing partners the notion of a utopia that will never be achieved. However, the client service, operational and organizational models presented in this paper define a continuum of practical solutions that describe an optimal state for every stage of the business. In an almost Pareto fashion, there is an optimal model for every stage of the evolution of the business that combines high-quality client solutions with internal profitability. The practical issue is not whether those models are attainable; instead, the question is whether the path to an optimal model will be to:

• Achieve optimal profitability by growing into better economics (i.e., use the top line to fix the bottom line).

• Invest first to achieve growth over time.

• Stop growth to improve profitability.


Client Service to Profitability Correlation

PROFIT PER OWNER

BREA

DTH

& D

EPTH

OF

CLIE

NT

SERv

ICES

Broker/Agent

Basic Advice

Planner/Strategist

Wealth Manager

2. Evolution of the Practice

1. Restore to Optimal

Current Status

By utilizing the original concept of the evolution from a broker/agent to a wealth manager, it becomes clear most CPA advisory practices suffer from two main problems:

1. They are not attracting enough clients because they have not defined a compelling value Proposition for clients. Therefore, profitability is either poor or, if there are profits, their impact on the firm is marginal.

2. They have created a compelling value Proposition to clients but they have not effectively captured the opportunity; thus, their economics are poor. They need to attract more clients and revenue.

The first step is to revitalize the practice to more closely reflect the optimal model for that stage. CPA firms first need to improve their client value Proposition, then continue to evolve along the optimal line. Alternatively, if the client value is already high, fix the profitability before growing further.

To help you develop an evaluation framework of where you are relative to the optimal line, there is a simple test you can use to gauge your firm’s client perspective “score” and determine an appropriate plan of action.


Client Perspective Diagnostic Test

Metric for Last 12 Months Your Metric Score

Number of Clients ___________________Less than 100 clients = 0 points 100 – 300 clients = 5 points More than 300 clients = 10 points

Growth in Revenue ___________________Less than 10% = 0 points 10% to 20% = 5 points More than 20% = 10 points

Percent of CPA Clients Who Receive at Least One Advisory Service

___________________Less than 5% = (-5) points 5% to 10% = 5 points More than 10% = 10 points

Client Breakdown Percent

By AUM Less than $250,000 %_____ $250,000 - $500,000 %_____ $500,000 - $1,000,000 %_____ More than $5,000,000 %_____

These scores are cumulative. More than 30% of clients less than $250,000 = (-5) points

More than 50% of clients less than $250,000 = (-10) points

More than 40% of clients more than $500,000 = 5 points

More than 60% of clients more than $500,000 = 10 points

Percent of Clients Who Receive Service

Investment advisory %_____ Brokerage account %_____ Financial plan %_____ Life insurance policy %_____ Retirement plan %_____ Long-term care policy %_____ Other plans (education) %_____ Other (non-tax) %_____

Total sum is less than 150% = (-5) points

Total sum is between 150% and 200% = 5 points

Total sum is more than 200% = 10 points

Percent of Clients by Contact Frequency (Non-Tax Related)

Quarterly (scheduled) %_____ Twice a year (scheduled) %_____ Yearly (scheduled) %_____ Unscheduled more than once a year %_____ Unscheduled once a year %_____ More than a year ago %_____

These scores are cumulative. More than 20% of clients met more than one year ago = (-10)

More than 50% of clients with unscheduled contact = (-5)

More than 70% of clients with scheduled contact = 5

More than 80% scheduled = 10

New Business Sources as Percent of All New Business

New asset fees or brokerage commissions from existing clients %_____ Other new services to existing clients %_____ New CPA clients %_____ New external clients %_____

These scores are cumulative. Less than 30% of new revenue is from existing clients = (-5)

Less than 10% of new revenue is from new services = (-5)

Less than 50% of new revenue is from CPA clients = (-5)

Your Score Your Percentage Score (see the maximum)

Maximum Score 60 points


The purpose of this diagnostic test is to raise your awareness of the metrics you can use to measure your success with clients in your marketing efforts. The test draws your attention to the fundamental premises for the success of the client service model and strategic marketing for your firm. Most of all it:

• Captures the client opportunity within the CPA client base.

• Defines target clients and focus on them. Even if revenue is profitable in the short term, serving the wrong clients will detract from, not enhance, your ability to build an optimal practice.

• Broadens each client relationship to create a holistic wealth management practice.

While hardly scientific, your score may help you identify the key issues you face to implement a growth strategy:

• Less than 50 percent: Your score indicates you need to focus your immediate efforts on re-establishing the advisory service strategy, defining the compelling proposition to clients and perhaps resolving any quality issues or perception of quality problems. You are not going to be in a good position to grow revenue unless you address these issues first. You probably were deficient in the questions about client assets, client meeting frequency and new business sources. Perhaps you also received low scores in other areas. Such a score will be characteristic of a relatively new practice and should not be discouraging. Instead, you should focus on doing the following:

» Make a greater impact on the CPA client base. You need to identify and focus your efforts on those partners who are the early adopter(s) in the CPA firm and pursue stronger and better relationships with them. Communicate clearly the overall strategy of the CPA firm and the role of advisory services within that strategy. If the advisory services have been part of the CPA firm for more than two years, you need to evaluate and review the commitment of the firm partners to advisory services.

» Ask CPA partners how clear and compelling the business proposition for advisory services is and what you can do to improve that clarity.

» Review the table on page 14 and consider what processes you can adopt.

• 50 to 75 percent: Your score indicates that you have a well-established practice that is attracting clients and successfully growing. Your focus likely needs to shift to increasing the depth of services and further integrating the wealth management practice with the CPA firm.

» Which services can you add and how? Review the table on page 15 and consider how you can implement some of the concepts discussed.

» Resource partnerships will give you immediate and credible access to an expanded array of client solutions. Review the “Building the Capacity” discussion starting on page 10.

• More than 75 percent: You are very successful in capturing the opportunity, and your focus should be on growth, expansion and the organizational structures that can support the growth. Focus on the “Organizational Structure” discussion starting on page 18 for the definition of roles and responsibilities.

Having reviewed the client perspective, firms also need to consider the profitability perspective. The table on the following page may help you evaluate your financial position and the steps that can be taken to address it.


Profitability Perspective Diagnostic Test

Metric for Last 12 Months

Your Metric Score Explanation

Gross Profit Margin (Revenue Less Professional Compensation as

Percent of Revenue)

________________

Less than 35% = 0 points 35% – 50% = 5 points More than 50% = 10 points

Typical causes are: Low productivity

Poor pricing Poor mix of products and services Poor leverage Overpaying advisors Overpaying the referral source

Operating Profit Margin

________________Less than 10% = 0 points 10% to 20% = 5 points More than 20% = 10 points

Review the analysis of gross margins and overhead

Overhead Percent ________________

Less than 40% = (-5) points 40% to 50% = 5 points More than 50% = 10 points

• Too much administrative staff where professional staff is needed

• Inefficiencies in the back office

• Poor cost control

• Not enough critical mass to support this business model

• Unfocussed marketing expenses

Revenue per Professional

________________

Less than $250,000 = (-5) points $250,000 to $400,000 = 5 points More than $400,000 = 10 points

• Some professionals may be unproductive

• Overstaffed with professional employees

• Not enough people doing business development

• Clients do not have enough assets to support this level of service

• Pricing

Revenue per Staff________________


• Hiring too many employees

• Hiring administrative staff rather than professional staff


Clients per Professional

________________

Less than 50 = (-5) points 50 to 80 = 10 points (no points if revenue per client is less than $3,000) More than 80 = 5 points

• Some professionals may be unproductive

• Overstaffed with professional employees

• Not enough people doing business development


Revenue per Client ________________


• Poor client selection

• Not differentiated enough

• Not enough services

• May also be impacted by the location (e.g., rural)

Your Score Your Percentage Score (see the maximum)

Maximum Score 70 points


The purpose of this diagnostic test is to raise your awareness of the metrics you can use to measure your firm’s overall profitability and steps you can take to improve it. By itself, revenue growth rarely produces a profitable and valuable wealth management practice. Instead, CPA firms often create an appealing service model that suffers from poorly defined economics. This failure is due either to poorly defined compensation, low pricing or investment in resources that do not have the critical mass to be profitably deployed.

• Less than 50 percent: Your score indicates a practice that is either in the early stages of its development or one that struggles to define its economic model. Typically, that indicates either:

» A significant investment was made into creating a full-blown internal subsidiary that is not yet finding enough clients to justify its high cost.

» A practice that struggles from the client perspective. (In both cases, you should review the client services discussion on page 15).

• 50 to 75 percent: You are successful in achieving good profitability, and chances are you have a good client perspective score. The challenge now is to create leverage and to add capacity. Review the team concept model on page 12 and financial statements on page 25.

• More than 75 percent: If this score combines with a high client perspective score, your only question is how to grow while maintaining the same level of financial and client success. The evolution model presented in the “Optimal Ensemble Practice” section, beginning on page 13, should be helpful in defining the structures for which you are striving.

Ultimately, the discussion in this paper should present you with a clear decision tree and an evolutionary plan for the next few years as presented on the final chart.

To come full circle, Carnegie said that wealth is created by invention, by identifying opportunities and addressing needs. By addressing the needs of clients and identifying opportunities, CPAs can create wealth—wealth for their clients and wealth for their firms. Most importantly, wealth is created by innovation. This paper offers not only the necessary blueprints, but should also stir your passion to innovate, to inspire and to create a more successful wealth management practice.


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Diagnosis and Realignment

Low Profitability and High Client

Score

Low Profitability and Low Client

Score

High Profit and Low Client Score

Form a strategic partnership/joint

venture.(See pages 11

and 18.)

Develop internal capacity and

capabilities for advisory work.(See page 26.)

Institutionalize the role of wealth

management in the strategy of the firm.

(See page 6.)

Continue growth through marketing to external (non-CPA) clients. Create geographic presence in

multiple offices (if applicable). Consider the formation of specialized departments within wealth management.

Create internal capabilities and team

delivery structure. (See page 18 or 26.)

Leverage the resources of your strategic partners

(e.g., broker/dealer). (See page 11.)

You are delivering high value to clients but either the

pricing of services or the

internal infrastructure prevents you

from capitalizing on the value you

deliver. (See pages 18 or 26.)

This is unfortunately the situation in many firms. The lack of

integration between

traditional and advisory services does not create

sufficient opportunity.

Often, internal economic decisions

(compensation and overhead) exacerbate the

problem. (See pages 18 and 22, or 26 and 27.)

This is a rare situation for firms. The danger here is

that despite the economic success,

the advisory services are not growing and not integral to the


Thus potentially, profitability may

be lost.(See pages 10

and 15.)

Firm GrowthCapacity

Resource Decisions

Lifestyle Decision

Depth of Services

MaturityGrowth Momentum

Multi-Partner Firm

Remain Solo

Improve quality of client base.

Leverage the capabilities of your broker/dealer and

other strategic partners.

Year 1 Year 2 Year 3

Develop and implement a plan for restoring optimal client service and internal economics.

Wealth Management Services Growth Timeline


Diagnosis and Realignment

Low Profitability and High Client

Score

Low Profitability and Low Client

Score

High Profit and Low Client Score

Form a strategic partnership/joint

venture.(See pages 11

and 18.)

Develop internal capacity and

capabilities for advisory work.(See page 26.)

Institutionalize the role of wealth

management in the strategy of the firm.

(See page 6.)

Continue growth through marketing to external (non-CPA) clients. Create geographic presence in

multiple offices (if applicable). Consider the formation of specialized departments within wealth management.

Create internal capabilities and team

delivery structure. (See page 18 or 26.)

Leverage the resources of your strategic partners

(e.g., broker/dealer). (See page 11.)

You are delivering high value to clients but either the

pricing of services or the

internal infrastructure prevents you

from capitalizing on the value you

deliver. (See pages 18 or 26.)

This is unfortunately the situation in many firms. The lack of

integration between

traditional and advisory services does not create

sufficient opportunity.

Often, internal economic decisions

(compensation and overhead) exacerbate the

problem. (See pages 18 and 22, or 26 and 27.)

This is a rare situation for firms. The danger here is

that despite the economic success,

the advisory services are not growing and not integral to the


Thus potentially, profitability may

be lost.(See pages 10

and 15.)

Firm GrowthCapacity

Resource Decisions

Lifestyle Decision

Depth of Services

MaturityGrowth Momentum

Multi-Partner Firm

Remain Solo

Improve quality of client base.

Leverage the capabilities of your broker/dealer and

other strategic partners.

Year 1 Year 2 Year 3

Develop and implement a plan for restoring optimal client service and internal economics.

Originally Prepared by:MOSS ADAMS LLP999 Third Avenue, Suite 2800Seattle, Washington 98104-4019Tel (206) 302-6500Fax (206) 652-2098

Originally Created: May 2005Updated and Modified by 1st Global: November 2011

©2011 1st Global

Securities offered through 1st Global Capital Corp., Member FINRA, SIPC Investment advisory services offered through 1st Global Advisors, Inc.

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