Although relatively few have made the move, the ones who have
are committed and talented.
Over the past decade we've watched carefully as many
accountants have expanded their professional credentials to include
advice and financial products. And like traditional financial advisors,
those accountants realized that offering a broader platform of
capabilities strengthened their client relationships and created
additional opportunities for revenue. In effect, accountants have
become wealth managers.
But the transition from accountant to advisor to wealth manager has not been swift or painless. In fact, many accountants realized that offering products and services outside the scope of their core business could have a negative impact on an otherwise satisfactory accounting relationship. For example, an underperforming investment product can quickly cast a pall on a stable client base. And, many accounting firms that envisioned new sources of fee-based revenue were surprised by the complexity and intricacies of offering advice and investment products, finding themselves overrun with unexpected compliance and regulatory issues and the added burden of running a separate advisory company.
Despite the obstacles, accounting firms continue to express interest in offering a wealth management platform to their affluent clients, but we estimate that only 20% of U.S. firms have made the investment of time and capital to do so. The number of accountants truly operating as wealth managers is limited, but they are committed and talented and have the ability to impact the traditions that govern the accounting business, the advisory community and the established methods of distributing financial products through professional intermediaries.
Some of our recent empirical studies and consulting engagements have shed light on the challenges and opportunities that face accounting firms, advice practitioners and product providers as accountants continue the transformation into wealth managers. The balance of this article will further explore those issues for each of the impacted parties.
The principal benefit of adding a wealth management platform at accounting firms is the major boost in earnings per client. At one firm, the average increase in revenue for accounting clients who became wealth management clients was 31 times more over a three-year period. In practical terms, it means that clients initially generating $10,000 in accounting revenues over a 36-month span would generate an additional $310,000 in wealth management revenue. This is largely due to the established, high-quality relationships that accountants have with their clients. The reverse is also true-if the accounting firm offers compatible services, a wealth management approach can help produce new, meaningful accounting fees from services provided to trusts and businesses uncovered through the planning process.
At some accounting firms, a successful wealth management practice can be the lure for new accounting business. While only a portion of existing accounting clients become wealth management clients, the majority of wealth management clients become tax and accounting clients because there is a natural progression between the services. Another firm with whom we worked attracted 42 new clients for their wealth management business and, over time, 40 of them also became accounting clients.
On the flip side, the expenses associated with operating a wealth management business can be overwhelming. Most of the pro formas we've reviewed have inflated revenues and unrealistically low expenses, and do not account for the lengthy client acquisition cycle required to convert prospects to clients. In these circumstances, many firms have been unable to deliver against growth expectations. One workable approach is for firms to build their wealth management infrastructure incrementally, as it is needed, rather than all at once. Another tactic is to form less costly (and potentially less profitable) joint ventures with financial advisors to offer a complete range of services, allowing variable costs to substitute for high fixed costs.
And finally, as mentioned previously, there is still considerable apprehension among accountants that issues in the wealth management relationship will adversely impact the accounting business. Most firms are aware of the issue but have not identified a foolproof solution and are focused on managing client expectations and superior execution.
As noted above, some accounting firms have opted to partner with individual advisors or advisory firms to control costs while still accessing the desired financial expertise and products. When structured properly, these joint ventures can be highly profitable for both parties. It is important to address revenue sharing arrangements upfront. Some accountants want a portion of product-related revenues, and the financial incentive can be a terrific motivator. Others prefer not to share in product fees and commissions and, instead, receive indirect financial incentives such as marketing support and practice-development training.
We recently met with representatives from an accounting firm and a financial advisory firm that established, with equal ownership, a separate advisory company. The firms work together to profile existing accounting clients for wealth management opportunities, and the advisory firm delivers the holistic planning and appropriate products. At the current pace of growth, the average annual profit from the wealth management business is expected to surpass the profits from the tax and accounting business after just four years in operation.
The difficulties that advisors will face by partnering with, or competing against, accountants who offer wealth management are numerous. Accountants, who have long been an important conduit to high-net-worth clients, will no longer be an active source of new business referrals for advisors. Furthermore, accountants hoping to grow their business faster will often seek new prospects outside their client roster and compete directly against advisors or encroach on other referral sources, such as attorneys. An accounting firm we know cultivates its new wealthy clients from the practices of three law firms with whom they had long-standing working relationships. Today, almost 80% of qualified prospects are directed to the accounting firm for wealth management services, and the advisors who received the bulk of past business referrals must now compete for the remaining 20%.
Financial Product Providers
Accountants are considered an exceptional distribution outlet for financial products due to the size and loyalty of their customer base. And because accountants tend to work with fewer providers than their advisory counterparts once a relationship is established it can be lasting and lucrative. The conundrum, however, is the vast number of products and providers in categories like life insurance, portfolio management, credit, mutual funds, real estate, property and casualty insurance and hedge funds means there is very little distinction between them other than service and extras. Because service is an intangible, and heavily influenced by personal preferences, most product providers must focus on building a suite of ancillary capabilities to supplement their relationships with accounting firms.
These extras used to take the form of trips and entertainment, but regulatory changes and a more competitive business environment have prompted an interest in specialized business techniques. We've witnessed a variety of training programs launched over the past decade designed to help wealth managers with topics as disparate as time management, compliance and client psychology. The program in greatest demand today is a strain of business coaching targeting the key business development weaknesses of the practitioners. In particular, accountants operating as wealth managers need assistance mining their existing client base for new sales opportunities and attracting new, wealthy prospects and business owners. A superior program, while costly and time consuming to build, can help foster allegiance between a product distributor and a wealth manager.
Up The Down Staircase-
And Vice Versa
Although only a relatively small percentage of accountants are pursuing a wealth management platform, those who are have the ability to shift the balance of trade among their accounting peers, the ranks of U.S. advisors and the product sponsors and providers who work with them to service affluent clients. Suffice it to say that accountants offering wealth management can be double-edged swords-simultaneously delivering tremendous opportunities and thorny challenges (see table) to the firms and professionals they work with each and every day.
Hannah Shaw Grove is the author of five books on private wealth and advisory practice management. Russ Prince is president of the consulting firm Prince & Associates.