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.
Accounting Firms
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.
Financial Advisors
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.