Why are CPAs selling client referrals, and should you be buying?

    The whole question of whether CPAs are doing financial planning is a murky one. Some 3,000-plus members of the AICPA, or about 1% of its total membership, have gotten their Personal Financial Specialist (PFS) designation, which is the AICPA's version of the CFP designation. And these CPAs traverse the entire spectrum, from those who have sold their accounting practices and do nothing but financial planning to those who do little if any planning themselves, referring their clients to financial advisors to do the work.
    Why? It's not an easy thing to be a financial advisor, CPAs are learning. On the surface, financial planning seems to be a discipline similar to accounting, but they are perhaps more different than similar. Planning requires heavy duty relationship-building and analytical skills. Some CPAs have 'em; some don't. Suffice it to say that there's a steep learning curve, and it's not one that most CPAs want to climb, as evidenced by the demographics above.
    Helen Modly of Focus Financial Consultants in Middleburg, Va., has somewhat harsh but often-heard criticisms of the CPA/financial advisors whose work products she's examined. Says Modly, "I have yet to meet a CPA who didn't believe he was already providing financial planning services. We have a few local CPAs who will refer very complex cases to us without the expectation of compensation. But most do basic planning in-house. For example, I see 'retirement projections' from CPAs that are merely printouts from some basic financial projection program, creating a year-by-year accumulation model using linear return assumptions of 8% to 9% with no adjustment for expected volatility. [At this level of sophistication], you get a very rosy retirement scenario. I'm sure there are some CPAs who do a very thorough planning job, but most are no longer working in public accounting firms. My business partner is a CPA, and she agrees that most of them 'just don't get it' when it comes to a comprehensive financial planning engagement."
    Which would explain why it's easier for many CPAs to refer their clients to established financial advisors than to do the planning themselves. It's a little like understanding something about how a car runs but not wanting to actually work on it yourself. Interestingly, this practice raises more questions than might first come to mind. For those eager to buy or sell client referrals, the question is, "How do we do it?" For those who see a red flag when they hear of these arrangements, the question is, "Should we do it?" And for those who are first and foremost client-centered, the question is, "Is this good for the client?" This article will address the first question; look for a follow-up article next month that addresses the second and third questions.
    Tom Giachetti of the law firm of Stark & Stark in Lawrenceville, N.J., one of our industry's best-known securities attorneys, favors referral arrangements. "CPAs should be leveraging client relationships to get compensation they wouldn't otherwise receive. However, if they really want to be part of the planning process, they're required to create an infrastructure. It's better if a CPA finds one or two advisors he trusts, sends them clients and receives a referral fee in return, and of course, both the CPA and advisor fully disclose the arrangement to the client. The advisor could be paying the CPA 10% or 20% to as much as 40%, although the typical ongoing fee I see in these arrangements is 25 to 35 basis points," says Giachetti.
    Sounds simple, but many advisors say they've tried these arrangements and they don't work. One of them is Mark Briggs, owner of Briggs Wealth Management LLC in Glastonbury, Conn., who since 1999 has been trying to find CPA firms with which he can share one-third of the fees referred clients pay him. Yet he hasn't had great luck: "I was able to sign up two CPA firms. One has sent us four clients in two years; the other, just two clients." What's the problem? Theorizes Briggs, "I think most CPAs are too busy with day-to-day activities to leverage these relationships. They grab the low-hanging fruit. Of the four referrals we got from one of the firms, two were received simply because the CPAs sent out to their clients a notice about my services. In other words, the partners weren't really going out of their way to promote the service. I'm just not sure they can put out a consistent energy or effort to develop these relationships."
    Another advisor, who wishes to remain anonymous because his remarks concern his own CPA firm, attributes the problems in setting up these arrangements to most CPAs not understanding the financial planning process: "My experience with CPAs is they don't understand financial planning the way I do. They think I'm an investment manager, although we do much more than that." When this advisor approached his CPA firm about a referral arrangement, the partners indicated they would want an equity stake in his firm. Not taking readily to that idea, our advisor waited a while, only to find out the CPA firm had bought into another well-established planning firm in his town. He says, "This now troubles me because it's a competitor."
    But other advisors would say these problems aren't unusual and can be avoided. Ken Dodson, owner of King Dodson Armstrong Financial Advisors Inc. in Columbus, Ohio, has learned the ropes and says the lessons can work for other advisors. Of course, it probably doesn't hurt that Dodson is a CPA/PFS involved in his local CPA community for 20 years. Nevertheless, he's had to do the same thing he tells other financial advisors to do: "Plan to spend a lot of time up front talking to the CPA firm about how it's going to incorporate financial planning into its services. You must have a buy-in by the partners or lead accountants. That's the hardest part for the CPA firms... they may strike up a deal, but they may or may not buy into it."
    The easiest way to get CPAs to understand what you are going to do for their clients-and to get their buy-in-is to do planning and/or investment management with the CPA firm's partners. "They need to experience it firsthand," says Dodson. Bill Heichel with Pinnacle Wealth Planning Services Inc. in Mansfield, Ohio, agrees. "Getting CPA buy-in is always a tough situation. The best way to actually get them to do this is to have one of them do a financial plan with us so they can see it in operation. That usually makes a big difference."
    OK, let's say you've wowed the CPA partners with the plans you've done for them and they're now ready to roll. How do you structure the relationship? There are several critical pieces to it: the definition of the CPA's share of revenues you will derive from his client, an understanding of how long that share will continue, and a delineation of what the CPA will do over and above the referral, if anything, to earn his share. Dodson pays his CPA referral sources 25% of the fees he collects from their clients. "Not 25 basis points, but 25% of fees," he clarifies. Since Dodson provides comprehensive planning and investment management services-and even though he usually charges clients as a percent of assets managed-he believes that percentage of total fee is the right way to measure the CPA's share.
    Heichel splits it a bit more finely, depending upon the CPA's role. "My company, Pinnacle Wealth Planning Services Inc., works exclusively with CPAs in one of four ways: we get 'free' referrals from CPAs, as do many advisors; we enter into Solicitation Agreements with CPAs [whereby Pinnacle pays for referrals]; and we establish RIA Co-Advisor Agreements with either Pinnacle as the lead RIA, or the CPA firm as the lead advisor. The fee split is different depending on which way the CPA wants to work. Most of our arrangements are RIA Co-Advisor Agreements with Pinnacle as the lead RIA," explains Heichel. "From the CPA's perspective, we require a small time commitment, they sign off on the plan, and either we deliver it together to the client or my firm does it alone. The CPA holds the client's hand but does very little actual financial planning or investment work." For that, the CPA gets paid 40% of the fee and Heichel's firm keeps 60%.
    In most cases, these fees are paid indefinitely by advisors for whom this is a successful marketing strategy. That helps ensure the CPA will remain involved in the process.
    For planning as opposed to ongoing investment management, Heichel charges a flat $6,000 and keeps $4,500. The CPA is free to mark it up as he wishes. "Typically, the CPA will collect $1,500 on top of our $4,500, but they may charge more or less if they want to," adds Heichel.
    So, clients are coming in the door, you and the CPA are both getting paid ... what can go wrong? Plenty, says Dodson. "It's hard to make these relationships work, because a very high level of trust is needed between the firms that is sometimes never achieved. It doesn't take much to screw up a client relationship and thereby ruin the relationship you have with your CPAs."
    Clearly, a quick dip in this pond may not yield the intended results. Advisors with successful referral arrangements have explained their planning process to their CPA partners, perhaps prepared a plan for one or more of them, earned the partners' trust and worked closely with the CPAs to ensure client satisfaction and continued referrals. Just think of this endeavor as a new and different marketing program for your firm-one that must be done right or not at all.

David J. Drucker, MBA, CFP, a financial advisor since 1981, sold his practice 20 years later to write, speak and consult with other advisors. Please visit www.daviddrucker.com for more information.