CPAs Guide to Building a Successful Wealth Management Practice

CPAs and Wealth Management
The Critical Path to the Optimal Financial Services Firm
Updated and Modified: November 2011

©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

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

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.

The exact definition of wealth management has been
elusive in the industry. Wealth management does
Wealth management is characterized by: not refer to a service or product, but a method for
delivering a suite of services and a philosophy for
• A business model built around target managing client relationships. Wealth management
clients’ needs addresses all areas of a client’s financial life in a
customized way, without emphasis on specific products
• A comprehensive service approach and implementation vehicles. The process is one of
advice, customized solutions, implementation and
• An emphasis on advice, not product
regular review.
• Sophistication of solutions
The unique relationship between the CPA and the
• Independence and objectivity client offers a perfect foundation on which to build
comprehensive financial services. Therefore, the joining
• The benefit of planning
of CPA services and financial advice has an inherent
• The ability to deal with complex issues competitive advantage in the industry. However, many
CPAs have struggled to implement a true wealth
• A proactive approach to client solutions management model within their firms. Most firms fall
somewhere between serving as a basic product provider
and acting as a true wealth manager.


Wealth management The evolution begins with the model most firms adopt in the early
days of their financial advisory effort, the “broker/agent” service
does not refer to model. As the practice evolves, the increasing sophistication of
the professional(s) and the increasing depth of client relationships
a service or product, drive the practice to its ultimate destination of wealth manager.
The evolution to wealth management for a firm can be measured
but a method for delivering in the following ways:

a suite of services and • Depth and Breadth of Client Solutions: An increased level
of technical competency and expertise
a philosophy for managing
• Client Engagement Process: A more sophisticated system
client relationships. for engaging clients and explaining opportunities
• Structure of the Practice: The sufficient capacity and capabilities
through staffing and/or resource partnerships
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/Strategist
Emphasizes planning and
strategies to meet goals.
Uses the client relationship to
explore multiple opportunities.
Better competence, but
limited capacity.

Wealth Manager
Integrates 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 • Investment planning
• Retirement planning • Insurance planning
• Income protection and • Estate planning
asset preservation • Education planning
• Business planning • Special situations
• Debt management

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
The fundamental premise threat to the success of those CPA firms in the business. A 2007
study conducted by the American Institute of Certified Public
must be to provide the Accountants (AICPA) and Moss Adams found the most critical challenge
facing CPA firms is the lack of awareness among clients that financial
client with qualified experts, planning/advisory capabilities exist within the firm. In addition, the
Journal of Accountancy interviewed 1,500 affluent clients of CPA firms
whether the advisor and found that “lack of expertise” is the leading correctible reason for
lost wealth management opportunities. In the survey, 61 percent of
provides that expertise clients who did not use their CPA as a financial advisor said they did
directly or draws from an 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
external source. 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 Three Client Dimensions
Basically, a client’s decision process to work with a particular
firm is tied to the following three dimensions:
zation
1. The service and its convenience

price
speciali
2. The price &
3. The ability to handle specialized and complex issues xity

Specialization is the most commonly overlooked element comple
that contributes to a client’s decision to choose an advisor.
service & convenience
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.

Clients want to work with The complexity and specialization dimension becomes increasingly critical
as the size of the client’s wealth increases. Before dismissing the wealthiest
advisors who have expertise in clients as perhaps being too demanding, consider the following statistics.
According to a 2011 report by the Economic Policy Institute, the top 20
their specific areas of need and 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.
who have experience working Reviewing the table below, it becomes clear that if assets define the
revenue opportunity for wealth management, then the focus really must
with complex financial situations. 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


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.

Client Service to Profitability Correlation
breadth & depth of client services

Wealth
Manager

Planner/
Strategist
Basic
Advice
Broker/Agent

profit per owner

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


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.” Client
The Role of the Advisor

As firms develop areas of expertise (whether Relationship Manager/Primary Advisor
internally or through resource partnerships), the • Develops and maintains the client relationship.
role of the primary advisor evolves. The concept • Identifies and prioritizes client needs.
of the relationship manager becomes a critical • Has primary responsibility for client work.
function of the advisor’s role. The primary advisor • Involves other experts to serve specialized needs.
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
Insurance Specialist Estate Planning Expert
the appropriate experts. Art Husami of Husami &
Associates in California has a strong philosophy about
Business Planning Expert Retirement Plan Specialist
leveraging specialists in his practice. He emphasized


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 Awareness and Active Results and Complete
Planning Education Business Accountability Integration
Ensure partner Focus on increasing Increase advisor Highly involve advisors Clients fully
acceptance and partner knowledge and involvement in in client meetings with understand and expect
commitment to the education. client meetings with partners. the multiple service
wealth management partners. specialties.
practice. Begin client awareness Formalize goals and
through general Expect 50 percent expectations for Professional career
Define strategy and marketing and targeted of partners to make partner referrals. goals and path reflect
business philosophy. marketing. wealth management wealth management.
referrals. Create commonly
Identify and engage Include introduction to understood Financial success
dedicated financial wealth management in Add wealth expectations for and strong client
advisor. new client meetings. management questions the roles and relationships create
to tax interview forms. responsibilities of all transferability of the
Establish financial Begin making professionals. practice.
budgets and introductions through Establish system
expectations. “early adopter” to track client data
partners. related to uncovering
Gain understanding wealth management
of clients’ needs and Establish credibility of opportunities.
develop strategy for advisors in the firm.
building expertise.

Create incentive
system for all members
of the firm to uncover
opportunities.*
* 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
Increased Sophistication in Increased Knowledge of
The Foundation Increased Specialization
Financial Planning Investment Options
Investment advice. Financial planning. Deeper application of Increased complexity of
investment planning client issues.
Turnkey investment solutions Tax planning. solutions, tax-advantaged
utilizing asset allocation and and alternative investments. Comprehensive service
managed account strategies. offering.
Meaningful integration of tax
Insurance capability through advice and financial planning. Advanced areas of expertise,
outsourcing. 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: Importance:
• Has an established • Provides value-added
relationship with client. client service.
• Is recognized as credible. • Responds to client
• Has knowledge of client. needs.
• Deepens firm’s
Constraints: relationship with client.
• Compliance-driven
relationship. Constraints:
• Limited service • Needs CPA for access
opportunities; unless to client.
client is a business • Needs firm structure to
owner, the relationship properly capitalize on
has narrow scope. 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 • Business development
• Organizational structure • Financial performance


CPAs need to know: CPAs may want to know: CPAs do not need to know:
• Client feedback and complaints. • Copies of performance reports. • Details of implementation.
• Significant events. • Significant changes in account
• New services provided to client. positions or vendors.
• Potential tax or business issues.

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 Liason Executive
CPA Firm Committee/Board
of Directors

Wealth
Management CEO

Advisor Advisor Advisor Advisor

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
CPA Partners relationships. For that reason, the CPA firm partners are
tasked with recognizing new business opportunities. As Skip
• Expectations should be established for Briggs explained, “The CPA partners have responsibility for
making qualified referrals. identifying new wealth management opportunities within
their client base. The advisor’s role is first to assist the partner
• Accountability should be enforced to in securing the business, then to service those clients and to
achieve those referral expectations. further cultivate the financial services relationship.”

• Compensation should not only reward Alternatively, many firms have found it most effective to place
for achieving referral goals, but should the business development responsibility on the shoulders of
penalize if expectations are not met. the advisors. The dynamics and structure of the firm influence
how this responsibility should be divided, although certain
• Securities licensing is required for guidelines have generally proven effective as shown to the left.
incentives.
Designating the respective roles of all professionals in the
development of new business is step one; the next step
Advisors is establishing goals for growth. Many firms experience
frustration due to unrealistic expectations for effectively
• Expectations should include developing penetrating the client base and preconceived notions of
relationships with CPA partners. rapid growth. Firms must establish expectations for the
volume of referrals by the CPAs and for the realization of
• Accountability should be enforced business by the advisors, recognizing the desired rate of
for securing business with qualified growth over a specified period of time may not be realistic.
In a 2007 AICPA/Moss Adams Personal Financial Planning
referrals.
Practice Study, firms who set goals for growth and business
• Compensation should be tied to the development were far more successful than firms who did
generation of new business. 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:


Example Business Development Goals

Start Stage 1 Stage 2 Stage 3 Stage 4
Consider an • ctively contact
A Establish 120- At this stage, At this stage,
example firm with 100-150 clients. 150 total wealth the firm should the firm should
3,000 individual management have wealth have wealth
Client clients. • arket to all
M clients. management management
Opportunity clients. relationships relationships
with more than with 25 percent
• stablish 50
E 20 percent of the or more of the
new wealth qualified client qualified client
management opportunities. opportunities.
clients.
Qualified Typically, 80 percent of the clients will be qualified prospects for wealth management, and as many as
Opportunity 30 percent can be converted successfully.

Target Number
of Clients 50 150 250 300+
(Based on 3,000
CPA Clients)
Target Revenue
$1,600 $2,200 $3,000 $5,000
per Client

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 Revenue Growth Through the Four Stages
of the client relationships should also expand.
$2,000,000
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 $1,500,000
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 $1,000,000
ultimately target $5,000 in revenue per client
relationship. The progress can be seen on the
graph to the right. $500,000

The combined penetration into the client
opportunity and the increase in revenue per client
as a result of more comprehensive services should $0
ultimately result in an exponential growth in Stage 1 Stage 2 Stage 3 Stage 4
revenues. Under these assumptions, a firm with Based on a practice with five partners and 3,000 clients
3,000 clients should be able to reach $1,500,000 in For illustrative purposes only. The results of your firm’s financial
gross revenue in Stage 4. 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 720 770 824 882
Management
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 $16,000 $49,500 $90,000 $150,000
Retention
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 Advisors 1 2 3 4
# of Support and Administrative 1.0 1.0 1.5 2.0
Staff
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).


CPAs Guide to Building a Successful Wealth Management Practice

CPAs Guide to Building a Successful Wealth Management Practice

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