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Practice Management

Finding it hard to form an effective alliance with a local CPA firm? Here’s some new information that should help.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).

How many CPAs do you know? More important, how many are you working with to develop your practice? If the answer is “none,” it’s time to make alliances with CPAs a key part of your business-building efforts.

Here’s why: Almost 82% of wealth managers have told CEG Worldwide that referrals from other professionals, such as CPAs, are a very important source of new clients. What’s more, referrals from other professionals are a key driver of these wealth managers’ success. The same percentage of wealth managers (almost 82%) told us their five best new clients were the result of referrals from other professionals—almost five times the number whose top new clients came through the second-best method, client referrals.

Advisors often find it challenging to form effective alliances with CPAs. One reason is that advisors often don’t know what CPAs really need and want. With that in mind, here’s a look at some key findings of a 2010 study that CEG Worldwide conducted with 205 CPAs across the country who have been providing investment advice and/or insurance planning for a fee and/or commission for at least five years.

The conventional wisdom is that CPAs often distrust financial advisors and don’t want to work with them. However, two of our key findings about how CPAs structure the investment side of their businesses shed some new light on the opportunity you have to form strong alliances with them.
Working Together Works
A sizable majority of firms in our study group—over 65%—take a collaborative approach, in which they provide financial services and products through strategic arrangements with financial services providers outside of their firms. The last time we surveyed CPAs in 2004, we found that few of them were working in a collaborative manner with outside advisors.

When we examined the revenues of the CPAs, we found that collaborative firms of every size earned more from financial services than those CPAs who offered investments exclusively in-house. The difference was especially pronounced among very large collaborative firms, which on average earned more than twice as much as the very large internally based firms.

These collaborative firms’ willingness to turn to outside professionals is most likely a response to market factors such as the increasing complexity of financial products and greater client challenges due to market volatility. We discovered important clues about what makes the collaborative firms more successful.

For example, when asked about the key success factors for their financial services practices, more than nine out of 10 collaborative firms cited committing resources to their practices, compared with slightly less than eight out of 10 of the internal firms. While this difference is not huge, it nonetheless signals a greater willingness among more collaborative firms to do what is necessary to make the financial services practice a success.

Another difference: Collaborative firms are more likely to leverage their current accounting clients and other contacts to identify prospects for the financial services side of the business. These firms understand that the accounting practice can be a fertile source of new business for the financial services business and that partners are the key to harvesting this business.

Collaborative firms are also more likely to cite three other success factors: being able to access financial services professionals on a case-by-case basis, creating strategic alliances with experts in life insurance and creating strategic alliances with experts in investments. All three of these factors reflect a common theme: Collaborative firms will look beyond their own offices for the expertise their clients require.
CPAs Are Wealth Managers
The second key finding is that approximately two-thirds of the CPAs that CEG Worldwide surveyed are wealth managers. This means that they take a consultative approach—focusing on establishing and fostering close, long-term relationships with their clients and their clients’ other professional advisors—instead of the more common transaction-based, “investment generalist” approach used by the vast majority of advisors today.

Our studies of financial advisor have found that only small minorities are wealth managers. Our study of more than 2,000 leading financial advisors found that just 6.6% use a true wealth management model. On the other hand, because of the nature of their tax work, many CPAs tend to take a long-term, consultative approach with their clients. They are wealth managers, even if they don’t call themselves wealth managers.

Wealth management is a good fit for these CPAs: Firms that offer wealth management services and do so collaboratively with outside advisors enjoy the greatest success—earning an average of more than $1 million in gross revenues from financial services and products. In sharp contrast, investment generalist CPA firms that offer financial services exclusively in-house earn just $427,062 on average.
Three Dissimilarities
There are several key differences in the practice management styles of wealth manager CPAs versus their transaction-focused peers that account for at least some of their higher average revenues. First, wealth manager CPAs are much more likely to be selective about new clients, choosing to work only with those who are more affluent.

Seven out of 10 wealth manager CPAs require a minimum asset size for new financial services clients, compared with just over half of the investment generalist CPAs. Likewise, wealth managers are more likely to require a minimum fee—47.8% compared with 32.8% of the investment generalists.

Second, the data tells us that CPA wealth managers tend to be more deliberate than investment generalists about the futures of their financial services practices. For example, two-thirds of wealth manager CPAs have created formal business plans for their financial services practices, while just 41.8% of investment generalist CPAs have such a plan in place. Likewise, just over half of wealth managers have formal marketing plans, compared with 34.3% of investment generalists. There is a clear connection between an investment in time and effort to create business and marketing plans, and increased revenues for financial services practices.

Third, our study shows that CPA wealth managers make approximately 50% more personal contact with top clients—through face-to-face meetings, phone calls, letters or emails—than do investment generalists. We found that, on average, wealth managers had 14.9 such contacts per year with each of their top 20 clients, while investment generalists had 10 contacts.

As we discovered previously, there is a high correlation between increased client contact and greater client loyalty. This loyalty makes clients more inclined to provide additional assets to manage, to offer referrals for qualified prospects and to remain with the financial professional through market downturns—all of which can help boost financial services revenues.

There are some important conclusions that advisors can take away from these findings. First, you should have confidence in your ability to form a strategic alliance with a CPA, given that so many of them want to work in a collaborative manner with outside advisors to offer financial services.

In addition, your efforts to form strategic alliances should be focused on those successful CPAs who are both collaborative in nature and take a consultative wealth management approach. You don’t need many alliances with average CPA firms—you just need one alliance with one great CPA firm to help you build your business.

Finally, the best way for such firms to take you seriously and to increase your chances of successfully forming a mutually beneficial alliance is, of course, to adopt a true wealth management business model at your own firm. If you want to form an alliance with a top CPA, make it a point to become a top advisor yourself. If a great CPA sees that you are aligned with his or her way of thinking and working with clients, you’ll maximize your chances of forming a profitable alliance.

John J. Bowen Jr. is founder and CEO of CEG Worldwide, a global training, research and consulting firm dedicated to helping advisors become more successful. Download a free e-book that explains in detail how to build a strategic alliance with CPAs at http://webshare.cegworldwide.com/marketing/strategic_alliance/.



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