When looking at the world’s providers of financial advice, CPAs and accountants have a distinct advantage — should they choose to use it. Accountants are typically detailed, rigorous, ethical, systems-oriented and good with technology. These are all attributes that root the profession, and provide the opportunity to completely distinguish us from the rest of the financial services world. So, I ask, why do so many accounting firm wealth management offerings look so much like what the rest of the world is doing?
The question is a serious one, albeit easily interpreted to be rhetorical. I think that the best way to illustrate for you the clear distinctions that we possess is by exposing some of the common flaws I see in large non-CPA firm financial planning offerings, so you can evaluate where your firm stands with regard to these flawed offerings.
First is pricing. I see the larger firms have almost exclusively moved to an assets-under-management model versus a commission-driven compensation system. This is a good thing for most consumers, but only if that recurring fee delivers exceptional value. Managing money alone is not exceptional value unless your manager is the one in a million who always outperforms. I’ve been looking for that superstar my whole life and haven’t found one yet. Exceptional value is found beyond the asset management services from tax planning, detailed risk management analysis or family office services … none of which most large firms are willing or capable to do.
Beyond the AUM fee, I frequently see some commission-based activity that also seems a little out of whack to me. Just today we were chatting with a new family office client about their investment accounts at a very large, well-known international bank and investment management firm. In addition to their portfolio of stocks and bonds, the client also had two good-sized 529 accounts for their minor children. I applaud the fact that these accounts exist, but did the advisor/brokers really have to put them into A shares with a full upfront commission and annual trials for an account with an allocation that can only be changed once per year? Mind you, this client pays over six figures per year in AUM fees, and the broker had to ding them for an upfront commission on their children’s education accounts? I know firsthand that the 529 firm they chose in particular has a no-upfront-load, institutional-low-expense share class. That’s what I use for myself and my clients, and think that most accountants can take a similar approach to add value and reduce client costs.
In bull or bear markets, there are always positions that do not show a profit. In the past two years, I have not seen one new client from a large Wall Street firm where loss harvesting was a regular part of their protocol or annual services. None of us want losing investments, but if you are an investor, you know that even in the best years there are certain positions that simply go down in value. I believe that not reviewing a portfolio for loss harvesting possibilities on a regular basis is subpar service.
Especially with the recent calamities in Russia causing the markets to drop severely, opportunities exist, probably today, to do what the others are not doing. Any holding where a manager has very strong conviction to hold may not be a candidate due to the wash sale rules should you want to own it inside of 30 days of selling it. But others, where the manager is not so convicted or where a suitable replacement may work similarly, may be different and make things happen.
What’s in a name?
Core to the less desirable offerings from many large firms is their use of titles for their advisors and their language. I’ve seen many advisors from these firms call themselves financial planners or a family office. When you are a part of a large firm, you need your large firm’s approval of any title that you choose to give yourself. Why would that large firm allow the use of the term “financial planner” when the advisor does not deliver financial planning?
The definition of financial planning is pretty clear if you go to the Certified Financial Planner Board’s website. Clearly these large firms do not do all of the steps required nor do they cover all of the subject matter suggested to prepare a comprehensive financial plan. They may handle certain elements of a financial plan, but they are not financial planners. They are using language and words that may deceive the client into thinking they are getting financial planning when all they may be getting is asset management and a forecast as to whether they can retire comfortably (or not).
Income tax planning is clearly one of the important subject matters to be included in a financial plan. Did you ever notice the disclosure at the bottom of most statements? Without quoting all of the firm’s disclosures, they basically say, “We do not offer tax advice and you need to visit with a qualified tax professional to help you with that.” Sure, I get it that most cases with some meat on the bones will need guidance from a qualified tax nerd (chill out, guys — that is a term of endearment in my book) to really evaluate the possibilities. And there, my CPA friends, is one of your biggest advantages! Not only can you give tax advice, but in this world if you don’t give tax advice you’re not going to be able to hold onto your best clients. Make sure the world knows this advantage.
The world of alternative investments is another where the services of the large firm pales compared to an accounting firm with a solid high-net-worth offering. If your client brings a deal or an investment opportunity to their large-firm advisor, that large-firm advisor is required to say that they cannot give advice with respect to that matter unless it is a product offered by their large firm.
This is something that the client doesn’t figure out until confronted with the situation. We recently had a situation where a large firm promised that they could help with that until the client actually brought them something to review … then they had to tuck their tail between their legs and fess up that they couldn’t help. The advisors, outside of a brief moment of embarrassment for their previous embellishment, didn’t really care because they already had the $25 million in AUM and were getting paid handsomely.
Most clients over a certain size already own alternative investments, whether it be their operating business, real estate, loans or private investments with friends and family. This is core to how many entrepreneurial Americans have built their net worth. Suggesting to a client that they shouldn’t do that or that you can’t help them with it is a deal-killer in my eyes.
If you care about my opinion, I feel that the majority of a client’s core portfolio should be invested in fairly liquid, traditional investments. I’ll define “core” as the portfolio designed to provide their lifestyle needs. But beyond the core, or even for a slice of the core, good alternatives are welcomed by most who have the net worth and time horizon to benefit from them.
The large firms’ definition of alternative investments is often products that they manufacture or sell. In my experience, you may find suitable alternatives from the large firm, but many are overloaded with fees so that the returns for investors are highly diluted. I’ve owned six in my lifetime, and only one worked out as touted. The rest lingered longer than expected with returns less robust than anticipated. A CPA financial planning firm can offer advice with respect to alternatives. If you cannot, reevaluate your licensing arrangements and firm affiliations and look to free yourself up to deliver what your HNW clients want.
From my perspective, the only times a large financial firm can help a client to buy or sell a business is when it is big enough for their M&A department. That then rules out almost all of your closely held business clients. When it comes to small and mid-market M&A consulting, there is a big void in the marketplace. Preparing a client for the exit from their business may take years. There may be issues from balance sheet cleanup to noncompete and nonsolicitation agreements from key employees, to stock grants, 83b elections, leases and many other matters that need guidance. I’ve seen over the years that helping a client with an exit plan and preparing them for the onslaught of due diligence that a buyer will require are critical and invaluable … and something that a large firm simply does not allow their advisors to offer.
The last area I’ll pick on with the large firms are their services for risk management, another of the core subject matters required to be analyzed in the financial planning process. They’ll tell you that they can sell life insurance, disability insurance, long-term-care insurance and annuities … and I say, “Big deal.” That’s only half or even less than half of the real work needed to do a thorough risk assessment for your clients. Will they go deep on examining existing holdings such as complicated permanent life insurance products? Do they know enough to ask the right questions about the assumptions you need to evaluate an in-force illustration? Not likely.
What about your clients’ umbrella liability, auto and homeowners policies? What about an exhaustive review of the ownership structure for some of their more valuable assets such as businesses, rental real estate or partnership activities? I don’t believe I’ve ever seen advice from a large Wall Street firm encouraging a client to buff up their LLC or family partnership agreements to tighten the protections or to enhance their asset protection strategy. In fact, it is unlikely that you’ll even get them to read it — if their boss would even allow them to do so.
I hope you can now see that your success and the satisfaction of your clients is completely within your control. Instead of doing things the way other firms do, take a fresh look and be a service provider leader, not a follower.