How much of a competitive threat are the CPAs in your neighborhood?

At first glance, the numbers are intimidating. The American Institute of Certified Public Accountants reports that almost 3,000 members have obtained the group's Personal Financial Specialist (PFS) credential since it was first offered in 1987. These accountants are in your territory offering a combination of tax planning and investment advice.

Irving, Texas-based H.D. Vest, which calls itself “the nation's largest provider of financial services delivered through tax professionals,” has a network of about 6,000 independent contractors in all 50 states. Most are CPAs with Series 6 or Series 7 licenses. They also have the vast resources of Vest's new owner, Wells Fargo, at their disposal.

But if you drill deeper into the PFS designation, you'll find that the overwhelming majority of these 3,000 professionals are offering just the basic elements of financial planning — hardly the array of sophisticated financial solutions a wirehouse broker delivers.

And H.D. Vest's numbers show the firm is barely making a dent in the retail market. Its 6,000 contractors control just $16 billion in assets held by 1.8 million clients, according to the firm. That translates into an average client account of less than $9,000.

“It's kind of like when banks started getting into the investment business. Everyone said they were going to take over the world,” says Jim Fult, president of the Financial Institutions Division at Raymond James Financial Services in St. Petersburg, Fla. “That hasn't happened.

“Very few CPAs are salespeople,” Fult adds. “They're technically proficient, but they typically do not have the personality of a financial adviser, skilled in building trust and developing relationships. Sure, some are natural-born rainmakers, but they're not a large portion of the profession.”

Brad Ptolemy is one of those rainmakers. A sole proprietor CPA in Los Angeles, Ptolemy manages money for about 20 of his 150 clients through H.D. Vest, bringing in an average $250,000 to $400,00 per account. Not too shabby. Still, despite his CFP and PFS designations, Ptolemy says he's no threat to successful wirehouse reps.

“Most of my clients are wealthy enough to have accounts with Smith Barney, Merrill Lynch or PaineWebber. I deal with those brokers every day,” Ptolemy says. “I'd feel like a dope if I ever started going after that business.”

Building Bridges

Most CPA firms are reluctant to add investment services because of the costs, the licensing requirements and the liability issues involved, Fult says. Likewise, most broker/dealers don't want the liability associated with tax planning. The obvious choice is to form an alliance, sending client referrals back and forth, and sharing revenues from those clients.

“Strategic alliance is the buzzword for the new century,” Fult says. “Each profession has its own strengths and weaknesses.”

And just about every large brokerage firm has some kind of program to help brokers connect with CPAs. Raymond James calls its program Professional Partners.

American Express Financial Advisors offers something called the Professional Alliance Program. American Express supplies brokers with pre-approved introductory letters, along with brochures and presentation materials they can use when recruiting CPAs. The firm also conducts background checks on CPA partners and helps process contract paperwork. American Express reps have revenue-sharing alliances with CPAs in 37 states, ranging from casual “handshake” deals to formal partnerships, according to the firm.

Whatever the structure of the deal, it's the perfect time to consider an alliance with a CPA, says producer Jeff Christakos, an independent broker with First Union Securities Financial Network in Westfield, N.J. “Now that the Internet bubble has burst and conditions are uncertain, there's a lot of concern about the direction of investments,” Christakos says. “People are looking more for advice than investment products. In the high-net-worth area, that advice is coming from accountants.”

Christakos, who has been a CPA for 22 years, jumped into the securities business when he joined H.D. Vest in 1993. Today he is building a niche for himself within First Union by establishing revenue-sharing alliances with CPA firms (he has two such relationships in New Jersey) and venture capital firms (he has one relationship so far).

Christakos typically splits commissions and fees 50-50 with the CPAs. But that split varies depending on the extent of his involvement. Sometimes Christakos attends meetings with clients in the CPA's office. He'll take a larger slice for that kind of active role. Other times he simply gathers a list of client names and addresses from the CPA firm, and takes a smaller share, he says.

Since he's an independent broker, working with ultra-high-net-worth clients and receiving a payout of roughly 90%, he can afford to split revenues with CPAs, Christakos says.

“Herb Vest [the founder of H.D. Vest] was a pioneer in the industry, but he didn't find a way to capture those high-net-worth individuals,” Christakos says. “That's where the First Union name comes in handy.”

If you're looking for a CPA partner, Christakos suggests calling the personal financial planning division of your state's Society of CPAs for a recommendation. Or contact CPAs who are teaching local college courses, who author trade journal articles or who serve your existing clients.

“[The CPAs'] reputation is critical for me because my reputation is tied with theirs,” Christakos says. “Ask yourself if you would want to be a part of their firm, and make sure they're willing to commit to the concept.”

Sacrificing Payout

Of course, an alliance with a CPA is going to cost you something. Under Prudential Securities' program, called the Prudential Alliance, the CPA receives a percentage of the fee clients pay to Prudential, and the broker's payout is then calculated based on the remaining gross, the firm states. If an outside money manager is involved, that expense is deducted from the fee, then the CPA's share is subtracted, and finally, the broker's payout is calculated.

Prudential's Director of Alliance Marketing Carolyn Ounan wouldn't give the exact financial split between broker and CPA, but says it is better than 50-50, in favor of the broker. And there are enough benefits to brokers to more than compensate for the amount they fork over, Ounan says.

“We find a lot of times that the alliance builds a stronger bond, which leads to more referrals and, we hope, increased client retention,” Ounan says.

Karl Hahn, a 29-year-old broker and $700,000 producer with Prudential in Burlington, Mass., says he considers the amount paid to CPAs a solid investment in his business.

“Seventy-five percent of something is a heck of a lot better than 100% of nothing,” he says. Since he formed his first alliance in early 2000, Hahn's assets under management are up 40% to about $70 million, he says. Almost half of the 80 households in his book now have a relationship with one of his two CPA partners, both of whom are referring seven-figure accounts, he says.

“The client is the CEO,” Hahn says. “Once a quarter he sits down with his estate planning attorney, his CPA and myself. We work together for the benefit of the client. Things didn't always work that way.”

Ounan adds that Prudential handles the contract paperwork and answers questions clients have about alliances. Although she wouldn't say exactly how many brokers have taken advantage of the program, it is available in 43 states and applies only to fee business. (Sharing commissions is a little trickier unless the CPA has a Series 7 license.) None of the CPAs that Prudential aligns with are “active” registered representatives, she says.

CPAs Stealing Clients

Another sticking point always enters the conversation when brokers consider alliances with CPAs. They ask, “Couldn't the CPA eventually get licensed and start stealing my clients?”

“We found that a handful of CPA firms tried that in the early days and discovered very quickly it was more difficult and time-consuming than they thought it would be,” Ounan says.

Still, it happens.

In 1999, Steve Giella was a broker with A.G. Edwards in Norfolk, Va., when clients called him with some disturbing news. Giella's CPA partner was sending letters to their mutual clients inviting them to transfer their investment accounts to his CPA firm. This accountant joined an RIA firm and started selling mutual funds on the side, Giella says.

“He was after the 1% trail on that business,” he says.

Giella severed the relationship immediately. Interestingly, all of the clients Giella referred to that CPA have since switched accountants. But clients the CPA sent Giella have all stuck with him. And despite the bad experience, Giella remains passionate about the value of CPA alliances — almost a third of his clients came from CPA referrals.

“I think CPA alliances are among the most overlooked and undervalued resources out there,” Giella says.

In August, Giella moved to A.G. Edwards' Atlanta office and forged another gentleman's agreement with a CPA who is definitely not interested in delivering investment advice, he says. The referrals continue to flow in, and the average account size is considerably larger than referrals from other sources, he says. His CPA referred a $4 million account this summer.

Giella concludes, “If the CPA referred you, and the clients have known him for 20 years, you don't have to go through that gate of whether they trust you or not.”

Registered Representative welcomes your comments on this story. Contact Senior Editor Michael Hayes at mhayes@primediabusiness.com or call 212/462-3580.

Reassuring Reluctant Partners

Like brokers, CPAs are also leery about alliances. Their credibility is at risk, too.

“I keep hearing that over and over again,” says Candy Lee, president of Financial Services International Corp., a broker/dealer in Seattle.

For the past few months, she has been pounding the pavement, pitching alliances with accounting firms, but encountering some resistance. So far, she's snagged one firm, and is making progress on deals with six others, she says.

In response to CPAs' concerns about credibility, Lee emphasizes that brokers work only with brand-name asset management firms and top clearing organizations.

She also discovered that CPAs cringe at the thought of referral fees. “They feel like they're selling their souls,” she says. So her firm pays its CPA partners a fee to monitor the tax consequences of client portfolios. It's a subtle difference, but it works. “I'm speaking their language now,” Lee says.

Allowing CPA partners to ease into relationships gradually has helped erase some tension, Lee says. But CPAs continue to focus intensely on investment performance when interviewing brokers, she says.

“They want to see numbers; they want a trophy,” Lee says. She hopes CPAs will eventually warm up to the idea that wealth management means more than double-digit returns.
— M.H.