In the world of wealth management, the union of financial advisors and certified public accountants is often viewed as the proverbial match made in heaven. What's not to love? CPAs are often pressed by clients for advice on managing their money, advice that accountants sometimes feel is beyond their expertise. And advisors covet the CPA clientele, usually business owners whose wealth has blossomed throughout the course of their long-running relationship with their trusted accountants. Put advisors and accountants together under the same roof, as conventional wisdom has it, and watch the synergy skyrocket.
The problem, of course, is there's nothing romantic about the sparks that end up flying. Although the industry doesn't track the success rate of mergers between CPAs and advisors, observers of the wealth management field say these couplings fail more often than not. Tony Wood, founder and chief executive of Method Holdings in Atlanta, which partners with CPA firms on wealth management needs, estimates the success rate in the industry at no more than 40 percent. Rick Telberg, chief executive of Bay Street Group in East Hampton, N.Y., a marketing management and strategy firm for the accounting world, is even more dismissive about the outcomes. "On paper, it looks like a match made in heaven," he says. "In real life, it's hell."
What’s the Problem?
What goes wrong? There are deep differences in the cultures of the two worlds, differences that can create practical problems in the smooth operation of a merger and can also lead to personality clashes between advisors and accountants. CPAs chiefly charge hourly fees for their professional services; they’re adverse to commissions or anything else that smacks of self-dealing. Advisor income can include commissions and, increasingly, fees levied on assets managed. The compensation structure can breed resentment. Accountants put in arduous work weeks as April 15 approaches; advisors are not clock-punchers and prefer to put in whatever hours are needed to manage their relationships. Accountants may see partnership as a career goal; advisors typically are more interested in a payout grid that rewards the asset growth that accompanies the onboarding of affluent clients. In the eat-what-you-kill world of financial advisory, a good salary and bonus is not a part of most FAs’ career calculus.
Accountants have concerns about sharing clients: The fear is that the accountant will lose a long-term client if the client becomes dissatisfied with the results of investment decisions made with the advisor. Advisors at wirehouses owned by banks often have the same concerns when salespeople on the bank side try to cross-sell to advisor clients.
Some financial advisory firms notice the differences. Mariner Wealth Advisors, a Kansas-based RIA with $3.8 billion in assets under management, has taken stakes in two wealth practices in the past two years that were affiliated with accounting firms. Most recently in July, Mariner announced it bought a majority stake in Orizon Investment Counsel from its parent firm, Orizon Group in Omaha, Neb. The wealth management unit added $300 million in AUM to Mariner; the unit had formed with Orizon in 2000.
Mariner CEO Martin Bicknell said that, in his experience, running a firm with multiple business lines can cause operating conflicts; the company’s resources often are drawn in the direction of the more influential division. “If a wealth advisor is running a dual entity, sometimes the financial resources go to the wealth division. If an accountant’s running it, sometimes it goes to the accounting division,” he said. “I think it’s hard to grow both together. I’ve not seen it work as well as I would have thought it would.”
Daniel A. Tucker, president of Orizon Investment Counsel, said both sides were able to share clients throughout their relationship. In fact, they still do; the wealth management unit still works in the same building as its former parent. “To our clients, we still work together,” he says. The decision to sell the stake to Mariner was an amicable one, Tucker says; the unit began seeking new partners in order to grow faster than it would have by remaining at Orizon Group. The plan is to reach $1 billion in AUM in the next five years.
The two sides of Orizon were different worlds. “Everything on the CPA side of the hall is looked at as billable hours. You pick up a new project and hire people to do that work. There‘s only so much margin in that work; the more business you get, the more people you have to hire,” Tucker says. “You got a bunch of CPAs in tax season working seven days a week, 80 hours a week. And investment people show up at 8, leave at 5. Not working on weekends does tend to create frustration.” There was frustration on the wealth management side as well. Tucker says some of the partners were paid with salary and bonus, a compensation arrangement that caused dissatisfaction.
“We never did it well, I’ll tell you that,” Tucker says, sounding a little rueful. “Even with the success we had, I don’t think we ever effectively came up with a compensation model that actually motivated partners to produce.”
Some advisors see legal hazards on the CPA side. Accountants are obligated to respect the privacy of their clients’ tax information, and may only share it with advisors when given specific client approval to do so.
Tension?
With all the tension that can surround an accountant/advisor linkage, it’s no surprise that more deals aren’t done. CPA interest in wealth management appears limited, judging from industry group data. About 7,000 accountants hold the personal financial specialist (PFS) designation accredited by the American Institute of CPAs, more than twice as many as five years ago but a bare fraction of the total 300,000 CPAs serving clients in the country, Telberg says. About 2,400 CPAs belong to the 23,000-member Financial Planning Association, a share that‘s little change in the past four years. A similar level of representation can be found among certified financial planners; about 11.5 percent of the 66,800 certificants have reported to the CFP board that they’re CPAs.
Yet the limitations in growing accounting practices tends to spark an interest in wealth management among some CPAs. Hourly fees are the chief form of revenue, but an accountant can only prepare so many tax returns in a week. Growth comes by adding staff, or getting into more lucrative lines of work. David DeVoe of DeVoe & Co., an M&A consultancy in San Francisco, says profit margins in accounting tend to be a fraction of the 25 percent levels seen in wealth management. “When the model works well, it can be an extremely powerful combination,” he says.
Some large accounting firms that have separate wealth management units are finding it easier to outsource the operation. Method Holdings was founded about 18 months ago by Wood, a Wharton School of Business grad and former accountant who built an RIA in the early 1990s, Financial Strategies Group, that he later sold. Method takes minority stakes in RIAs (AUM typically runs between $200 million and $2 billion) that are owned by large accounting companies, and seeks to improve their performance. Method likes to stay below the radar and not interfere with the brand image of the firms it does business with, Wood says.
He describes Method as the “communications bridge” between the CPAs and wealth managers. Part of the problem that accountants have in working with advisors is the difficulty in understanding the various wealth management business models—RIA? B/D? Hybrid? Fee-only? Do you do financial planning? Do you pick investments yourself or hire someone else to manage that part of the business? The breadth of questions can be daunting to an outsider, and Wood recommends that advisors take their time and be clear in their responses. Wood keeps handy a “top 10” list of other questions that CPAs should pose for advisors looking to merge. Is there any potential reputation risk to the accounting firm from a union? What kind of business development will the wealth managers perform? And--perhaps most important--what system do we use to settle disputes, and how should the merger be unwound if we decide things aren’t working out according to plan?
Setting expectations early in the relationship is crucial, says Jack Thurman, managing partner and president at BKD Wealth Advisors, the $2 billion RIA of accounting firm BKD LLP in Springfield, Mo. “What happens is, the CPA says, ‘This is going to be easy. I’ll bring in this wealth manager and he’s going to bring in business.’ And the wealth manager says, ‘Oh this will be easy. The CPA is going to refer me business,’” says Thurman, a former Merrill Lynch advisor who managed $200 million. “They don’t ever share that. They don’t share goals. ‘OK, CPA, you’ve got to refer this amount, and RIA, you’ve got to go out and develop this amount and bring it over on the tax side.’”
Some accounting firms appear to have a healthy respect for the differences of the two sides. In 2001 Hill, Barth, & King merged with the advisory firm Sorce Financial Group to form what today is called HBKS Wealth Advisors, an RIA with $1.5 billion in assets that‘s held separately from the accounting business. CEO and Managing Principal Christopher Allegretti says assets have grown largely organically over the years, and the wealth management unit contributes about a third of the entire enterprise’s revenues. Compensation is key, Allegretti says. Advisors are paid according to goals structured around production and firm profitability.
“In a sales culture, you really can’t put limits on how successful somebody can be. … When you pay guys to be productive and you’re asking them to expand revenues, there’s got to be a win in that for them,” Allegretti says. Advisors “don’t sit and wait for the CPA referral, but the CPA referral certainly helps. It’s an engine that runs. Having it attached to the CPA chassis makes it run really, really well,” he adds.
