Providing Financial Services - Avoiding The Ten Traps

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Troy Waugh A few years ago, one of my clients decided to get into the lucrative business of financial services. After all, financial services companies have been competing with CPAs in the accounting and tax business for years. Partners selected one owner to become the financial services “guru” for the firm. He spent years getting licensed, obtaining a CFP designation and lining up money managers and product sources.

After years of preparation and investment, hundreds of thousands in out-of-pocket costs and lost billings and endless meetings behind closed doors with all the partners, financial services failed. The partners of the firm would not buy financial services from their partner. The partners would not place their employee benefit plans with him. Naturally, it followed, not one of them would recommend him to a client. Embarrassed, angered and bitter, this partner left the firm.

Yet, we know there are many reasons why we should be offering financial services to our clients. If you are considering adding financial services to your firm, here are the ten traps you want to avoid, along with a potential solution for each one:

Trap One: Trading your “most trusted business advisor” status for a shiny suit

CPAs are the country's most trusted business advisor. Insurance agents (as a group) rank low on the surveys that ask, “Who is your most trusted business advisor?” At the core of trust for accountants are two key elements: independence and objectivity. By changing your role from advisor to salesman, you risk losing your independence and objectivity. Once your recommendations are motivated by commissions or referral fees, rather than the problems you solve, you begin to erode your trust-worthiness.

Trap Two: Exacerbating your staff shortage problems

If you are like most firms, you are overworked and under-staffed. Adding another service to your existing service lines means you will have ramp-up time and training to invest. Most solid investment and/or insurance professionals invest years in training and prospecting to develop a business. If you are short of people today, what will happen when you divert your attention to non-productive areas for a few months?

Trap Three: Forgetting to establish solid product expertise

Have you had a relative in the insurance business, only to drop out after a few months? Insurance trainers direct new agents to call on their relatives first, because relatives and friends are vulnerable to a relationship. Were you uncomfortable buying from the relative? If so, it was probably because of his lack of expertise. To become expert in financial and estate planning, investment management and insurance products, you must be willing to invest years to learn the products and how to apply them. Insurance and investment firms have large think tanks of product designers who are constantly developing new ways to solve problems and you must stay current.

Trap Four: Making financial services your hobby

If your clients don't have need for financial services, you will waste an enormous amount of time and energy dabbling in the business. If you are not going to be serious about the business, you are better off staying out of the business and keep your present variety of referral contacts. Once your referral contacts learn that you are in the business, the referrals will dry up. So, you could lose more referrals than you gain in income.

Trap Five: Giving up client control and asset value

Properly structured, adding a financial-service's business can double the value of your accounting firm. When you refer clients to another party, you risk losing control of the client. The other party can sell things you do not approve of to your client. And the other party can take control of your client and actually go into competition with you for tax and accounting services. Some of the large financial services companies are offering free tax returns already, for qualified accounts.

Also, when you refer business to another party, the present-value of the income stream has been given away. That present value is an asset that you could sell rather than give away.

Trap Six: Offering a limited product line

All clients are not created equal. Some need personal financial planning to become debt free, others need investment management and still others have insurance needs. A limited product line will limit your ability to serve all your clients well. Becoming an asset gatherer for a money-manager or a bird-dog for an insurance agent will inhibit your ability to serve your entire client base well.

Trap Seven: Not developing a marketing plan and selling skills

To establish a serious financial services business, one must focus on building sales volume into the business. The most successful people can make persuasive benefit arguments for their products and services. Do you have the selling skills to regularly contact your clients, make recommendations to them and ask them to buy? There is a difference between answering a client's request for services and pro-actively developing new business. You must develop the latter. Many CPAs do not want to sell, or appear to be persuasive with your client. If this is the case, how are you going to build your business?

Trap Eight: Holding your license in the CPA firm

The National Association of Securities Dealers, the Securities and Exchange Commission and your state securities and insurance regulators are very strict governing bodies. Many of their rules are quite different than accountancy board rules. For example, the NASD requires that a principal review all registered representative's correspondence. Holding your securities license in the CPA firm may subject non-related correspondence to extra review. The governing bodies have strict surprise audit procedures and they will have no sympathy with your tax season (in fact, they may select this period thinking you will be most sloppy).

Trap Nine: Not understanding the profit sharing with your partners

Some of the 90% profit sharing arrangements the slick broker-dealers and insurance brokers mention really amount to 27%. Are you receiving 90% of 30%? More importantly, what are you receiving in terms of support and service from the financial services provider?

Trap Ten: Not setting solid goals for your financial services business

Do you want to earn more income? For example, a good goal would be for your owners to earn $250,000 whereas today you are earning $200,000 each. Or, is your income level satisfactory and you want to have a better lifestyle? For example, you are satisfied with your $200,000 of income and you really would like to work less and have the same income. Or, is your goal somewhere in between? By clearly articulating your goals for your financial services business, you can establish a business plan to get there.

The solution: Every CPA firm is different and there is no one-size-fits-all solution. However, for most firms, setting up your business and holding your securities and insurance license in a separate entity, outside the accounting firm, is a good first step. This way you will maintain client files, control and value in this business. Next, developing a relationship with a full-service financial services provider is probably a good idea. Find one who is financially sound and stable and can provide you access to financial planning, estate planning, investment management, insurance and investments, retirement administration and employee benefit programs. Set a goal of $50,000 of additional income per owner as a minimum; otherwise you are dabbling.

Using this approach, you have the opportunity to maintain your independence, while giving the clients an option to purchase from an entity, which you have some ownership. If you are just in a referral relationship, you lose client control, maintain some fiduciary risk and get no payment.

In selecting a financial services partner, the following are key considerations: 1) Is the partner financially sound and stable? 2) Does the partner have a client-centered focus or will he drive the highest commission products? 3) Will the partner help you achieve more business with him than without him? 4) Will your partner take direction from you? 5) Will the partner provide training for you so you can identify client issues? 6) Does the partner have a clean record with the insurance and securities regulators? 7) Will your clients react well to your partner's personnel? 8) Does the partner have a broad product and services line?

All forward-thinking state boards have opened the doors for CPAs to provide financial services. Building a financial services business along side your CPA firm is a powerful client-centric approach to the complex and competitive world in which we operate.

Permission is granted to publish this article by Troy A. Waugh

Troy A. Waugh, CPA, MBA
Waugh & CO, Inc.
PO Box 1208 Brentwood, TN 37024-1208
1 (615) 373-9880
Fax (615) 373-9885

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