CPA Wealthcare - From Success To Significance

May 23rd 2011
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By Tony Batman, chairman and CEO, 1st Global

If it desires, the CPA profession can rapidly become the dominant provider of comprehensive high-profit wealth management and financial planning services in the U.S. to the 15 million American households who comprise two significant market segment classifications—the emerging affluent and affluent families, or roughly 12 percent of the 120 million American households that make up more than 75 percent of America’s financial wealth. These households are loosely defined as those families that either currently own or have the high probability of creating at least $500,000 of investable financial assets.

Emerging affluent and affluent families are the core economic drivers of modern CPA firms. They also represent the core of a modern wealth management practice. 

The wealth and income market segmentation of U.S. households is very complicated for many reasons and is fraught with incorrect business, economic and government policy implications. The segment of America referred to as “mass semi-affluent” families represents approximately 100 million families with less than $100,000 of financial assets and also represent about 22% of aggregate U.S. financial wealth. The exclusion of mass semi-affluent from the definition of the “core” segment of a CPA practice is not an implied or expressed statement about their personal or aggregate economic value or personal virtue. The mass semi-affluent segment generally includes the youngest households just commencing the wealth accumulation stage of their wealth cycle. Americans in this segment therefore generally have lower incomes and little wealth, but they can be an important segment for basic financial planning services.

The term “wealthcare” is an apt concept to capture the essence of the CPA-centric combined financial planning and wealth management firm. Clients are segmented between those families requiring basic “financial planning” with no significant estate issues and those families requiring comprehensive “wealth management” because of multigenerational matters, complex estate issues, complex taxation or closely held business problems needing solutions. In other words, financial planning clients are generally those who are building an estate. Wealth management clients are those who have already built an estate large enough to transcend their personal financial needs beyond their own lifetime.

With the tremendously unfair competitive advantages that CPA firms have it is still astonishing that CPA firm wealthcare providers are estimated to generate an appallingly low 0.1 percent (one one-tenth of 1 percent) of aggregate retail financial services industry annual revenues. This illustrates a monumental opportunity for CPAs to gain tremendous market share by enabling their powerful wealthcare value propositions and confiscating the business of the classic traditional providers of financial services that have shown time and time again to under serve the CPA firm’s very best “core” clients.

The purpose of this writing is to memorialize a broad vision for the CPA profession as America’s preferred and standard-setting wealthcare providers to America’s affluent and emerging affluent households.

Wealthcare: A Journey Toward Human Flourishing

Each and every mentally healthy and self-aware person in the world hungers for these three things: happiness, significance and meaning. That quest is cured mostly in one’s vocation and not in one’s leisure or educational pursuits. Happiness is defined on one hand by some as “hedonistic pleasure,” but such shallow happiness is short-lived with well-known unintended negative consequences. On the other and better hand, Aristotle best defined happiness in Greek as “eudemonia,” translated as “human flourishing,” a beautiful phrase expressing the highest form of noble human activity and achievement. It is a high form of sustainable joy experienced in the total absence (not the denial) of conflict, guilt and regret. Its modern translation would be “doing good and being good.”

One of the most important drivers of human flourishing is the making and honoring of meaningful promises to one’s self and especially to one’s loved ones. The wealthcare profession at its core is one of enabling your clients to make and honor important life promises. Regrettably, making promises in America is now riddled with anxiety and seems to be actively avoided for the fear and likelihood the promise will become a lie. As CPAs, it is up to you to correct this unfortunate American pathology! When success is achieved for your clients, you, your firm, and your profession win big. It is easier to win now than ever before.

The word “imagine” is perhaps the most important word in the English language. Imagine for a moment the perfect mental state, a state of perfect emotional satisfaction where you and your clients have completely flourished and are not hindered by conflict, doubt or regret. You and your clients can make and honor important promises. You as provider and your clients as recipients of ethical wealthcare can attain eudemonia.

From Success to Significance

Many CPA firms have attained wonderful levels of financial success and that is a very good thing for their shareholders and employees. Some, but not enough, courageous and forward-motivated CPA firms fortunately are on a quest to move from “success” to “significance” because of their wealthcare services. This will lead to exponentially more economic success and toward their firm’s emotional significance and market dominance than their less motivated peers. Emotional significance and market dominance both are symptoms of human flourishing. These focused few CPA firms see a path to become market dominators because of their wealthcare capabilities. The entire CPA profession will also enjoy this growth from success to significance if they will merely emulate their better and more courageous peers.

The flash convergence of one’s prepared mind with unbounded opportunity illuminated by intense crisis creates the big bang physics of great leaders and the dominating businesses they manage. Few people ever pay the price for life’s preparation for chance, or strive for the visual acuity to see such opportunity, or manifest the moral courage to act on the opportunity. The CPA profession has arrived at such a rare flash convergence. It should go boldly on offense and avoid defensive cautiousness in order to change for good the manner in which wealth management and financial planning services are provided to all Americans, but especially the emerging affluent and affluent families, the sweet spot for CPA services. It is your time. Your clients are crying out for your serious intervention into their lives and businesses. They have few, if any, trustworthy professional options.

The CPA Brand Defines the New Moral High Ground

The financial crisis commencing with the historic “Lehman weekend” in September 2008, and the ensuing long and deep Great Recession have unmasked the numerable Wall Street, big bank and insurance industry hidden conflicts. It also exposed these firms’ avarice (i.e., extreme greed without regard to the great harm done to others), selfishness and contradictions that came perilously close to halting the progress of Western civilization for a very long time. The emotional trauma still permeates the collective tension-filled consciousness of America.

The carefully crafted retail brands of the traditional powerhouses like Merrill Lynch, Bank of America, Morgan Stanley, AIG and even the almighty Goldman Sachs are severely damaged, and most are dead, not ever to be resurrected to their former glory. These firms and others like them are understandably in denial about their demise—but their meaningful presence is over! America is deeply and broadly questioning the moral leadership of its once mighty financial institutions. Lost trust is never regained—in business, in relationships, in anything. Government intervention does not create any relief. In three years, the greed, lunacy and hubris of Wall Street has simply been shifted to the greed, lunacy and hubris of Washington, D.C. and Americans do not feel any more confident from the myriad new regulations and laws such as the Dodd-Frank Financial Services Regulatory Reform Act and proposals to wind down Fannie Mae and Freddie Mac.

A corporate or personal brand is created by the repetition of consistently honoring promises to customers and clients. It is not created by marketing strategies, contrary to the scholars employed on Madison Avenue. The CPA brand is powerful and stands on the shoulders of the noble virtues of professionalism, competency, independence, and objectivity. The vast majority of CPA firms live up to the CPA brand standards and consequently the CPA brand is the second strongest brand in America, second only to Apple Computer. The CPA profession can own the moral high ground in all financial services disciplines. The whole financial services industry has been laid at your feet. It is up to you to see this as either opportunity to be exploited for good or as work to be avoided. Forward-thinking firms will do as Indiana Jones famously did in the memorably stressful scene in “Raiders of the Lost Ark” by picking the true Holy Grail. They will “choose wisely.”

Tax Alpha: The CPA’s Unfair Competitive Advantage

The two biggest financial concerns of Americans in the emerging affluent and affluent segments are first the tax drag on wealth accumulation and, second, the anxiety over sustainable drawdown rates on retirement portfolios to yield cash flow and income. Regarding tax drag on wealth accumulation, CPAs should understand the concept of “tax alpha.” 

For perspective, the term “investment alpha” is the statistical metric that investment analysts use to prove or disprove the added economic value and portfolio returns created by the professional advice and portfolio management strategies over what an investor would receive by investing in a broad-based index or proxy. It also determines whether that added investment return, if any, was caused by a portfolio manager’s “skill,” or by mere “luck.” The unspoken dirty little secret that investment professionals do not want investors to know is that investment alpha is usually non-existent or is negative. (The absence of substantial investment alpha does not mean necessarily that the value of an investment advisor’s services to clients is not substantial. Even in the absence of investment alpha, the greatest investment advisors and financial planners have saved their clients’ financial lives with behavioral finance skills that have kept their clients from impulsively and unknowingly engaging in damaging financial ideas.)

Tax alpha is to CPA wealthcare providers what investment alpha is to leading portfolio managers. Tax alpha is the CPA’s dominant professional technical advantage against which traditional institutional competitors cannot compete. Tax alpha is the comparative economic advantage that CPA firms produce for their clients merely by the overlay and integration of tax advice concurrent with investment and risk management advice. Tax alpha is provable. Tax anxiety is growing in America as politicians elevate the debate of increasing state and income taxes to clean up America’s balance sheet. This new narrative tees up a tremendous tax alpha opportunity for you. It is your hugely unfair competitive advantage. 

Most major financial institutions are prohibited by their internal compliance policies and in their written disclosures to their clients from ever providing tax advice in the context of investment planning or insurance risk management. Their written legal policy disclosures usually say something to the effect of “none of the investment or financial advice we render to you should be construed as tax advice. You must consult with your CPA or tax advisor before implementing the investments we recommend to you…” I have long been struck by the notion of how disadvantaged your competitors are because of this fact and that CPA wealthcare providers could never imagine engaging in investment advisory services or risk management services in the absence of comprehensive tax advice. This tax alpha, the very unique service proposition of proven after-tax net wealth gain from CPA tax skills, should never be underestimated. Discussing legal means to reduce the tax drag is an intimidating and unfair advantage over your competition.

Consolidation of Households to Fewer Advisors and the Need for Sustainable Income Solutions

Many forces are converging to create the perfect opportunity to which market-dominating CPA firms will benefit. The biggest generation shift in American history has begun. During the next 15 years, 78 million baby boomers will transition psychologically and financially from ”wealth accumulators” to “wealth deaccumilators” (a.k.a. retirement income consumers) as they begin the drawdown of retirement portfolios to sustain them for the remaining 25 years of their lives. Social studies have shown that during the wealth accumulation phase, Americans have on average 2.8 financial advisors with whom they seek financial advice. As investors approach the stage of life formerly known as retirement, they begin moving their dependence of financial advice away from numerous professionals to only one professional, and this plays very strongly into the CPA firm’s hands.

The motivations for consolidation to one advisor as one approaches retirement are numerous and obvious. For one, as wealth increases and life’s complexity increases with age, most Americans desire only one small team of unified experts under one roof to manage their varied matters. Second, the solutions for tax-efficient deaccumulation are far more complex and interrelated, involving myriad differing financial products that require supervision and management by one advisory group. (Deaccumulation and sustainable income solutions require the integration of multiple solutions like bond ladders, immediate annuities, systematic liquidation of diversified long-only portfolios, special asset allocation for taxable and non-taxable holdings, capital loss and gain harvesting across multiple custodians, alternative investments like oil and gas partnerships, private REITS, and structured inflation hedge and income-producing products, among others.) Third, astute heads of households see the necessity to involve more family members in their financial affairs necessitating fewer advisors rather than more. CPA wealthcare firms, because of their tax knowledge and household accounting approach to service, are best positioned by far as America moves to wealth deaccumulation and transitioning to sustainable retirement income solutions.

The “Profession” of Wealthcare Versus the “Business” of Wealthcare

A firm’s or person’s economic value rises in a free market system like American capitalism, only if the firm or person demonstrates consistently that they can solve more complex problems than their peers. A CPA firm that has a local brand (i.e., promises that are consistently fulfilled) of just simply being better at problem solving, makes more income and wealth for its owners than less talented firms. Likewise, employees only receive higher wages when they demonstrate an ability to solve more complex problems for the organization. The capital and labor markets are very efficient at properly pricing services and talent. The wealthcare industry is not excluded from this truth.

To put it another way, CPAs must commit to bringing higher-order benefit services like comprehensive wealthcare to society, and he must jettison providing lower-order benefit services like tax compliance, which is becoming far more competitive and less profitable (except where the commoditized compliance services are integrated as marketing feeders to the more lucrative higher-order wealthcare services). An example of this development (if one wishes to argue against this notion) is that many leading CPA wealthcare firms simply “freely give” the annual tax return to their premium wealthcare clients, and the costs of tax compliance services is easily embedded in the annual wealthcare retainer or asset management fee.

To win in this new world, CPAs must master the two symmetrical sides of a wealthcare practice: the “profession” and the “business” of wealthcare. The “profession” of wealthcare is comprised of the technical competencies necessary to generate world-class solutions. CPAs are exceptional at the “profession” of the craft and have demonstrated they can boldly compete with the traditional institutions on proper, modern and technical solutions to complex wealthcare problems.

On the other hand, the “business” of wealthcare includes the leadership, management, marketing, operations, culture-making, productivity, processes and entrepreneurial acumen required to profitably deliver wealthcare solutions to targeted clients that annually increases enterprise value for the owners of the CPA wealthcare practice. Technical competencies in the absence of business savvy will dramatically hinder the exploitation of the opportunity before you. Most CPA firms need significant improvement in the “business” and processes of wealthcare.

Fortunately, the proven business processes are abundant and affordable and have been for a very long time. CPAs must abandon their addiction to uneconomic control over the commoditized and undifferentiating factors of production and begin to better leverage these unnecessary internalized tasks to outside partners like broker/dealers, insurance agencies, institutional custodians and research organizations. Successful firms have brilliantly mastered business leverage. Marginal firms have not. One of the hallmarks of a great profession is the desire of leading practitioners to teach the aspiring ones “how they went from business success to market significance.” Fortunately, the CPA wealthcare profession has this culture and it will be key to the opportunity before you.

The idea of “economic profit” has been demonized recently by certain sects of both the national media and national politics, and regrettably many CPA firms seemingly have succumbed to this demonization and behave as though all altruism is good and that working for any low fee that covers basic fixed costs and which attracts a new client is an appropriate business practice. That is very unfortunate. Most CPAs have entered the wealthcare business with no clear differentiating value proposition and therefore have predictably drifted downward to competing on the most barbaric and benign of business value propositions—price—and that strategy is a losing proposition! 

One must not necessarily be an MBA to know that in any industry there can be only one price leader like Walmart, Vanguard Funds or H&R Block. All others who try to be a low price leader will suffer and ultimately be in horrific peril for their survival. Market-dominating CPA firms charge premium pricing congruent with the value they create for their clients. I know of no market-dominating CPA firm that competes on price, for example, with H&R Block for traditional tax compliance serves. I also know of no market-dominating wealthcare firms that feel compelled to compete on price with local banks for asset management. That is ludicrous. You are much better than they are. Your value proposition is far more compelling. (Remember tax alpha for one and the Essential 25 Capabilities below for another!). Price competition has caused many CPA wealthcare firms to build businesses they eventually detest because they have built unprofitable and unsustainable businesses they cannot easily change or even unwind. They are stuck in hell. 

A business like wealthcare where internal costs are both fixed and high while revenues can be highly variable will inevitably get into a trap where it cannot afford to deliver the caliber of services its best clients demand and deserve. One final point: Without fair and sustainable profits, there can be no pro bono compassion extended to those destitute clients seriously in need of your services. As citizens of the world, compassion is an obligation and it is only profits from premium pricing to your best clients that underwrite the ability to be compassionate to the less fortunate. That is the way the world works, and that is a very good thing.

The Essential 25 Capabilities in a World-Class Wealthcare Business

I have long been struck by the notion that most CPA-centric wealthcare firms do not have high-definition TV clarity about the capabilities they must provide or have access to be dominant in the service to America’s emerging affluent and affluent families. See the chart below for the matrix of the 25 essential financial planning and wealth management capabilities required to win and build substantial enterprise value for your firm’s shareholders and high incomes for its employees. The matrix arrays these 25 essential capabilities to outline whether the solution culminates in a “product” or a “service” to the client. If it culminates in a product, the matrix demonstrates whether the product is an investment, an insurance solution or a bank/trust solution.

The matrix also reinforces the undebatable fact that it is impossible to internalize all of these capabilities within the CPA wealthcare firm. Leading firms have mastered leveraging access to these capabilities with outside resource partners like independent broker/dealers, master insurance agencies, RIA custodians and software vendors. 

Motivation Dissatisfaction

Motivation comes from dissatisfaction. People are not motivated to change, perhaps toward more human flourishing, until they are dissatisfied with the current status of what is truly important to them—their values. Yet, when acknowledging dissatisfaction with attaining what is important to them, even most people and most businesses never act on correcting that gap. They stay perpetually in a state of misery. On the other hand, many people are perfectly fulfilled with the reality state that their personal values are fully honored. Examples of the personal values with which one may be dissatisfied with the honoring of include one’s level of personal income, strength of personal balance sheet, personal financial independence, work culture, freedom, quality of work, meaning of work, stature in the community, respect among peers and a fairer and more moral society.

Most industry discussions about wealthcare are centered on how to serve more clients and to serve them better and that is a good thing. This discussion has achieved that and hopefully even more. It has given you a vision for your firm’s and your own personal path to human flourishing, honoring important promises you make to yourself and to your own loved ones, being good, and doing good. But it is a call to be bold and courageous. This is your time. All great living commences with a person’s quiet realization that he or she will never, ever, ever again play the coward’s role. The choice for great living is yours.

This Wealth Management article has been provided by 1st Global. With more than 500 firms affiliated with 1st Global, it is one of the largest wealth management services partners for the tax, accounting and legal professions. 1st Global delivers the required capabilities essential for wealth management excellence including progressive ongoing education, which places the firm in a unique position to offer wealth management knowledge.

1st Global was founded by CPAs on the belief that accounting, tax and estate planning firms are uniquely qualified to provide comprehensive wealth management services to their clients. Each affiliated firm is provided with education, technology, business-building framework and client solutions that make these firms leaders in their professions through dedicated professional client relationships built around wealth management.

1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 8150 N. Central Expressway, Suite 500 in Dallas, Texas,(214) 265-1201. Additional information about 1st Global is available via the Internet at

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