As an accounting professional, deciding to offer investment advice and recommend specific investments is a giant leap. However, it can be a very, very profitable one.
The AICPA published an excellent guide, The CPA’s Guide to Investment Advisory Business Models. It provides a roadmap towards becoming an investment advisor.
Where’s the Competition?
In the financial services world, your client likely gets advice from one of three sources:
- Financial Planner: They often provide advice at an hourly rate. In the purest form, clients walk out, plan in hand, with the option of making investments on their own or working through a financial advisor. Some planners also take the next step, making trades and monitoring portfolio performance.
- Financial Advisor: They provide advice and also make trades. They are paid on a transactional basis or per assets under management. They typically work for an established financial services firm.
- Registered Investment Advisor (RIA): These are often independent operators affiliated with an umbrella organization that provides their back office services, clearing and making trades.
Where’s the Opportunity?
The majority of professionals fit into the second category and work for large firms. They offer investment advice but stop short of providing accounting services, like filing taxes and offering tax advice.
So, what do those three advisory models have in common? All see tax planning as a central element of the financial planning and investment management processes. In many cases, the tax advice and filing portions are outsourced. As an accounting professional, it’s easier for you to incorporate the investment advisory business into your existing model.
Pros and Cons
Taking responsibility for your client’s investments has both pros and cons.
- Buying Anyway: Clients with assets will likely seek out professional advice. If you don’t provide it, they will buy it elsewhere.
- Established Relationship: As your client’s accountant, you have earned their trust. They see you as an impartial provider of advice as opposed to someone with an interest in selling a product.
- Financial Planning: Your business model likely includes a degree of planning and projection. This can be extended further into retirement planning, budgeting and estate planning.
- Retain Control: When you refer a client, there’s a risk things won’t work out. If your client suffers at the hands of a financial advisor or insurance agent, they will come back to you, asking you to take control. Why not start off in that role?
- Big Picture: You know about your client’s diverse assets, liabilities and dreams. They may not be as forthcoming with a financial advisor they don’t know that well. You see how all the parts fit together.
- Long Relationship: Tax filing can be seen as an annual transaction, and technology might limit the accountant’s role to only the most complex client scenarios. Investment advice is an ongoing relationship. It can continue generation after generation.
- Paid-For Advice: If your client has assets under management with you, they are paying for your guidance, even if you think the best course of action is sitting tight. You don’t need to do transactions to make the relationship profitable.
- Business Succession Planning: Your client’s serious wealth may be tied up in their business. If it passes to the next generation or is put up for sale, they will need accounting advice. That’s the primary part of your business.
- Significant Cash Flow: If your client has $5 million and you annually charge half of one percent (50 basis points), that’s $25,000 in revenue coming into your business.
- Your Objectives Align: Your client wants to make money. You want to increase your revenue. If and when the client’s assets increase, your revenue will grow proportionately.
- Goodbye Fiduciary: If you make money by investing your client’s assets in securities you choose, you are selecting one service provider from all the others. That provider is you. They might be able to buy no-load index funds on their own, following your instructions. Now you are recommending investments with overall higher costs because you need to be paid.
- State Regulations: Every state has its own rules. Whenever you have a client in a different state, you need to register to give investment advice.
- Federal Licensing: The Financial Industry Regulatory Authority (FINRA) requires several licenses before someone can give investment advice or sell securities. Typically, these include Series 6, Series 7, and Series 63, 65 and 66. That’s a lot of testing.
- Broker/Dealer Affiliation: You need the infrastructure to place trades, process transactions and provide account statements. You may have to hire an outside consulting firm to provide these services.
- Compliance Oversight: Regulators get involved in everything and will perform spot checks of your records. They will ask, how are you protecting client data in case of a disaster? There’s lots of paperwork to file.
- Legal Liability: It’s been said Wall Street is the only casino where clients who lose are able to sue the house and try to get their money back. Although you would not approach investing as gambling, many people look for someone to blame.
- Scale Costs Money: You might be able to help a few clients manage their investments, but rolling this service out to everyone will stretch your resources to the breaking point. You will need to hire additional staff, preferably individuals holding the relevant licenses, so you can delegate tasks.
As you can see, there are numerous advantages and drawbacks to expanding your advisory services to include investment advice. Weigh each side carefully before making a decision.