Strategies to Implementing a Wealth Management Business

Michael Tate, CPA, PFS916-929-1006

www.tpbscapital.com

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The Opportunity for CPAs• You’re committed to determining the needs and then

delivering the right services to your clients. • You play an important role in the lives of your clients and

in the success of their businesses. • However, there is a very real opportunity in today’s

marketplace to do more. • Industry research tells us that affluent individuals,

including business owners, are very interested in obtaining more than tax services from their accountants.

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Business Models of Financial Advisors

Investment generalist: Advisors who offer a broad range of investment products and do not specialize in a single type of product. Conduct brief fact finding sessions and then offer clients a suite of possible products based on their needs. Transaction focused

Wealth managers: Advisors take a comprehensive approach to meeting client needs by using a highly consultative approach to construct integrated, personalized solutions.

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Business Models of Financial Advisors

N = 2,094 financial advisorsSource: CEG Worldwide, LLC., 2007

Self described wealth managers

46%Desbribing them-

selves as other than wealth managers

54%

Many Advisors Call Themselves Wealth Managers

Investment oriented advi-

sors93%

Wealth Managers

7%

Few Advisors Are Actually Wealth Managers

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The Two Business Models Compared

N = 2,094 financial advisors.Source: CEG Worldwide, 2007

Business Model

Investment Generalist

Wealth Manager

Average assets under administration $307.8 million $645.2 million

Average annual net income $279,000 $881,000

Average number of clients 269.3 101.1

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CPA Opportunity Key Points Substantial numbers of clients would like to obtain additional financial

services from their accountants. Despite this, relatively few accountants offer financial services, meaning

that relatively few clients obtain these services from their accountants. When clients are able to obtain financial services from their

accountants, they report very high levels of satisfaction with both products and service.

The interests of clients point to a wide range of financial services needs, including investment management, insurance products, financial planning and estate planning.

Only a small percentage of financial advisors are offering wealth management.

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How to Implement a Wealth Management Business

1. Buy It2. Build It3. Joint Venture4. Strategic Outsource

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Buy It

Advantages• Proven talent can be

acquired immediately• Allows leveraging of existing

clientele of both organizations

• Control over existing client relationship is retained

• Scale can be obtained quickly

Disadvantages• Capital requirements make

this option suitable only for large firms.

• Firm assumes all risk associated with the acquisition and new service offerings.

• Lending in this economy

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Build It

Advantages• Allows leveraging of existing

clientele.• Control over client

relationship is retained.

Disadvantages

• Requires substantial commitment to new resources, including additional expertise and expanded infrastructure.

• May distract from core competencies.

• Firm assumes all risk inherent in new service offering.

• Custodian minimum

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Joint Venture

Advantages• Requires minimal

commitment of resources.• Allows leveraging of existing

clientele.• Control over client

relationship and level of client service can be retained.

• Risk inherent in new service offering is shared with strategic partner.

Disadvantages• Requires a close match

between the firm and the partner in terms of culture and requires significant time commitment to ensure success.

• Equity left on table

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Strategic Outsource

Advantages• Requires minimal commitment of

resources.• Allows leveraging of existing clientele.• Control over client relationship and

level of client service can be retained.• Adopt best practices through

experienced provider• Maintain all ownership• Quick startup time

Disadvantages

• Some control lost• Possibly cost

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Gross Revenue per CPA Firm from Financial Services

N = 394 CPA Firms3 or fewer partners= smallSource: CEG Worldwide, Capturing the Opportunity, 2004

2003 Revenue (Average)

2004 Projected Revenue (Average)

Projected Increase from 2003 to 2004

Smaller firms with in house financial services (Gross)

$392,000 $546,000 39.3%

Larger firms with in house financial services (Gross)

$718,000 $1,037,000 44.4%

Smaller firms using outside financial services providers (Net)

$834,000 $1,359,000 62.9%

Larger firms using outside financial services providers (Net)

$1,241,000 $2,451,000 97.5%

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RIA or Registered Representative• Options on how form business:

– Create and oversee own RIA practice– Affiliate with an entity as a registered

representative– Become a broker of a broker dealer

• This comes down to fee based or commission

• All have pros and cons, but primary issues would be equity, control, compliance and perception

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FINRA vs. SEC

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RIA Formation

• SEC vs. State Registration– $25,000,000 assets under management

requirement for SEC• Net Capitalization requirements - $12,500• Timing• Costs – Minimal• IARD Filing• U4• IARD Example

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Licensing Exceptions to 65• CFP - Certified Financial Planner

– Awarded by the Certified Financial Planner Board of Standards, Inc.

• ChFC - Chartered Financial Consultant – Awarded by the American College, Bryn Mawr,

Pennsylvania • PFS - Personal Financial Specialist

– Awarded by the American Institute of Certified Public Accountants

• CFA - Chartered Financial Analyst – Awarded by the Association for Investment Management

Research • CIC - Chartered Investment Counselor

– Awarded by the Investment Counsel Association of America, Inc.

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Courses for License

• www.firesolutions.com• http://www.kfeducation.com/securities/ • http://pfp.aicpa.org/ • http://www.cfp.net/

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Compliance• Integral part of practice which cannot be overlooked• Must have individual overseeing the compliance

– Chief Compliance Officer– Outsource opportunities

• Email/File Storage/Manuals/Procedures• ADV Part I and II• Investment Advisory Agreements• Privacy Policy• Business Continuity• Code of Ethics• Organizational Chart• Policies and Procedures• Gift Log

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Technologies• Portfolio Management, Reporting, Back Office• Customer Relations Management (CRM)• Document Management• Financial Planning• Risk Assessment• Investment Policy Statement• Email Compliance

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Your Practice

Portfolio Reporting

Custodian

Rebalancing Solution

Financial Planning Software

CRM

Independent Entity

Position Analysis Solution

Technologies Must Work Together

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Solutions• Portfolio Reporting

– Portfolio Center– Black Diamond– Advent– BridgePortfolio

• Custodian – New Requirements

– Fidelity– Charles Schwab– TD Ameritrade– Scott Trade

• Rebalancing– Tamarac– I-Rebalance– TRX

• Financial Planning– Naviplan– Money Guide– Money Tree

• CRM – Client Relationship Management– Outlook– Sales Force– ProTracker– Retdtail– Junxure

• Position Analysis– Morninstar Advisor

Workstation– Principia

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Strategic Action Plan for Implementing a Wealth Management Business

• Define the Vision• Identify Needed Resources and Support• Create a Marketing Plan• Bring it All Together: The Business Plan

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Reasons Why CPAs Fail at Implementing a Wealth Management Business

• Too Busy with Core Tax Practice• Not Willing to Risk Losing Clients in Order

to Transfer Their Practice• Are Not Able to Change Their Mindset to

That of A Financial Planner• Do Not Achieve Full Partner Buy-In• Champion???

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Business Plan• Interview partners asking:

– What have we done in the past?– What will stop you from referring?– When a client asks for a referral, how are you

handling? Worked out?– Your approach to managing money?– In looking at your client base, what is the

approximate net worth of your top 15 clients?

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Quantify The Opportunity• Extract the following from Lacerte/Pro Systems into

Excel:– Interest– Dividends– Capital gains distributions

• With this information, assign a relevant interest rate to extrapolate the potential assets under management opportunity.

• Compare to partner responses for largest 10 clients.• Taking the potential assets figure, multiply by an

advisor fee rate – 1% is a good approximation.

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Present findings

• With your partners “why”/“why nots” and revenue potential, have an offsite meeting to discuss if this truly warrants an opportunity for the practice.– Are the dollars enough?– Can the practice be of the same quality?– Cost to start?– Can the “why nots” truly be overcome?

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Should You Even Be in the Business?

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Champion• Each firm needs a champion to head up the new

offering.• Will need to obtain their Series 65 or CFP.• Any partner sharing in fee revenue will need to

have a Series 65 or equivalent.• Critical area to discuss with compliance for

structuring.

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Company Kick Off• Host an event at a local establishment and invite

all potential clients – XYZ University.– Purpose is to announce new service, but must

be educational.– Do not make a commercial.– Invite local attorney to present on estate

planning issues. Be very clear on topics and client level of sophistication.

– Invite independent insurance agent to discuss relevant insurance topics

– Tax partner to discuss tax planning– Champion of wealth management offering to

discuss new approach

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Wealth Management Offering• Be very clear in your approach and the value of

having a CPA maintaining your portfolio– Knowledge of taxes– Coordination with other tax professionals– Independent and unbiased– Conservative– Most trusted advisor

• Offer clients a second opinion analysis of their portfolio. Explain your process of working with clients.

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Essential Strategies of Elite Financial Advisers

• Focus on Affluent Private Clients• Use the Advanced Planning Consulting

Process to Differentiate Yourself From the Competition

• Manage Your Practice Like a Business• Partner with Financial Institutions• Make a Lifelong Commitment to Learning

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Focus on Affluent Private Clients

• What Type of Clients Do You Have Today?• Are They Suitable For Your Services?• How Would You Qualify Affluent Clients?• How Would You Approach Them and Position

Yourself as an Expert?• How Would You Communicate With Them?• How Would You delight Them in Order For Them

to Become Your Marketing Apostles?

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Use the Advanced Planning Consulting Process to Differentiate Yourself From the Competition

• How Do Affluent Clients Buy Financial Services?

• What Can You Do to Eliminate Client Turnover?

• What Should Your Investment Policy Statement Look Like?

• How Can You best Demonstrate to Your Clients the Value You Bring to Them?

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Manage Your Practice Like a Business

• Which Financial Services are Affluent Clients Looking For?

• How do You Spend All Your Time on Revenue-Generating Activities?

• Where Can You Grow Income, Even With the Downward Pressure on Fees?

• What Do You Need to do to Sell Your Practice For Significant Value?

• How Do You Find the Right Balance In Your Personal and Professional Life?

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Partner With Financial Institutions• Where Can You Get Extensive Practice

Management Support From Financial Institutions?• How Can You Leverage the Technical Support

Available to Advisors?• Where Can You Get Advanced Sales and

Marketing Training?

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Consultative Client Process

Discover Meeting•Complete Discovery Process

Investment Plan Meeting•Presentation of Investment Plan

Mutual Commitment Meeting•Confirmation of Commitment

45 Day Follow Up Meeting•Organization of Account Paperwork

Regular Process Meetings•Review of Progress and Wealth Management

Investment Plan and IPS•Diagnostic of current situation, our recommendations for moving forward and details on our investment approach

Wealth Management Plan•Evaluation of financial needs with recommendations

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Discovery Meeting

– Record meeting– Thorough and detailed questions

• Always allow both individuals to answer– Do not focus on the assets – focus on:

• Goals• Values• Relationships• Process

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Create Investment Policy Statement

• Create your own or use an off the shelf solution:– IPS Advisor Pro

• Mind Map– Mind Mapper

• Goals analysis– Looking at where client is and where they want

to be – you are there to help them fill in the gaps

• Monte Carlo Analysis

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Financial Planning

• Two approaches depending on solution:– Goal Based– Cash Flow Based

• Need to address clients major concern:– Do I have enough?

• Should have “what if” functionalities• Asset allocation models built in

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For a consultative conversation on the concepts in this presentation or questions about TPBS Capita Management, please contact:

Michael TateMichael.tate@tpbscapital.com

916.929.1006 x103