Wealth planning: building better clients

The old 80/20 rule explains what most professionals in business face. If you run an accounting practice, it might be different – in that case, just 10% of your clients might generate 90% of your revenues. Brian Beck, founding partner, president and chief financial officer at WMGNA, looks at how to make the most of smaller clients

When it comes to tax, many practices have a large population of clients for whom the exercise consists wholly of preparing a tax return once a year.

And if these clients are W-2 employees, the fee of perhaps $500 is barely worth the effort, given their proclivity to prove disruptive out of proportion to their contribution.

Rather than jettisoning these clients, another strategy is to make them more valuable to your practice. The most direct way to do this is to provide services adjacent to a client’s tax needs. The largest, most relevant, and accessible service is wealth planning. Under the heading of everything a client does affects their taxes, and their taxes affect everything they do, accountants have more than a natural entrée to wealth management services. They have a rightful place. 

Here are typical scenarios among clients who pay fees of perhaps $500 that would benefit from a wealth planning option, and in the process, move them from $500 clients to $1,500 or $2,500 or more, not just with ease, but with demonstrable benefits for them.

The 1099 red flags

Many CPAs have clients in their practice who earn between $150,000 and $250,000 all from W-2 wages. Because their wages come from a single source, they do little to no tax planning or forecasting. Nonetheless, their 1099s show large capital gains, which are provoking $5,000, $10,000, even $15,000 of additional taxes, and they are angry about it.

That should be a red flag for an accountant that the client’s assets are not being properly or carefully managed. And the entirely truthful pitch to these clients – “Would you like to avoid a $10,000 tax bill next year through some proactive tax planning and investment management?” – is likely to get a fair hearing.

Even tax-deferred accounts offer opportunities

Even though tax-deferred accounts such as IRAs and 401(k)s do not provoke taxable events, they still offer opportunities for clients to reduce taxes as they are not going to stay tax deferred forever. What is the plan to access these funds, and is this plan tax-efficient?

For better or for worse, many of the companies that provide employer-sponsored retirement plans give employees a ‘portal-based’ solution that offers access to education and self-service or the assistance of robo advisors.

These approaches have their benefits, but they also have their drawbacks too. Chief among them is the inability to help a client navigate the nuances of their particular circumstances. In addition, just because education is available does not mean an employee is going to get it right. Further, these options do not offer the kind of human interaction that some of your clients crave when it comes to the wellbeing of their retirement or the legacies of their grandchildren.

For all these reasons, offering your clients the opportunity to engage in proactive planning for their retirement accounts can be a welcome offer. This is not to say that, as an accountant, you should rush headlong into wealth planning. However, it does suggest that a partnership with a trusted wealth planner will enable an accountant to share in some of the wealth planning fees and to play a more holistic role in the financial health of their clients.

Legacy development

Clients trying to save for retirement or on a glidepath during the final years leading up to retirement need a lot more tax and wealth management services than clients who are happily in retirement.

Still, the integration of wealth management services can offer upside for your practice, your clients and your clients’ children and grandchildren. While the grandparents are well situated, their children may be working hard, earning a good living but are bereft of the tax and wealth planning that can make a material difference in how well they are able to finance their children’s education or how well situated they will be for retirement. 

These children may have a tax CPA or they may not. They may already be a client of yours since many children, almost by default, work with their parent’s CPA. But because their assets are largely held in their 401(k) which is already, albeit inadequately, under management from the retirement plan sponsor, avail themselves of your tax preparation services only. Notably, if this is the case, there is little place to go with these clients. But with a wealth management option in place, there is. 

Orders of magnitude

How big an opportunity is wealth planning for a tax practice? Of the 60-80%, to perhaps 90%, of a CPA’s client base that represent a low fee, annual tax preparation service, perhaps 30% of those are ‘low hanging fruit’ that can be converted into a larger, more profitable client.

From there, what can be contemplated is that the clients that cannot be upgraded, and have no other material connection to the practice, can be diverted to another CPA who is happy to have that business. What is left then is a practice that consists of some large clients, many, many clients generating between $2,000 and $5,000 annually, and a small portion of clients that require annual tax preparation services. In short, for many CPAs, this would be a practice that is more profitable and fully utilises the skills and expertise of its staff.

Collecting wealth management fees

Ultimately, any level of wealth management services involves collecting fees, since the value of the proposition, financially speaking, involves increasing revenues per client. As a group, CPAs are risk-averse when it comes to their practices, and the notion of any kind of fee outside of their normal practice may be unsettling. Here are three models often used:

Partnership model: Under this model, a CPA and a wealth manager form an registered investment adviser (RIA) together, as a partnership. The wealth advisory services are managed by this partnership with the CPA, generally in a passive role, and the fees earned by the RIA are divided up. There is a straight path forward for CPAs in good standing, and in most states, where the so-called Series 65 Exam can be waived. This exam is administered by FINRA and consists of 134 scored questions.

Form a separate RIA to collect fees: A less involved approach would be to form an affiliated RIA for the express purpose of collecting the fees that flow from the wealth advisor who is managing and custodying the assets. The reason to form a separate RIA stems from the possibility that the entity collecting the fees could get audited by the SEC or state regulators. If accounting, tax and wealth advisory fees are co-mingled, the audit may extend to the entire CPA practice. Collecting fees through an affiliated entity short-circuits this possibility.

Straight referral fees
Both parties can achieve a hands-off arrangement through the payment of a straight referral fee.

Under this arrangement, the CPA would refer their client to an RIA with whom they have an existing relationship. The RIA would earn their customary fees, presumably a percentage of assets under management. The CPA would then charge the client an additional fee for managing the relationship with the RIA and overseeing what they are doing. If the CPA charged a client $2,000 annually for placing a client with an RIA and staying involved in the relationship, that is the equivalent of earning 50 basis points on $400,000 of the client’s assets.

Tax accounting is not an easy business.  Further, several trends have converged over the years to make it even more difficult.  However, by proactively working to upgrade its customer base to higher-value clients, a practice can enjoy more profitability, perhaps fewer headaches, and engage in the calibre of work that matches the skills and experience of its staff.