into Financial Services
2005 - With baby boomers set to retire in increasing droves,
there will be a growing need for financial advisors. In a
research report, “A Synopsis of the CPA Industry and
Highlights of Their Models for Entering the Investments Business,”
Tiburon Strategic Advisors (www.tiburonadvisors.com)
notes that CPAs predict that over the next 10 years financial
services will be one of the hottest fields for accounting
firms looking to enhance their revenues. Studies have shown
that regardless of size, accounting firms that offer financial
services consistently generate more revenues than those that
do not. Nonetheless, as of June 2000 less than 50% of CPA
firms were delivering financial services.
interested in expanding into financial services must consider
all the potential options and expect to spend at least six
to nine months planning before offering financial services.
The biggest consideration and often the biggest hurdle for
firms expanding into financial services is choosing a business
model. Choices include building a financial services firm
from scratch, acquiring an existing financial services firm,
or joint-venturing with an existing financial services firm.
Each model has advantages and disadvantages (see Exhibit
from scratch. Although this can be viable
for larger companies, it is usually not the best option
for small to mid-sized accounting firms. Starting from scratch
is by far the most difficult and expensive approach. At
least one partner will be consumed full-time in building
the financial services side of the practice.
should expect to spend at least $65,000 annually for things
such as compliance, personnel, technology, and investment
2). A business plan and realistic budget are essential.
strategy. One of the most effective methods
for getting into financial services quickly is to acquire
an existing firm. An acquisition strategy may be more costly
upfront but it can be attractive if the acquired entity’s
existing cash flow can finance the cost over the term of
single most important consideration when acquiring another
practice is its culture: How does it conduct business? Is
it fee-based or transaction-oriented? What is its philosophy?
The success of the acquisition depends on retaining acquired
clients. If the culture of the targeted firm clashes with
the acquirer’s culture, then the union cannot work.
considerations when acquiring a practice are the different
organizations’ brands, target markets, and client
bases. For example, if the acquirer specializes in helping
small business owners, it won’t want a financial services
firm whose clients are predominantly teachers.
a good fit is found, financial matters can be considered.
A practice that is mostly commission-based will generally
command a lower valuation than a firm that is mostly fee-based.
Generally, fee-based practices trade for approximately two
times revenues, whereas commission-based practices trade
for around 1 to 1.5 times revenues. The amount of expected
client servicing can also affect the purchase price.
can be accomplished in a number of ways, but “earn-outs,”
which structure the acquisition so purchase payments are
directly tied to client retention and future net revenues,
generally work best.
acquiring a practice—and gaining potentially hundreds
of clients overnight—is popular, patience is key.
Finding the right practice at the right price may take years.
The acquisition route should not exclude the pursuit of
other strategies at the same time.
venture. While building from scratch or acquiring
an existing practice may make sense for companies with considerable
time and resources, the model that has proved most successful
for accounting firms involves developing strategic alliances
with current financial services providers. Because this
approach does not require committing thousands of dollars
to personnel, compliance, and other start-up costs, a joint
venture is generally the least expensive and most flexible
to a study done by CEG Worldwide (cegworldwide.com), companies
that use joint ventures as opposed to in-house services
are substantially more profitable, regardless of size. Small
companies offering services through joint ventures earned
twice what small companies offering services in-house earned.
For larger entities, the difference in earnings was 58%.
Joint ventures produce very little overhead. Without the
direct costs for personnel, technology, and research, nearly
all of the revenues coming from financial services flow
directly to the bottom line. The CEG study also found that,
in addition to greater revenues through joint venturing,
the services provided were much more expansive. If a client
needs a particular solution or product, an accounting firm
can simply find the right partner in that particular area.
This is far more expensive for an in-house practice.
joint venture entails a 50/50 split of revenues derived
from financial services. Depending on the state of operations
and the services the firm wants to provide, it may be required
to obtain a securities and insurance license.
a joint venture can help a firm expand into financial services
quickly, a strategic partnership involves planning. Considerations
are similar to an acquisition: How well do the potential
partners’ philosophies match? Are the sizes of the
practices comparable? Will the customer service be comparable?
What is the experience of the strategic partner? What kind
of marketing support is expected?
best source of potential strategic partners is a company’s
existing client base. Current clients can be asked for feedback
about who provides their financial services and how satisfied
they are with the relationship. With this information, the
firm can contact potential partners to discuss a possible
a CPA firm has decided to begin offering financial services
to its accounting clients, the next level of planning begins.
The following is a list of things to consider before deciding
which model to adopt.
Budget. Know how much can be spent.
Services. Know what services, such as insurance
and estate planning, are desired and whether they will
be fee-based or commission-based.
Target market. Identify the needs of current
Philosophy. Determine an investment management
strategy—for example, index funds or active investment
Involvement. Determine the level of involvement
in clients’ financial matters.
Marketing. Discuss how the firm wants to communicate
its new services to its clients.
Competition. Identify the firm’s competitors
and the services and products that competitors currently
Boyle, CFA, is the founder of Boyle Capital (www.boylecapital.com),
a registered investment advisory firm based in West Des Moines,
Ia., and president of One Up On the Street (www.1uponthestreet.com),
a private-label investment solution for investment professionals.