Getting in the Financial Planning Game

8/9/2019 Getting in the Financial Planning Game

1/48 Financial Planning Disclosures July/August

in the

FinancialPlanning

Getting

By David S. Murphy, CPA, CFP, Ph.D.,

and Philip H. Umansky, CPA, Ph.D.


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Financial Planning Disclosures July/August 9

With the current economic downturnsignaled by a major drop in the stockmarket in 2008, declining home values,high unemployment, rising health care costs, com-plex individual income tax law changes and Mado-type rauds, individuals are increasingly looking ornancial planning resources.

And CPAs can help.On the national and local level, the American

Institute o CPAs (AICPA) and VSCPA respectivelyhave done much to provide ree nancial literacyresources and programs to consumers. The AICPAhas its 360 Degrees o Financial Literacy and Feedthe Pig initiatives. The VSCPA has its Financial Fit-ness initiative, which includes ree nancial planningseminars and webinars, Speakers Bureau, Ask-a-CPA E-mail Program, tax call-ins in Richmondand Roanoke, television interviews, e-newslettersand more.

The VSCPA has also been very involved withpromoting nancial literacy in the Virginia second-ary education system and general public awareness

o the importance o nancial tness through thegovernors declaration each year o Virginia FinancialLiteracy Month.

The more ocused issue, however, is that whilethe CPA proession and the current economic en-vironment have created both exposure and impetusor nancial literacy and planning, how is the pro-ession developing this market in terms o businessopportunities?

What is driving the market?There are several macro trends that show the

market is expanding and that CPAs are well posi-tioned to take advantage.In a 2010 Consumer Financial Literacy Survey o

2,028 adults in the United States, conducted by Har-ris Interactive, 34 percent o American adults gavethemselves a grade o C, D or F on their knowledgeo personal nance. This extrapolates to about 77million persons in the United States. In the samesurvey, 78 percent o adults agreed or stronglyagreed that they would benet rom the services oa nancial proessional.

Though many questions in the survey indicatedthat Americans are underprepared in terms o nan-

cial planning, perhaps most concerning was that 56percent o respondents said they do not have a budgetand 33 percent save 0 percent o their householdincome or retirement.

While persons who indicated such would not beprospective clients o CPA nancial planners, thereis some evidence that even those with some degreeo nancial sophistication may need help.

In a survey o 206 MBA students (Murphy andYetmar, 2009), participants were asked: 1.) i theythought preparing a personal nancial plan was im-portant; 2.) i they were interested in preparing w


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such a plan; 3.) i they had time to do so;and 4.) whether they elt that they had thenecessary skills and knowledge to prepare apersonal nancial plan.

While 76 percent o respondents indi-cated that they thought preparing a nancialplan was important and 67 percent wereinterested in preparing a nancial plan, only40 percent elt they had the time to prepare a

plan. Most surprisingly, only 33 percent eltthey had the nancial expertise to preparea plan. Given that the participants averageage was 29, they had 6 1/2 years o workexperience and had an average income o$47,500 and obviously had a degree o

nancial sophistication, as MBA students the latter statistic in terms o expertiseis surprising.

Charles Overbey, a Richmond-basedCPA/Personal Financial Specialist (PFS)and Certiied Financial Planner (CFP),sees some generational dierences in terms

o the need.Younger persons tend to have challengeswith cash low and credit management,while the older persons are more ocusedon retirement and many have been soldinappropriate investments, Overbey said.He agrees that skills, knowledge and timeare actors that send clients to him.

There is growing body o evidence thatthe typical American may not have thetechnical knowledge to perorm nancialplanning. When 1,984 Baby Boomers werepresented with a problem to compute the

balance o a $200 investment that earnsinterest o 10 percent compounded annu-ally ($242) ater two years, only 18 percento respondents could do it (Lusardi andMitchell, 2008).

CPAs who perorm nancial planning areseeing a degree o pessimism in their clients,which may make the CPA services evenmore important. In a 2010 AICPA survey oits Personal Financial Planning membership,72.2 percent o the 421 CPA respondentsindicated that their typical client has become

more risk averse over the last year, and 54percent said the typical client is not verycondent in the stock market.

Seizing the marketTrust

Charles Coker, a sole practitioner CPAwho operates in Northern Virginia, has seena 20 to 25 percent increase in his number o

personal nancial planning clients over thelast two years, many o whom come romhis traditional base o personal income taxclients.

A big part o my job is educating clients,Coker said. They do not have the time,

and the CPA designation provides the trustactor.

The trust actor is important. In 2006,Amplitude Research conducted a survey o1,007 investors to determine who rated thehighest as the most trusted nancial advi-sor. CPAs were rated the highest, ollowed

in order by CFPs

and attorneys. Thosenancial advisors who sell nancial productsor services, such as stock brokers, insuranceagents and real estate brokers, were urtherdown the list.

The trust associated with a CPA obviouslystems rom the independence and objectivitythat are at the oundation o the core CPAunctions o accounting, auditing, taxes andmanagement consulting. However, the trustactor can easily be leveraged to personalnancial planning and to the existing clientbase o medium- to high-net worth business

owners, managers and tax clients.Compounded with the act that most

CPAs work on a ee-only basis and are notinvolved in selling nancial products, theCPA has a natural competitive advantage inmany respects.

ExpertiseIn terms o expertise, currently the

AICPA has a specialty designation, thePersonal Financial Specialist (PFS), whichis designed or CPAs who work in personal

nancial planning. Among the requirementsto be a PFS, CPAs must work in the personalnancial planning eld or two years, andbeginning ater December 31, 2010, pass thePFS, CFP or Chartered Financial Consul-tant exam. Per the AICPAs PFS list, thereare currently 110 PFSs in Virginia.

CFP, the other major specialty desig-nation related to nancial planning, can be

held by both CPAs and non-CPAs, and tosome extent it is a competitor to the CPA/PFS. There are ar more CFPs than CPA/PFSs, and CFPs can work in a number odierent types o rms, rom banks to wealthmanagement rms.

Proper planning

In 2007, Moss Adams, LLP, CPAs, in co-sponsorship with the AICPA, surveyed CPArms involved in personal nancial planningto determine best practices. The studyshowed that at that time, the typical CPAs

personal nancial planning services weregrowing aster than the broader nancialplanning market and had higher operatingmargins than non-CPA peer nancial advi-sors o the same size. The study identiedour successul operating models:

Solo practitioner: The CPA perormsa number o traditional CPA servicesor clients including personal nancialplanning.

Single entity:

The CPA rm has aseparate division within the rm thatperorms just personal nancial planning.

Stand-alone business: The CPA rmeither partially or ully owns a subsid-iary that does personal nancial plan-ning, to which reerrals are made.

Preferred referral partner:Thepartner can be an independent busi-ness to which the CPA reers potentialnancial planning clients, with the CPA

either receiving or not receiving reer-ral revenue.

There are many nuances in each o themodels identied, and they all can be suc-cessul though they have common andunique challenges. No matter the modelused, the study identied our best practices:1.) develop plans and goals; 2.) develop aprocess or monitoring perormance o thenancial planning business; 3.) ormalize thecompensation system; and 4.) devote time

10 Financial Planning Disclosures July/August

Younger persons tend to have challenges with

cash fow and credit management, while the older

persons are more ocused on retirement and

many have been sold inappropriate investments. Charles Overbey


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Financial Planning Disclosures July/August 11

and resources to marketing.The most common challenge is deter-

mining the type o client the CPA wouldaccept in terms o either net assets, incomeor some other client acceptance criteria.James Shepherd, CPA/PFS, CFA, o KuehlShepherd, Kozlowski and Associates, hasbeen doing personal nancial planning or28 years. He says, Developing a philosophy

o which personal nancial planning clientsto take is important.This is refected in the philosophy o many

CPA rms, where they strive to serve thoseclients to which they can provide real value-added services.

For example, Cherry Bekaert & Hollandindicates on its website that it works exclu-sively with a limited number o prominentamilies or whom it is able to add signicantvalue and make a dierence in their nanciallives. Wesley Watkins, CPA/PFS, partnerwith the rm, says that while there is a lot

o nancial awareness, someone needs tobring it all together in a plan.

Other common challenges include thecompliance part o the business in terms obeing registered investment advisors. Theunique challenges associated with the solopractitioner mode were how to not becomeoverworked, and the greater propensity orthe client base to have lower income and lessinvestable assets than other models.

Challenges or the single-entity and stand-alone business models include ensuring that

non-nancial planning proessionals marketand reer potential clients to the nancialplanning side o the business, and that auditor tax clients who are reerred receive thesame high level o service they receive withtraditional CPA services.

The challenge with the preerred partnerreerral model is ensuring that the inde-pendent business did not steal the clientby oering services such as tax complianceand planning, which the CPA had initiallyprovided.

John Napolitano, CPA/PFS, CFP,

chairman and CEO o U.S. Wealth Man-agement, based in Braintree, Mass., helpstransition CPA rms into personal nancialplanning over a three- to ve-year period.His clients see personal nancial planningas a mechanism to move away rom billablehours and charge based upon value, so rmscan actually work ewer hours and makemore prot.

As mentioned previously, CFPs are themajor competition or CPAs who want to getinto nancial planning, at least or potential

clients who do not already have an existingrelationship with a CPA. In the study o MBAstudents, 75 percent o respondents said theywould seek the services o a CFP, with 16percent seeking a CPA/PFS and 4 percentseeking a non-PFS CPA. Obviously, CPAscan also hold the CFP certication andmany in the nancial planning eld do.

ConclusionThe current economic environment mayprovide an excellent opportunity or CPAsto provide personal nancial planning servic-es or their clients. Because CPAs are ratedvery highly in the trust actor, and because oclients excellent results in other traditionalCPA services, CPAs who hold a PFS or CFPhave excellent opportunities.

Transitioning into this service is notwithout risks and challenges, but manyCPA rms have made the transition and aresuccessul.

Lusardi, A., and O.S. Mitchell. (2008) How Much DoPeople Know about Economics and Finance? Ann Arbor, MI:

University o Michigan Retirement Research Center Policy

Brie.

Murphy, D. and S. Yetmar. (2009) Personal Financial

Planning Attitudes A Study. Forthcoming in Management

Research News, issue to be selected.

David Murphy, CPA, CFP, CFS, Ph.D.,

is proessor o accounting at Lynchburg

College, where he also serves as the

chair o the Accounting Department

and as director o the fnancial planning

track in the colleges MBA program.

Beore earning his doctorate in

accounting and fnance at Washington

State University, he was in private

practice in Seattle, Wash. Contact him

at [email protected].

Phil Umansky, CPA, Ph.D., is associate

proessor o business at the Sydney

Lewis School o Business at Virginia

Union University and chairman o the

Accounting and Finance Department.

He is a CPA Ambassador, a regular

contributor to the WTVR Virginia

This Morning TV Show on money

management topics, and a member othe VSCPA Editorial Task Force. Contact

him at [email protected].

Getting in the Financial Planning Game

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