Working with CPAs in the Wealth Management Business

When Brian Mackey, Jesse Mackey, and I decided 10 years ago to start 4Thought Financial Group (4TFG), it was a process to feel comfortable with giving up some of our independence. As I later learned, being “comfortable being uncomfortable” is a good thing.

When Brian and I entered the life insurance business with Cigna Individual Financial Services Co. (CIFSCO) in 1979 and 1984, respectively, we realized what we liked the most about the industry was being independent to determine our own destiny. If you worked hard and were lucky, you could make a lot of money.

Over our firm’s history, we have gone through different business models in prioritizing the services we offer. As the world of financial advising, financial planning, and wealth management have changed, the core of the CIFSCO philosophy remains intact. Serve first! Always serve your client’s needs first! For years, the industry has debated the “fiduciary standard.” We are fiduciaries. We are not affiliated with any broker/dealer, only federally registered with the SEC as a “registered investment advisory (RIA)” firm. We work for our clients—not for the broker/dealer.

What we do is “true financial planning”: We review the client’s objectives, current planning, and recommendations to make sure that the client is on track to accomplish his or her objectives. At that point, the client can take our financial plan and go anywhere to implement it. We do not conduct any transactional investment business, property and casualty insurance, or legal work.

Yet most clients still choose to implement with us when it comes to managing their money and potential life, long-term care, or disability insurance needs. Why do we earn such loyalty from clients? The answer is simple—most of our clients come from accounting referrals.

We have always known that CPA firms that perform attestation services are not ethically allowed to perform the wealth management services to the same business owner that they are doing the attestation work for. This has always been one of the reasons for our value-add, because we do not do any accounting or tax work for clients.

Commercialism

I was moved to write this article when I read, “How Independence and Commercialism Can Coexist” by Vincent J. Love in the January/February 2022 CPA Journal.

It is true that we deal with small to mid-size CPA firms that do not have all the resources to have an in-house “financial planning” or “wealth management” department. It’s also true that these firms “outsource” these services to us with full disclosure to the client (whether or not they choose to receive a referral, or a solicitor’s fee). But from my point of view, this is in the client’s best interest. First, there is not an “unconscious bias,” as Love refers to it in his article. Secondly, CPAs are referring these services to specialists such as us who perform them exclusively.

I have never understood how the mid- to large-size CPA firms conduct both auditing and financial advising. In my opinion, the client is not being optimally served, and there is a potential conflict of interest. I have spoken to accountants who do not refer internally to their wealth management departments. Some CPAs are not comfortable performing this referral function (even though they can be compensated), and others may not like the internal choices that are available. There is an argument to be made that the accountant plays a crucial role in the financial planning process—we obviously agree with this. As we like to say, a tax advisor must be at the table to guide a client on the tax impact of any financial planning decisions.

CPAs have always been America’s most trusted advisors, and I believe this is still the case. But if the financial solutions recommended by the wealth management departments of mid- to large-size CPA firms do not work, then their status as America’s most trusted advisors may be in jeopardy.

This does not have to be the case. As Love points out, “the accounting firm’s leadership must have a commitment to integrity and ethical behavior, or ‘tone at the top’ must be evident in its interrelationships throughout the firm.” He further adds, “Professionalism needs to be nurtured and preserved for the good of the accounting profession and benefit of the public interest.”

Working with Accounting Firms

One of the keys for professionals in the financial advisory community when working with CPAs is knowing how a CPA firm works. An advisory firm must be proactive and keep the accountant (as well as other professionals, such as attorneys) in the loop when it comes to what the client is being recommended by the advisory firm or is contemplating doing from another resource. All of the professionals need to be on the same page; we call this the team approach. It’s all about the client and having all advisors act in the client’s best interest—it’s not about who gets credit for what.

CPAs need to know the tax aspects of the client’s investable portfolio. In these days of paperless transactions, a value-added service by a financial advisory firm is to make sure that the accountant is copied on all 1099s or 1099Rs, as well as any management fees that have been paid on taxable accounts (as opposed to tax – deferred accounts). Advisory firms should also be in touch with accounting firms to find out if there are any carryforward losses that can be used to offset capital gains.

Another area that an advisory firm should work with the accounting firm on is knowing which effective tax rate to use for required minimum distributions (RMD) from tax-deferred accounts each year. The last thing a CPA wants to know is that not enough income taxes were withheld from the RMD. CPA firms have an advantage here because they already know what the client’s effective tax rate is. Are there qualified charitable distributions (QCD) that may not have been reported correctly on a client’s 1099R? If this may be the case, the financial advisor should let the CPA know; here, the advisory firm may have the advantage.

I learned a long time ago (I left public accounting in 1984, but still maintain my CPA license) that once the tax year is over, it’s all history in putting together clients’ tax returns. It’s all about the income tax projection and being proactive before the year is over. A financial advisory firm should provide any taxable income (dividends or interest), gains or losses in the taxable portfolio, or RMD information to the accountant for the tax projection.

Estate Planning

If there is wealth passing intergenerationally when a business owner dies, it is important for their CPA to make sure the individual is current with a comprehensive estate plan that includes asset protection, distribution with minimum probate delays, and estate and gift taxes. This is also an area where the RIA firms have more experience than CPA firms in getting clients to act. The reason is that they are trained better than most if they have learned the life insurance business. Some say that life insurance is not bought but sold for potentially very good reasons. The human psychology in this area is complicated to communicate and becomes part of the problem of why nothing gets done, including unsigned legal documents.

If CPA firms do not properly address a client’s business succession, along with the estate planning, the business may not survive. But this cannot be done in a vacuum. Personal property, real property, and fringe benefits must be examined to optimize the desired result. Is the accounting firm going to look at owner and beneficiary designations on life insurance policies? Are they going to request in-force ledgers (new projections) to be run on old life insurance policies? Are they aware of the potential liability if some of the life insurance policies run out of cash value in a low-interest environment? Finally, do they really want the reputational risk if the planning does not work out, and the risk of losing the auditing and accounting part of the engagement?

Coexisting

I applaud CPA firms that have figured out how independence and commercialism can coexist. To my way of thinking, that’s the definition of trust—when independence is balanced with commercialism. I suspect that Vincent Love is correct in that many accounting firms can improve on how they are perceived by the outside world. If a bad result occurs, it will be all over social media. Maybe it’s time to reconsider changes in the business model before something like another Arthur Andersen happens.

Martin E. Levine, , CPA, ChFC, CAP is the CMO of 4Thought Financial Group, Inc., Syosset, NY

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