Over the past few years, advisors have worried mightily about the threat posed by the rise of the so-called robo-advisors. However, as we’ve seen in recent months, several robo-advisors have shut down, while many of the more prominent ones have seen their growth rates decline dramatically. Still there is a threat out there that financial advisors need to be aware of: and it’s not from robo-advisors, but from Certified Public Accountants (and what robo-tax-preparation has done to them!).
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope and guest hosted this week by Jeff Levine, we discuss why CPAs represent the biggest competitive threat to financial advisors today, why the demise of the DoL fiduciary rule has opened the door for CPAs to expand their practices by offering financial planning services, and the steps financial advisors can take right now to help stave off that threat.
It’s not news that financial advisors have been dealing with compressed margins for years, but CPAs have been under that same pressure for far longer, as “robo” tax preparation software has dramatically reduced tax preparation costs for consumers. By expanding into financial planning services, CPAs have the opportunity to add value for their clients by capitalizing on the fact that, not only do they already have a deep knowledge of their clients’ financial situations, but they also enjoy a very high level of public trust.
All of this, including the fact that consumers prefer one-stop shopping, makes financial planning a great fit for CPAs. The American Institute of Certified Public Accountants (AICPA) knows this as well and has been busy promoting their Personal Financial Services (PFS) designation, which (by the way) is only available to CPAs. And now, with the Department of Labor’s fiduciary rule now officially out of the picture, a major regulatory hurdle is out of the way, opening the door for larger accounting firms to take a closer look at entering the wealth management arena.
All is not lost, however. To combat this threat, financial advisors can focus on developing their tax planning expertise, and work on making themselves indispensable to tax professionals by proactively sharing and providing client information and collaborating with as early as possible every tax season. Because CPAs who already work productively with financial advisors are less likely to decide to go into competition with them… especially if the CPA is counting on you as their referral source!
The bottom line, though, is simply that CPAs represent a threat to financial advisors, as they are driven increasingly towards the advice business because of the pressure on their own accounting firms… but there’s still an opportunity for advisors to create stronger professional relationships with accountants and even grow their practices in the process.
(Michael’s Note: Today’s #OfficeHours features Jeffrey Levine, CPA/PFS, CFP®, CWS®, MSA. Jeff is the Director of Advisor Education at Kitces.com. You can follow Jeff on Twitter @CPAPlanner. The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Good afternoon, everyone, and welcome to Office Hours with Michael Kitces. Don’t adjust your screens. I know this is going to be hard to believe, but I am not Michael Kitces. My name is Jeffrey Levine. I’m the Director of Advisor Education at Kitces.com, and during our time together today on Office Hours, we’re going to talk about what is perhaps the biggest threat to advisors today. And no, it’s not robo-advisors. Despite the cries from many over the last few years about the rise of robo-advisors – that they’re going to take over – that hasn’t really happened. Even the very successful robo-advisors, like Wealthfront, have seen growth rates drop dramatically over the last few years. Many of the robo-advisors that came to forefront with great fanfare have since fallen by the wayside or shut down entirely.
And even the recent studies regarding Millennials, who are understood to have the greatest desire to work more with a robo-advisor, or others who are more digital in nature, say that they want the advice of a human to go along with it. So the rise of robo-advisors has been greatly overstated.
So with that, what then is the next possible disruption for advisors in this space? I will tell you: I personally believe that it’s CPAs. Tax professionals actually represent the greatest threat to non-CPA financial advisors today. And there’s a number of reasons that’s the case.
Reasons CPAs Are A Competitive Threat To Other Advisors [1:44]
First off, CPAs themselves are under margin compression. They’re already facing a lot of the issues that advisors are now starting to face. And CPAs have had this pressure for a lot longer than advisors have.
How long have clients been able to go to the store and buy TurboTax or a similar type of program? It’s a lot longer than they’ve had access to financial planning software! And frankly, it’s a lot easier to get that output to work, right? Because when you go and you want to complete a tax return, there are really only two basic goals you have in mind, right? You want to fill it out correctly, and you want to fill it out so that you pay the least amount in tax possible. That’s really it, right? There are no other goals.
On the other hand, financial planning has so many different competing goals, and it’s much more difficult to program that language into any computer. So if you’re a CPA and you realize, “Well, gee, my industry might be under a siege,” where do you look next? Oftentimes going to be to the financial planning space. So that’s one reason why CPAs represent the threat.
Again, even technology has made it easier with integrations into tax planning software. It’s so much easier today to prepare a tax return than it was years ago, and more and more people are doing this themselves. And even some of the – I hate to use the word, “budget CPA or tax professionals” – like H&R Block, last year announced that they had a partnership with IBM’s Watson? So now you have Watson looking and saying, “Well, what other deductions are possible here?” So it becomes very challenging for a CPA to compete in that world, again, where the goals are relatively straightforward. I want to report my taxes correctly, and I want to pay as little tax as possible, and computers can optimize for that very easily.
And even traditional accounting is going to eventually come under siege, because of blockchain technology. That represents a significant challenge to the traditional accounting profession, where their job is recording and verifying. If we have everything available on open ledgers, well, let’s face it, that again takes away a lot of the job opportunities that the traditional CPA does. So that’s one of the major reasons, again, that CPAs themselves are under threat from both margin impression and obsolescence… so they’ve got to look elsewhere.
The other reason that CPAs are in a great position today is that CPAs are one of the more trusted professions. A recent Gallup poll, for instance, showed that about 38% of people viewed CPAs with a high or very high degree of ethics and trust. Now, that may not sound like a lot, 38%, but that was the amount of people who voted them as high or very high. Now, let’s compare that to some other financial professions, such as a banker. Well, bankers actually were about 50% less likely to have either a very high or high degree of trust and confidence. And what about stockbrokers? Stockbrokers were three times less likely to have those same levels of high degree of trust and a high degree or a very high degree of trust. So again, CPAs, while 38% may not be the pinnacle of trust and understanding with clients, it’s a lot higher than others in the financial profession.
And don’t forget, CPAs have a deep knowledge of their clients going in. When you prepare a tax return, you are picking up a lot of information from your clients. That’s why over the years, so many advisory firms have adopted some of these 1040 overlays. You’ve probably all seen them at one point or another, where you go and you take that 1040 overlay and you put it down against the actual 1040 and it highlights that the client has $3,000 of interest. Why don’t you inquire as to what interest rate they’re earning, or where those assets are being held, etc.? So those 1040 overlays help advisors create value… but that’s all information the client’s CPA has already!
And clients like one-stop shopping. That’s why so many financial planning firms today have begun to incorporate tax planning. Because people want to go to where it is easier for them, right? They want to go to one place and have everything done in a reasonably quick manner and in an effective manner. And obviously, the the CPA tying in, it’s that much less that the CPA has to request documents. They already have the documents, the 1099s… they control it. So it’s an easier process all around. Things are easier for the client, things are easier for the CPA. It’s a win-win-win in those situations. So again, that’s another reason why CPAs represent a potential threat.
And even if we look back at some of the recent statistics that have come out at where CPAs are today, what services they’re offering today, well, about 54% of CPAs today already offer services in retirement planning. About 48%, or about half of all CPAs do succession planning, and about 23%, so about a quarter of CPAs, today offer some sort of wealth management service. So this is a really big issue for advisors coming on the forefront, and it’s not going to go away anytime soon.
The AICPA And Their Personal Financial Specialist (PFS) Designation [7:22]
Furthermore, think about CPAs and the push that the AICPA itself is making to get CPAs more involved in the financial planning process.
The AICPA is making a huge push. For starters, for those that don’t know, there actually is already a CFP equivalent, if you will, that only CPAs can get. It’s called the PFS, or Personal Financial Specialist. So if you’ve ever seen a CPA with the designation after their name of CPA/PFS, that means they’re going to be in the financial planning end of the spectrum. In addition, for those that don’t have the CFP or that don’t have a PFS designation, in those instances, the AICPA is trying to make it even easier for those CPAs to gain knowledge as well as to display that knowledge on their website to attract clientele.
For instance, recently the AICPA launched its new PFP (Personal Financial Planning) Certificate Program. The certificate program includes a number of different certificates in the areas of retirement planning, risk management, investment planning, estate planning, as well as actual practical applications for CPAs. And the CPA can take any single one of those areas, pass the test, get a certificate, and in addition to that, get what the AICPA is calling a digital badge. So certificants would get a digital badge for their website to demonstrate their financial planning expertise in a particular subject matter area. It would go there, and they would be able to prominently display that, “Hey, I have the knowledge in this particular area. I’m able to help you with it.” It’s a major, major push by the AICPA.
In addition to that, the AICPA has got resources such as ads that are already created, and brochures that are already created, for CPA financial planners to use. They are trying to push CPAs in that direction, because they realize that there’s a tremendous value that can be had by the public by CPAs engaging in this. And again, it protects the CPA on the loss of business profit margin on their end.
So don’t expect this trend to go away anytime soon. In fact, it’s likely to continue to accelerate over the years, where the advisor will come under pressure… again, not from robos. Robos aren’t the greatest threat, it’s the other human beings, the other advisors who have a deep level of knowledge of the client situation because they have that tax information and because they have a deep, deep relationship with the client. Again, CPAs typically represent the most trusted advisor, when compared against others like lawyers, financial planners, stockbrokers, insurance representatives, etc. So you have the built-in trust, you have the knowledge, and now you have the push and resources and the backing of the AICPA and other organizations. So that’s why, again, advisors really need to keep an eye on this.
One item of note here, we have seen this in practice already. When the DoL fiduciary rule came out, it actually halted some of the larger CPA firms in their steps because they didn’t know what to do? They’ve got a good business already, and, “Let’s wait and see what happens.” But now that the DoL’s fiduciary rule has gone by the wayside, we’ve seen an increase in many of the larger CPA firms, the national brands out there – the ones with $20+ million in revenue per year – show an uptick in their acceptance of the wealth management field, and they’re beginning to adopt that service more and more, and they’re beginning to see more and more uptake there. So again, a greater threat today from your fellow CPA or your fellow professional than from the robo-advisor.
Steps Financial Advisors Can Take To Stave Off The CPA Competitive Threat [11:00]
So what can you as a non-CPA advisor do to prevent this? Well, a few things.
Obviously, you want to have (or get) a deep level of knowledge on the tax planning side. That helps, right? That’s an easy winner.
The other thing is, though, if you’re already working with a CPA, you want to keep them out of your business. Well, how do you do that? Well, you make yourself indispensable to that CPA. Help them on the planning side when there’s a question, and be a resource for them. Have everything buttoned up come early January, February, etc. What if you were to make that CPA’s life easy, and send them a list of all the 1099s that they should expect for that client? And send them the list of all the cost basis information that they’re going to ask for later anyway? You have it. It’s done. Make that CPA not your adversary, but on your side. There’s a tremendous opportunity for you to do that, not only to protect yourself from those tax professionals who may at some point step into your field, but also to embrace working with them and to expand your business and generate more referrals from CPAs!
So that’s our takeaway for today. You really want to be cognizant of the CPAs’ growing potential to come into the financial planning practice, and take over those relationships that were with the traditional wealth manager that didn’t offer those services.
I want to thank you for joining this week’s Office Hours with Michael Kitces. Again, I am not Michael Kitces, but Michael will be back next week. And take care, everyone. Have a great day. Bye-bye!