When Brian Mackey, Jesse Mackey and I decided 10 years ago to start 4Thought Financial Group (4TFG), it was a process of becoming comfortable giving up some of our independence. As I later learned, being “comfortable with 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 that what we liked best 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.
During the history of our firm, we have gone through different business models in prioritizing the services we offer. While the worlds of financial advisory, financial planning and wealth management have changed, the core of the CIFSCO philosophy remains intact. Serve it first! Always serve your customer’s needs first! For years, the industry has debated the “good faith standard.” We are believers. 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 “real financial planning”: We review the client’s goals, current planning and recommendations to ensure the client is on track to meet his or her goals. 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.
However, most clients still choose to implement with us when it comes to managing money and their potential life, long-term care or disability insurance needs. Why do we gain such loyalty from customers? 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 permitted to perform wealth management services for the same business owner for whom they are performing attestation work. This has always been one of the reasons for our increased value, because we do not do any accounting or tax work for clients.
commercialization
I was excited to write this article when I read, “How Independence and Commercialism Can Co-exist” by Vincent J. Love in January/February 2022 CPA Journal.
It is true that we are dealing with small and mid-sized CPA firms that do not have all the resources to have an in-house “financial planning” or “wealth management” department. It is 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 an attorney’s fee). But from my perspective, this is in the best interest of the client. First, there is no “unconscious bias,” as Love refers to in his article. Second, CPAs are referring these services to specialists like us who perform them exclusively.
I have never understood how medium and large CPA firms do auditing and financial consulting. In my opinion, the client is not being optimally served and there is a potential conflict of interest. I have spoken to accountants who are not referred from within their wealth management departments. Some CPAs are not comfortable performing this referral function (although they may 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 certainly agree. As we like to say, a tax advisor should be at the table to guide a client on the tax impact of any financial planning decision.
CPAs have always been America’s most trusted advisors, and I believe that is still the case. But if the financial solutions recommended by the wealth management departments of mid-sized and large CPA firms don’t work, then their status as America’s most trusted advisors could be in jeopardy.
It doesn’t have to be like that. As Love points out, “accounting firm leadership must have a commitment to integrity and ethical behavior, or the ‘tone at the top’ must be evident in its interactions throughout the firm.” He further adds, “Professionalism must be nurtured and maintained for the benefit of the accounting profession and the 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 to know how a CPA firm operates. An advisory firm must be proactive and keep the accountant (as well as other professionals, such as lawyers) informed when it comes to what the client is being recommended by the advisory firm or is considering doing from another source. All professionals must be on the same page; we call this team approach. It’s all about the client and all advisers acting in the best interest of the client – it’s not about who gets the loan for what.
CPAs must know the tax aspects of a client’s investable portfolio. In these days of paperless transactions, a value-added service from a financial advisory firm is to ensure that the accountant copies all 1099s or 1099s, as well as any management fees that have been paid on taxable accounts (as opposed to taxes -deferred accounts). Advisory firms should also be in contact with accounting firms to find out if there are any carried forward losses that can be used to offset capital gains.
Another area in which an advisory firm should work with the accounting firm is to know which effective tax rate should be used for required minimum distributions (RMDs) from tax-deferred accounts each year. The last thing a CPA wants to know is that not enough taxes were withheld on the RMD income. CPA firms have an advantage here because they already know what the client’s effective tax rate is. Are there qualified charitable distributions (QCDs) that may not have been correctly reported on a client’s 1099R? If this may be the case, the financial advisor must notify the CPA; here, the consulting firm may have the advantage.
I learned a long time ago (left public accounting in 1984, but still hold my CPA license) that once the tax year is over, it’s all history in collecting clients’ tax returns. It’s all about projecting your income tax and being proactive before the year is over. A financial advisory firm must provide the accountant with any taxable income (dividend or interest), taxable portfolio gains or losses, or RMD information for tax projection.
Estate planning
If there are assets that pass down the generations when a business owner dies, it is important for their CPA to ensure that the individual is up to date with a comprehensive estate plan that includes asset protection, distribution with minimal probate delays and taxes on wealth and gifts. This is also an area where RIA firms have more experience than CPA firms in getting clients to act. The reason is that they are better trained 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. Human psychology in this area is complicated to communicate and becomes part of the problem of why nothing is done, including unsigned legal documents.
If CPA firms do not properly handle a client’s business succession, along with estate planning, the business may not survive. But this cannot be done in a vacuum. Personal property, real estate and fringe benefits should be considered to optimize the desired outcome. Will the accounting firm look at owner and beneficiary designations on life insurance policies? Will they require the books in effect (new projections) to be executed on old life insurance policies? Are they aware of the potential liability if some of their life insurance policies expire with no cash value in a low interest environment? Finally, do they really want the reputational risk if the planning doesn’t work out and risk losing the audit and accounting portion of the engagement?
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I applaud CPA firms that have understood how independence and commercialism can coexist. To my way of thinking, this is the definition of faith – when independence is balanced with commercialism. I suspect Vincent Love is right that many accounting firms could improve how they are perceived by the outside world. If a bad result happens, it will be all over social media. Maybe it’s time to reconsider changes to the business model before something like another Arthur Andersen happens.
