choosing the wrong one could be detrimental to your firm.
by russ alan prince
your $5 million high-net-worth practice
central to establishing your accounting firm’s wealth management practice is selecting a suitable elite wealth management business model. a lot of thought goes into deciding first if wealth management is applicable and meaningful at an accounting firm; and second, if so, the best way to establish and grow a wealth management practice.
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the choice of business model makes a great deal of difference. there are five main business models to choose from.
one business model is not inherently better than another. the best choice of a business model is the one that is the best fit for the accounting firm. also, to some degree, accounting firms can mix and match the different business models depending on circumstances as well as a transition from one business model to another based on experience and the strategic direction you set for your accounting firm’s elite wealth management practice.
five main business models
there are options – including internal, outsourced and hybrid models – that should be carefully evaluated against the human and capital resources of the accounting firm and the overarching goals for the wealth management practice. it is important to realize that certain client situations may necessitate modifications to a selected business model. there are five main ways to deliver financial strategies and products to clients.
business models
| build | the accounting firm creates its own elite wealth management practice from scratch. the biggest obstacle tends to be recruiting the wealth managers. |
| buy | the accounting firm buys one or more wealth management firms. |
| build then add | after building the wealth management practice, the accounting firm buys one or more wealth management firms or adds to the ranks by recruiting more wealth managers. |
| joint venture | the accounting firm enters into a formal equity or revenue sharing joint venture with one or more wealth management firms. |
| referrals | on a case-by-case basis, the accountants refer their clients to external wealth managers for predetermined compensation. |
when considering which business model is most viable, there are many variables to weigh. factors affecting which business model an accounting firm adopts include the cost of implementation and time to market. other factors include how well each option aligns with the accounting firm’s culture, values and way of doing business. different cost structures are of significant importance.
fixed costs are high if the accounting firm chooses to build a wealth management practice from scratch. wealth managers are often expensive to recruit and retain.
buying a wealth management practice can be even costlier, at least initially. today, there is likely to be a large premium for the acquisition.
if you aim to build a wealth management firm and then add on other wealth management firms or recruit more elite wealth managers, the fixed costs are usually high. for many accounting firms using this business model, the idea is to use the profits from their wealth management practice to finance the additions.
the fixed costs for joint ventures are low as the expenses are predominately variable. for accounting firms, some additional personnel is usually required. still, the operational costs are principally borne by the respective firms while revenues are shared. similarly, referrals have little, if any, fixed costs.
because of the considerable cost differentials among the business models, most accounting firms start with the joint venture or referral model. this lets the accounting firm’s senior management and the accountants get a good idea of what it takes to succeed in the wealth management business. a large percentage of accounting firms that adopt the joint venture or referral business models continue with these models, but some have experienced success transitioning to one of the other business models.
what can be complicated is determining which business model to pursue. each wealth management business model has its advantages and drawbacks. what is detrimental to many accounting firms with wealth management practices is that their business models are not in sync with their firm’s culture and strategic initiatives. as none of the five business models is inherently better than another, the best one for any particular accounting firm is a function of several factors.
using the joint venture or referrals models is the way many accounting firms get into the wealth management business. these business models are mostly, if not entirely, variable cost models. starting with the joint venture of referrals models is a risk mitigation strategy.