there are benefits to both.
by anthony glomski and russ alan prince
your $5-million high-net-worth practice
accounting firms adopt one of two business models when it comes to offering financial products for fees or commissions. either they do or they do not. a fancier way of saying this is that an accounting firm has adopted a product-neutral or product-inclusive financial product business model.
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a product-neutral financial product business model is built around the delivery of services in exchange for a retainer, project or hourly fee. the typical services offered via a product-neutral model tend to be administrative, wealth planning or lifestyle in nature and might include accounting and tax work, estate and succession planning, and concierge support.
a product-inclusive financial product business model is similar to the product-neutral framework, with the addition of financial products such as investment management and life insurance. the products can be provided by an affiliated organization or a third party. still, the relationship and treatment of fees between the accounting firm and the product issuer must be clear and disclosed up front. in addition to the fee-based revenue associated with the product-neutral model, the product-inclusive model allows for asset-based fees and commissions, depending on the products sold.
as we have said, there’s no “best” business model. you and your high-net-worth practice can be hugely successful with either of these choices. what is important is that you think through which product business model makes the most sense in your situation.
considerations for selecting a financial product business model
when selecting a financial product business model for your high-net-worth practice, you start by taking into account its overarching objectives, the operating culture and environment at your accounting firm, the range of in-house capabilities and the risk-reward differential of each model. for instance, the margins for a product-inclusive model are typically 10 to 35 percent higher than those achieved with a product-neutral model. this is because of the attendant risks and potential for conflict that can arise when assuming fiduciary and similar responsibilities.
exhibit 1 outlines and compares the key considerations for selecting a family office practice model.
exhibit 1: considerations for selecting a business model
adopting best accounting firm high-net-worth practices
both the product-neutral and the product-inclusive financial product business models can deliver tremendous upside for accounting firms. success (and the ability to hit the high end of the margin ranges) is contingent, in many ways, on client-focused business development. in addition, success requires thoughtful business design and meticulous implementation, further supported by best practices (exhibit 2).
best practice #1: high-caliber personnel: the wealthy can often be demanding clients, which means that significant care must be taken when selecting and developing employees. for the long-term success of a high-net-worth practice, it is crucial to be able to access and manage high-caliber candidates who possess the requisite skills to work effectively with the wealthy. your high-net-worth practice must also have an ongoing personnel development plan that includes the training, education, mentoring and supervision needed to excel.
best practice #2: attention to wealthy client needs and wants: high-net-worth practices must address the immediate concerns and issues facing wealthy clients while maintaining the perspective that allows for long-term planning and achievement of goals. as such, it is essential that you and others understand the priorities and preferences of wealthy clients on a real-time basis. this is all very doable by adopting the everyone wins process.
best practice #3: adaptable infrastructure and operations: the infrastructure an accounting firm needs to support a high-net-worth practice is a function of the nature and range of services it will deliver to its wealthy clients. the more capabilities on the platform, the greater the infrastructure requirements will be. there are numerous options – including internal, outsourced and hybrid models – that should be carefully evaluated against the accounting firm’s human and capital resources and overarching goals for the practice area. closely related to the infrastructure, employees will follow the operational processes and procedures for seamless implementation and compliant results. it is essential to realize that certain wealthy client situations may necessitate modifications to existing protocols.
exhibit 2: best practices requirements by business model
delivering financial products
for those high-net-worth accounting practices that choose to be product-inclusive, they need to decide how to do so operationally. there are six principle alternative ways to deliver financial products to wealthy clients (exhibit 3).
exhibit 3: financial product delivery alternatives
when considering which delivery alternative is most viable for your high-net-worth practice, there are several variables to weigh (exhibit 4). factors affecting which approach your firm elects to adopt include the cost of implementation and time to market. a firm should also consider how well each option aligns with its culture, values and way of doing business. finally, your firm should take into consideration any initial and ongoing training requirements.
exhibit 4: key considerations of each delivery alternative
as the above chart illustrates, each delivery alternative has specific benefits and costs. each is viable for a particular type of high-net-worth practice and accounting firm. for example, if you want greater control, the build or buy or build then buy alternatives are best. while these approaches are the most capital-intensive, have the highest training requirements and take the longest to implement, they offer the highest potential return.
at the other end of the spectrum, the referral model offers the easiest path to providing financial products but the lowest profit potential. for many high-net-worth practices and firms, the joint-venture model may represent a viable middle ground between the other alternatives in terms of ramp-up time and future revenues. then, there is always some combination of all the different approaches.
conclusion
a major decision for many accounting firms and high-net-worth practices is whether to be product-neutral or product-inclusive. your decision impacts everything from sourcing wealthy clients to profitability, and from organizational structures to managerial responsibilities. either financial product business model can lead to a $5 million high-net-worth practice, but they tend to take slightly different paths to get there. the decision about whether to use a product-neutral or product-inclusive financial product business model needs to be carefully thought out.
2 responses to “product-neutral or product-inclusive?”
anthony glomski
jaret,
you raise a valid point. many cpa firms do not include these services as part of their business model. this is for several reasons, including what you mentioned about potentially losing referrals. for practices that do want to include these services as part of their business model, this article outlines the options that are available.
it sounds like you’ve had success with financial advisors as referral sources. that’s great. in other articles, we dive into how to maximize the opportunities with these types of relationships.
jaret rice
our best referral sources are financial advisors. if we offer the services that you’re suggesting, we will lose these referrals and turn off many people we are close to.