CPAs as financial planners.

Today's competitive marketplace demands that CPAs offer clients more than traditional tax and audit services. One way in which CPAs have responded is by becoming broad-based financial advisers. When evaluating what new services to provide clients, many CPAs realize their knowledge of tax matters and their expertise in handling financial affairs uniquely equip them to perform personal financial planning services.

Historically, CPAs and PFP have enjoyed a special relationship. For decades, CPAs informally served their clients as financial advisers. This relationship has changed, however, in recent years. Some CPAs now offer fee-based, specialized PFP services and still others are deciding whether to enter this market. CPAs can make a more informed decision if they know

* The demographic profile of CPA-financial planners

* The types of PFP services CPAs provide.

* Ways to develop PFP competency.

* Sources of clients.

* Factors important to clients seeking PFP services.

To develop this information, we conducted a survey of members of the American Institute of CPAs personal financial planning division. The questionnaire was developed by the AICPA planning and research department, the PFP division and a team of Baylor University professors. It was mailed to 1,000 randomly selected members; there were 281 usable responses.

TYPES OF PFP SERVICES CPAs RENDER

As shown in exhibit 1, page 101, CPAs identified three financial services they provided most frequently: income tax, investment and estate planning. Income tax's first-place finish was predictable. CPA-financial planners attending the 1993 PFP division conference reported that their clients' greatest concern was that taxes were taking a growing portion of their incomes. For CPAs seeking to expand their financial planning practices, the strong demand for income tax planning often provides a link to other PFP services.

Serving the financial needs of a diverse clientele requires knowledge of several disciplines. To meet their professional responsibilities, CPA-financial planners must consult other advisers. For example, survey respondents said the adviser they consulted most frequently was an attorney (72%), insurance professional (11%), broker-dealer (9%), other CPA firm (3%), banker (1%) and all others (4%).

Perhaps the need for legal documents when establishing trusts, transferring property and preparing wills influences CPAs' extensive use of attorneys. Reliance on insurance professionals and broker-dealers is to be expected. Few CPAs, for example, provide insurance products, and most do not offer their clients investment products and services. Minimal consultation with other CPA firms raises the question: Do CPAs fear losing clients to colleagues with more specialized knowledge? CPAS must decide on the level of PFP service they will provide. Services fall into three general categories:

* Consulting--the least complex level--typically involves advising clients on issues such as retirement or tax planning. CPA--financial planners usually recommend a specific course of action to solve a particular problem.

* Segmented planning is an intermediate level of service that consists of studying needs and making recommendations for broader areas, such as cash flow and estate planning.

* Comprehensive planning--the most complex level--includes identifying and ranking financial goals and recommending strategies to achieve them. This requires CPAs to analyze all of a client's needs. Because of its complexity, comprehensive planning is sometimes offered only by experienced CPAs who limit their practices to PFP services.

CPAs devoted 51% of their PFP efforts to providing consulting services. Meeting clients' segmented planning needs accounted for 30%. The remaining 19% involved preparation of comprehensive financial plans. As expected, not every CPA provided all three levels--90% did segmented planning and 72% prepared comprehensive plans.

DEVELOPING PFP WMPETENCY

Virtually all PFP providers said their practical experience as CPAs helped them become competent financial planners. Within this group, 83.2% said the experience was "very helpfill" in acquiring financial planning skins. Respondents also gave formal on-the-job training a high rating for developing competence. Educational materials and required continuing professional education courses were evaluated as moderately helpful.

Overall, CPA-financial planners said experience as a CPA provided the best preparation for developing a successful PFP practice. This supports the growing recognition that a natural relationship exists between CPAs and financial planning.

Some CPAs seek independent confirmation of their financial planning competency by obtaining one or more specialty designations, such as the certified financial planner (CFP), the chartered financial consultant (CHFC), the AICPA's personal financial specialist (PFS) and the chartered financial analyst (CFA). (See "Alphabet Soup: Financial Planning Designations and What They Mean:" JOFA, Jan. 94, page 78, for more information on specialty designation.

Only 49% of respondents had earned at least one financial planning designation, but many in this group held more than one. For CPAs who had earned specialized designations, two-thirds held the CFP. The PFS designation had been attained by 46%. Only 6% and 1%, respectively, held the CHFC and CFA.

SOURCES OF CLIENTS

From the six choices shown in exhibit 2, page 101, the CPAs providing PFP services ranked their three most important sources of new PFP clients as

* Extension of existing client relationships.

* Recommendations from current clients.

* Referrals from banker or attorney.

The first two were mentioned by 93% of respondents; the third was cited by 65%. In contrast, PFP providers said adverdsing, seminars and referrals from other CPAs yielded very few new clients. The survey found that firm size had no effect on sources of new clients. AD CPAs responding to the survey gave each of the six responses the same relative importance.

WHAT CLIENTS WANT

Although uniquely qualified as financial advisers, CPAs face stiff competition. Planners who aren't CPAs frequently gain new clients not because they know more, but because they routinely market themselves better than CPAs. To effectively market PFP services, CPAs must know what factors clients find important when shopping for these services. Survey respondents gave their highest ranking (95%) to the adviser's ability to understand the client's needs. As expected, many respondents believed clients valued two hallmarks of the public accounting profession-expertise and experience plus ethical reputation. On the other side, clients historically have not considered the cost of services a decisive factor when selecting a CPA.

DEMOGRAPHIC PROFILE

Membership in the PFP division does not mean a CPA offers PFP services for a fee. While 86% of respondents offered PFP services for a fee, 14% did not offer PFP services. For those who offered services for a fee, more than half had done so for at least six years. One-third of this group had offered fee-based services for at least 10 years. Exhibit 3, above, shows the distribution for the lengths of time CPAs provided fee-based PFP services.

Most respondents who offered PFP services had been CPAs for at least 16 years; 37% for more than 20 years. As the CPA-client relationship develops, meeting clients' financial needs becomes a natural extension of a long-term association. A combined analysis of "years as a CPA" and "time providing PFP services" suggests most CPAs offering such services had been licensed for a substantial period of time, indicating a willingness on the part of veteran CPAs to meet clients' needs in a changing market. Lengthy licensure does not, however, necessarily prompt CPAs to offer PFP services; 54% of CPAs not offering PFP services had been licensed for at least 16 years. About 75% of CPA-financial planners were between 36 and 55 years old. Only 11 were younger than 36 while 13% were over 55. Only 10% of CPAs providing PFP services were female. Exhibit 4, below, reveals that most providers of PFP services practiced in small firms. Of the respondents, 61.4% were part of firms with five or fewer professionals. Sole practitioners accounted for 35.6% of those offering PFP services. Because of this strong small firm presence, only about 17% of the firms had a separate financial planning department.

LOOKING AHEAD

In today's economy, even successful people struggle with their personal finances. As a result, clients are more willing than ever to pay CPAs to help them achieve financial peace of mind. CPAs who provide PFP services view these efforts as a normal extension of the CPA-client relationship.

Our survey confirms that once a CPA becomes a seasoned professional, few barriers exist to providing PFP services. Every firm does not need to offer comprehensive planning--a firm can choose the level of service it provides. The growing need for financial planning presents attractive opportunities for CPAs to serve their clients and expand their practices.

RELATED ARTICLE: EXECUTIVE SUMMARY

* THE KNOWLEDGE CPAs GAIN IN ADVISING clients on tax and other matters gives them many of the qualifications they need to provide personal financial planning services to their clients.

* CPAs WHO WHAT TO BECOME FINANCIAL planners can make more informed decisions if they understand the demographic profile of CPA-financial planners' and the types of serivices they provide, how to develop PFP competency and how to find PFP clients and discover the factors clients find important in shopping for a financial planner.

* A SURVEY SHOWED MOST RESPONDENTS WHO offered PFP services had been CPAs for at least 16 years. About, 75% were between the ages of 36 and 55 and only 10% were female. Most (61.4%) were part of firms with five or fewer professionals.

* IN THE SURVEY, CPAs IDENTIFIED THPEE services they provided most frequently: income tax, investment and estate planning. These were provided on three levels: consulting plus segmented and comprehensive planning.

* VIRTUALLY ALL PFP PROVIDERS SAID practical experience as a CPA helped them become competent financial planners. Only 49% had obtained at least one of the recognized financial planning designations--CFA, CFP, CHFC or PFS.

DELTON L. CHESSER, CPA, Phd, is Roderick L. Holmes Professor of Accounting at Baylor University, Waco, Texas. CARLOS W MOOPE, Phd, is Edwin W Streetman Professor of Marketing at Baylor University. WILLIAM K. GHEE, Phd, CLU, is professor of finance and insurance at Baylor University.