How to Start an Investment Advisory Practice

One firm that took the plunge tells all.
BY ROBERT K. DOYLE AND F. GORDON SPOOR

In an ongoing effort to meet the constantly changing needs of our clients, our CPA firm, Spoor, Doyle & Associates, began to provide investment advisory services on a fee-only basis in December 1997. It was a logical step for us to take. We had always taken great pride in the way our clients looked to us as their trusted and objective financial advisers, so adding investment services simply was a complement to our personal financial planning practice.

Like many other firms that are members of the AICPA division for CPA firms, we are a single-office local firm with two partners. We have three CPAs, including ourselves, and six other employees. In addition to PFP, our practice areas include individual, business and estate and trust tax services; auditing; litigation services; and small business accounting. We now also provide investment advisory services using no-load and load mutual funds bought at net asset value as well as helping wealthy clients who prefer individual stocks to find individual money managers.

Entering the realm of investment services is not a move any firm should take lightly. Before making this important decision, our firm went through a self-assessment to evaluate the impact on our practice and our readiness to assume such important responsibilities. Here are the steps we took.

EXPANSION CONCERNS
When we first began to think about adding investment advisory services to our practice, we considered not only our reputation as CPAs but also the professional needs of our clients. We wondered how the business community would view CPAs expanding into an area that already is cluttered with a multitude of other service providers. Likewise, we thought about how our existing and future clients would view their CPA firm providing such services.

Because we act as trustee for many of our clients, we also wanted to know whether our existing relationships with stockbrokers would be adversely affected. For the most part, the trust assets are in the custody of brokerage houses, where individual brokers manage them. This relationship has been beneficial for us and our clients, and we have no plans at present to remove those assets from their management. After speaking with traditional brokers, we find they are extremely wary of CPAs trampling on their domain.

Adding Investment Services

In a survey of small to midsize CPA firms

9% offer investment services today.

20% are considering adding such services in the future.

44% of the firms considering adding investment services already have consulted with an outside financial services company.

38% of the firms planning to offer investment services said they could do so without hiring new staff.

Source: Advisor's Capital Investments, Woodstock, Connecticut.

As a firm, we decided that providing our clients with investment advisory services should not jeopardize our existing accounting and tax practice. Therefore, our first step, and certainly the most important one in our decision-making process, was to question 5 to 10 clients and nonclient business contacts, individuals who could help us identify possible pitfalls, about whether offering those services would have a negative impact on our CPA practice. The questions we asked were designed to solicit their thoughts about CPAs as investment advisers and, more specifically, about our providing investment advisory services. We asked them to tell us candidly if they had any reservations whatsoever.

The responses were overwhelmingly positive. All those we questioned were strongly in favor of our performing investment advisory services; they saw no adverse effects on our practice as CPAs or on the profession as a whole. In fact, many thought no group was more informed about financial and investment objectives than CPAs and providing investment advice was a logical extension of a CPA's professional services. Based on these responses and our desire to be our clients' total financial advisers, we decided to take the next step, researching the often complex, but not overwhelming, regulations that would enable us to provide investment advisory services to our clients.

THE REGULATORY ISSUES
We contacted the Florida State Division of Securities, where we reached a very helpful and patient employee who walked us through the entire registration process. In Florida, passing the NASD Series 65 examination was one way to become a principal in a registered investment advisory firm. The other options include the Series 24, Series 26 and Series 66 licenses. To be a principal, Florida requires a score of 80% or higher on the license exam. We opted for a Series 65 license, which permits us to provide investment advice for a fee. Registration documents vary depending on the state. Florida uses form ADV, which is the same form the SEC uses. Once our assets under management exceed $25 million, we will be required to register with the SEC.

Perhaps the decision that took the most thought was whether we should provide the services independently or align ourselves with another investment adviser or broker-dealer. We were solicited by several companies that wanted us to work with them. Some were broker-dealers and others were CPA firms already providing those services. Their one similarity was that they alone would be responsible for making the investment decisions and asset allocations; our only responsibility would be to act as the intermediary with our clients.

Several quality organizations were available for us to choose from. However, after long consideration, we decided to remain independent and provide the services on our own. We believed aligning ourselves with another investment adviser unfamiliar to our clients would prevent us from maintaining a strong CPA-client relationship. We wanted our clients to have one person to contact with all of their financial questions. After all, one of the major reasons we wanted to provide investment advisory services in the first place was so our clients would have one financial professional for all their investment, tax and financial needs. Most important, we knew we could provide these services to our clients without the help of a third party and we knew we could do it well.

During the course of our investigations, we decided to form a separate legal entity, Doyle, Riley & Spoor PA, to perform the investment advisory function. While we did this primarily for liability purposes, it also allowed us to structure the ownership differently from that of our CPA firm. As Florida has broad examination powers over registered investment advisers, a stand-alone entity allowed us to keep our CPA firm books and records separate from those of the investment advisory firm.

HANDLING CLIENT ASSETS
Our next decision was to select a broker-dealer that could execute our transactions and act as custodian for our clients' assets; it was important to use one that offered a wide selection of mutual funds and that did not compete directly with us for individual investors. Again, the choices were many, but after interviewing three of the largest discount brokers, Charles Schwab, Fidelity Investment Advisory Group and Jack White & Co., we selected Jack White, a company we believed would best complement the services we planned to provide.

FIND THE RIGHT TOOLS
Selecting the tools we would need as an investment adviser also was an important decision. To help us make investment recommendations, we chose Morningstar Principia Pro Plus, a widely used subscription mutual fund database available on compact disk. We selected it because we had already been using Morningstar's products and had been satisfied with the results. We saw no need to switch. There are, however, other companies that provide independent mutual fund research and had we not already been so familiar with Morningstar, we probably would have examined other options.

To find an investment monitoring software package, we obtained a list from Jack White & Co. of software that interfaces easily with its system. While there were several providers to choose from, we tested only three, Centerpiece, DbCam and Advent. Of the three, Centerpiece was the only company to send a full working version of the software for us to test. The others sent only demonstration disks. While it took us longer to test Centerpiece using real data, we came away with a better idea of what we were buying. We ultimately selected Centerpiece, which generates performance reports for our clients' portfolios and also interfaces with our broker-dealer by dialing up Jack White's bulletin board. Once on the bulletin board, we can access our protected accounts and download the information we need directly to the software. By downloading daily, we have current information on our clients' accounts and can answer questions about portfolio performance and related matters.

FINDING CLIENTSOLD AND NEW
As we prepared to open the doors to our first investment advisory clients, we deliberately did not have a formal marketing plan in place. Instead, we began by discussing our investment services with selected clients when the need arose. We had decided we were not going to give unsolicited pitches for our services. Rather, when our client discussions turned to investments and investment choices, we casually mentioned we had begun to provide fee-only investment advice.

The majority of clients with whom we discussed our new services were intrigued by the objectivity we could bring to their investment decisions. The fact that we did not accept any type of commission or referral fee was very refreshing to most of our clients. While expanding our new practice area, we also recommended several more traditional brokers with whom our clients could discuss their investment needs. This approach also appealed to our clients. Offering our services along with recommendations of other advisers emphasized our objectivity. We made it clear to clients that our goal was obtaining the best investment advice to meet their needs, while acknowledging that that advice could come from us or from some other provider.

Our first client came to us in December 1997 as a result of a business sale. The company itself was a long-time client of our CPA firm and we had provided tax advice on the sale of the business. Along the way, we had informed the client of our new services and he decided to invest the entire sale proceeds with us. We designed a portfolio of no-load mutual funds that provided a balance of growth and income, along with a cash position to provide for a payment of his projected tax liability.

The remainder of our new accounts came to us from a variety of different situations. Some were the result of qualified retirement plan distributions, some from the sale of businesses while most others turned over to us their existing investment portfolios to manage.

After a little over a year of providing investment advisory services, we currently have $3.6 million under management. Now that we are comfortable with the administrative responsibilities, we are beginning to inform our CPA firm clients of our investment advisory services. Until now, the vast majority were not even aware these services were available. Using the database built into our tax software, we plan to select our tax clients who meet certain criteria, such as a certain dollar amount of interest and dividend income, capital gains and losses or IRA distributions. We will also manually review our client list to target other clients, including businesses, trusts or qualified retirement plans, that might be interested in our services. Once this initial target list is complete, we will send those clients a personal introductory letter explaining our investment capabilities. Depending on the client, we may follow up with a phone call or discuss it with them during our tax interview. We also are preparing an investment brochure to be ready during tax season. After April 15, we will evaluate our marketing efforts and consider developing a more formal plan.

GETTING STARTED
Deciding to add investment advisory services is a momentous decision for any CPA firm. We recommend that other firms planning to expand into this area first investigate their own expertise. Do you, your partners and associates have the skills necessary to manage client investments? Once a firm determines that it has, or can obtain, the necessary investment expertise, we suggest discussing the services you want to provide with a group of carefully selected clients and business associates who can give you the feedback you need to evaluate the proposed expansion. We have discovered that investment advisory services are a logical complement to the traditional PFP services that many CPAs already provide. But the same may not be true for every firm.

Investment Advisory Start-Up Checklist
  • Discuss your firm's proposed service expansion with clients and business contacts to get feedback on how they feel about your providing those services.

  • Make sure the investment community is not threatened by your expansion plans and understands some clients will always need a full-service broker.

  • Assess the abilities of partners and professional staff to advise clients on their investments. If necessary, obtain additional training.

  • Consult with your state securities department and the SEC to learn more about the regulatory requirements, including necessary securities licenses, registration as an investment adviser and recordkeeping needs.

  • Decide whether you will offer investment advice on your own or affiliate with another registered investment adviser.

  • Select a broker-dealer to execute transactions and act as a custodian for client assets.

  • Choose software and other tools to use in selecting, managing and reporting client investments. This may include products to help with mutual fund selection, asset allocation, performance reporting and related activities.

  • Decide how you will market your investment services to existing and prospective clients. This may include development of a formal marketing plan or more informal ways to approach existing clients.

  • Get to work!

Thus far, we believe we are providing our clients with a valuable and needed service. Our clients appreciate having one financial adviser that can counsel them objectively on investments as well as guide them on their tax and financial planning strategies. And it's a service we are happy to provide.

ROBERT K. DOYLE, CPA/PFS, is a registered investment adviser and principal in Doyle, Riley & Spoor PA, an investment advisory firm in St. Petersburg, Florida. He is also a shareholder in the CPA firm of Spoor, Doyle & Associates PA and a member of the AICPA personal financial specialist subcommittee.
F. GORDON SPOOR, CPA, is a shareholder in both Doyle, Riley & Spoor PA and Spoor, Doyle & Associates PA.

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