Using Money Managers

The right relationships can increase client satisfaction.

  • ONE WAY CPAs CAN UPGRADE THEIR INVESTMENT advisory services is to offer their clients the services of individual money managers. Managed portfolios permit the CPA to gain more control over the investment process vs. mutual funds and to develop customized investment and tax strategies to meet clients’ special needs.
  • SOME FINANCIAL PLANNERS STILL FIND A DIVERSIFIED portfolio of mutual funds to be the best option for their clients. This is particularly true for relatively small portfolios. Some managers have a minimum account size, ranging from $50,000 to $500,000 or more.
  • THE EASIEST WAY TO FIND THE BEST MONEY MANAGER for a client is to use a search consultant. Consultants screen managers, provide CPAs with a list of managers who offer what the client needs, monitor managers for consistency of investment style and provide quarterly performance reports and other research services.
  • WHEN SELECTING A MONEY MANAGER , CPAs SHOULD choose ones that fit the client’s performance, style and risk characteristics. In-depth due diligence is crucial to determine the manager’s ownership, assets under management, level of satisfaction among current clients, compliance with reporting standards, performance and ability to meet special client needs.
  • AFTER PLACING CLIENT ASSETS WITH A PROFESSIONAL money manager, CPAs need top-notch back office capabilities to monitor the manager’s activities and report performance to clients. It’s important to keep an eye on managers to make sure they continue to deliver what the client needs and expects.
CYNTHIA HARRINGTON, CFA, has been a money manager specializing in large cap domestic stocks for high-net-worth individuals and small institutions. Now a full-time journalist, her work appears in Bloomberg Wealth Manager, Plan Sponsor and Entrepreneur Magazine.

he investment advisory business is exploding. In 1992, financial planning companies, trust banks, accounting firms and similar entities managed assets of $120 billion. By 1999, these assets topped $700 billion.

The growth in assets under management is causing a revolution in how services are delivered. A 1999 study, “The Future of the Financial Advisory Business,” rocked the industry. The study concluded that companies that provide one-stop shopping with tax and estate planning, financial planning, legal advice and asset management under one roof will be the preferred choice of most clients. As the industry evolves over the next 7 to 10 years, the best way to attract more clients will be to expand and upgrade these services.

CPA practices with investment advisory arms are uniquely positioned to grow into this arena. One way for a firm to upgrade its services is to use individual money managers—in addition to mutual funds—to manage client assets. CFOs charged with managing their companies’ pension assets may also find they can benefit from using professional money managers.

The Value of Financial Advice

According to a 1998 survey

85% of those who use paid financial advisers say they are worthwhile.

Planners (35%) and brokers (33%) are the most frequently used paid financial professionals.

Nearly all consumers (92%) who use financial professionals are comfortable with their finances. Only 76% of those who do not use professionals make this claim.

Financial comfort comes from long-term relationships. Clients who have used their professionals for less than one year are least comfortable with their finances. Clients with relationships of more than 10 years have a comfort index of 3.54 out of 4.

Brokers and accountants have the longest relationships with clients (8.0 and 7.8 years, respectively) while financial planners have the shortest (6.4 years).

High-net-worth individuals (over $500,000) make the best clients. They

Pay the highest fees.

Are more likely to use professionals (70% vs. 48% with a $25,000 net worth).

Consider professionals worthwhile (92% vs. an average of 85%).

Source: Institute of Financial Planning (now the Financial Planning Association), Atlanta,


A CPA who has an investment advisory practice has more control over the investment process when using money managers vs. mutual funds. Developing a personal relationship with the manager allows the CPA to create customized investment strategies. While most of the benefits accrue to the client, the CPA will find advantages in this kind of relationship as well, particularly the ability to develop long-term fee income from asset management, as well as increased client loyalty.

Accounting firms that register as investment advisers or have investment advisory subsidiaries can use money managers to offer high-net-worth clients customized investment and tax management strategies. “The high net worth investor is looking for customized services,” says Len Reinhart, CEO of Lockwood Financial Group, a search consultant for more than 700 advisers to wealthy individuals. “When you customize for the client, it’s the difference between a $100 outfit from J.C. Penney and a $500 outfit from Saks. But in this case the client usually doesn’t have to pay any more for the extra service.”

Money managers can work with a CPA to develop a portfolio that suits each client’s tax needs. For example, a client with one or two positions in low-cost-basis stock will pay a big tax bill if he or she fully liquidates those stocks to buy mutual funds. A money manager, on the other hand, can analyze the positions and recommend and execute sales over time to minimize the client’s tax liability while maximizing investment returns and diversifying the portfolio. Managers can “harvest losses”—sell positions that are down due to market fluctuations when doing so doesn’t affect investment performance. These losses can cover gains in the manager’s portfolio or gains from sales of other assets, such as low-basis stock or real estate.

Lynn Mathre, president of Asset Management Advisors, Inc., in Houston, says her company uses individual money managers for clients—to their great advantage. Mathre started out in international tax at Arthur Andersen, and has been solely an investment adviser for the past 20 years. In one example from her own practice, “My client paid only $11,000 in taxes on a $2.1 million increase in his portfolio. A comparable mutual fund portfolio would have generated hundreds of thousands of dollars in taxes.”


Not all financial planners are flocking to individual money managers. Some still find a diversified portfolio of mutual funds to be the best option for their clients. “We use mutual funds because of the broad array of information out there on funds,” says Cynthia Conger, CPA/PFS, president of investment adviser Arkansas Financial Group in Little Rock. “Reliable data on account managers are harder to find,” agrees Phyllis J. Bernstein, CPA, director of the AICPA personal financial planning division.

Conger says the performance of some money managers doesn’t measure up to mutual funds. “We’ve seen how individual stockbrokers doing managed accounts have performed for our clients and it’s not that good.” Taxes are also a concern. Conger says she “sees 100 to 150 ‘capital gain’ trades from these accounts each year,” causing clients to pay more in taxes.

Bernstein sees some other disadvantages to separate account management as well. She says, “Separate accounts are subject to far less regulation, information on account managers is less dependable and comprehensive and more difficult for CPA/financial planners to understand. The paperwork to open an account is more burdensome than for a mutual fund portfolio. And since clients have individual ownership of each security in their account, they will receive an avalanche of proxies, trade confirmations and quarterly reports.” Bernstein also sees high minimum account size as a disadvantage for some clients. She believes anyone who wants a well-diversified portfolio should have close to $1 million of investable assets. “Investors with $100,000 to $250,000 do not have easy direct access to account managers. They have to work through an intermediary.”

To be successful using individual money managers also takes time. The proof of this statement can be found in the shutdown of the CPA Service Corp., the company the Florida Institute of CPAs established to offer turnkey asset management services to Florida CPAs. While the entity raised $20 million under management in the first two years, it needed $50 million to be profitable. “The lead time to get CPAs properly trained and oriented to this new business venture was just longer than we projected,” says Buddy Turman, executive director of the FICPA and president of CPA Service Corp. “Some CPAs are just not used to marketing their skills and services, even to existing clients. You have to ask for the business and close the deal to succeed.”


CPAs interested in making greater use of individual money managers should focus on clients who would gain the most value. Beth Gamel, CPA/PFS, executive vice-president of Pillar Financial Advisors in Waltham, Massachusetts, describes the process accountants can follow to determine where value would be added. The first step Gamel recommends is to evaluate your current client base, figure out reasonable categories to put clients in according to their investment needs and then back into an investment services model based on the largest category of clients. “It wasn’t that many years ago I would have said that if you didn’t have very wealthy clients—north of $2 million in investable assets—you weren’t going to qualify for individual account management. But the unbelievable proliferation of wrap programs has meant smaller account minimums.” Wrap programs package together a list of individual money managers that have total account minimums starting at $100,000, and are available through most major broker/ dealers that serve accountants.

Money managers can add particular value with wealthy clients who have a sizable portion of their investable assets in taxable accounts (not in IRAs and qualified retirement plans). For example, a client with $450,000 in stocks and bonds in taxable accounts and another $150,000 in tax-deferred IRA and 401(k) plans would be a good candidate. A client with $500,000 in retirement plans and only $75,000 in taxable accounts probably would not. Since an individual manager can add dramatically to a portfolio’s aftertax return, the client with little in taxable accounts may be slower to realize the advantages of a private manager’s services.

Who else is not a likely candidate? Not every client has the temperament necessary to work with a money manager. “Some investors are not comfortable handing over discretion for investment decisions,” says Reinhart. “And of course some of them are very good at trading their own accounts.” Private account managers who work with individuals also generally have minimum account sizes ranging from as low as $50,000 to as high as $500,000 or more. Because of this, CPAs searching for the right manager will need to tailor their search to the amount their clients have to invest with the manager. CPAs who are just starting to offer private account management may want to set account minimums of their own. Reinhart suggests that portfolios over $500,000 will see the most benefits from tax planning and other portfolio management advantages.

CPAs should not limit their prospecting just to wealthy individuals, however. Firms can also offer the services of individual money managers to institutional clients, such as pension and 401(k) plans, endowments, charitable foundations and educational institutions, to name just a few possibilities. Most are prime candidates for the diversification and individual attention money managers offer. And they typically have enough money to invest to meet minimum account size requirements.


There are several ways to find a money manager. The easiest is to use a search consultant. Search consultants

Prescreen money managers and maintain a database of qualified candidates.

Create lists of candidates based on each client’s criteria.

Monitor managers for consistency of investment style and portfolio management personnel.

Provide quarterly performance reports, benchmarking and research on market conditions. Most consultants offer CPAs online access to performance reports, reducing the back office administration of the CPA firm’s investment advisory arm. (When registering with the SEC or state securities department as an investment adviser, many CPA firms elect to form a separate entity rather than registering the firm itself, for liability reasons.)

Since search consultants place a large volume of assets with money managers, they typically can negotiate lower asset management fees. While money managers may charge 1% and up (based on assets under management) if a CPA works directly with them, using a search consultant as an intermediary can reduce the fees by more than half. Search consultants also charge a fee based on assets. The breakout is usually 50 basis points for smaller accounts around $100,000, declining for larger accounts. The consultant’s fee, combined with the clearing and custody fees and the fee to the money manager, ranges on average from as high as 1.5% to as low as 0.5%. The CPA would charge his or her fee on top of that. “These costs have really come down to approximate, or even cost less than, mutual funds,” says Mathre. Still, a CPA who negotiates his or her own deal with a money manager can avoid paying intermediaries anything.

CPAs should be wary of consultants who say their search services are free. These consultants are generally paid by the money managers, reducing the consultant’s objectivity.

There are a number of search consultants that serve individual investors. (See the resource list on page 62 for some suggestions on where to get started.) One of them on the list, Lockwood Financial Services, for example, screens thousands of managers to find 50 institutional money managers representing 90 different investment styles.

Through Schwab Institutional, CPAs can access a list of registered investment adviser consultants (RIAC). Schwab uses the CPA’s criteria to screen 300 separate account management candidates. It conducts ongoing research on all money managers and offers online performance reporting that integrates with most leading financial software, such as Advent and Centerpiece.

Do-it-yourself search. Schwab Institutional’s Managed Account Connection allows CPAs who maintain custody of client assets at Schwab to search their pre-screened database of managers in 80 investment asset classes. Fees range from 60 to 115 basis points, including the money managers’ fees and brokerage and custody services.

CPAs can also use the Money Manager Review’s Web site ( ) to locate, research, compare, rank, track and even contact any one of the managers the site follows. Managers’ performance is reported in several ways, including on a risk-adjusted basis. For an annual fee of $295, CPAs have access to a database of more than 800 managers offering 1,300 products.

The Directory of Registered Investment Advisers ( ) reviews in detail 13,500 of the 24,000 investment firms registered with the SEC. Published annually by Money Market Directories, it costs $450.

Find a partner. Another option available to CPAs is to partner with an investment adviser that does asset management for clients. Such an alliance can be a good way for a CPA firm to serve its wealthy clients. These companies, which provide financial planning services and help selecting individual stock and bond investments for high-net-worth clients, are watching the growth of the CPA investment advisory businesses closely. “What accountants are doing is both an opportunity and a threat. We’ve got this on our radar screen,” says Robert C. Smith of Spero-Smith Investment Advisers of Cleveland. Spero-Smith manages assets for 275 high-net-worth clients.

Smith has considered the prospect of an alliance with a CPA firm. In his ideal arrangement, the CPA firm would do the tax work and his firm would manage the investments according to the client’s overall financial plan. “The right fit would be a CPA firm that has a tolerance and appreciation for the ambiguity that is fundamental to the investment business, but not the accounting profession,” Smith believes. The CPA firm would be compensated through a fee sharing arrangement based on the services provided.


The best way to get started is to choose a list of managers that fit performance, style and risk characteristics for the client and for each asset class, such as large cap growth and value stocks, small cap growth and value stocks, bonds or cash. According to Peter Walker, publisher of Money Manager Review, there are clear steps CPAs should take in performing the necessary in-depth due diligence on money managers.

Read the manager’s registration statement, known as form ADV. It will include information on the manager’s ownership, financial condition, state registrations and form of payment. Look for any conflicts of interest or other problems. Use form ADV to investigate the background of the firm’s principals and any disciplinary or legal problems.

Ask about the number of accounts managed and total assets under management. The manager’s overall size makes a difference if the CPA is hiring the manager directly. It’s important to match the size of the client with the size of the manager’s current clients to ensure proper attention to the accounts. This generally isn’t a factor when CPAs use a consultant, because the consultant’s close relationship with the managers they recommend ensures that the CPA’s clients will be taken care of.

Check current clients’ satisfaction level by asking about the number of new accounts the firm acquired and the number it lost during the last five years. Net outflow may mean bad service. But if the manager’s investment style has been out of favor for an extended period, compare firms with the same approach to see if they have similar account losses.

Investigate the manager’s reporting standards. Clients should be able to rely on a certain frequency and depth of reporting. At a minimum, a money manager should be AIMR Level I compliant. (See exhibit 1, below.) CPAs should verify that the manager’s reported performance includes all accounts in a particular style, that the performance numbers are audited and whether performance is net or gross of fees.

Exhibit 1: AIMR Performance Presentation Standards
The Association for Investment Management and Research (AIMR) is a professional organization of analysts, money management organizations and retirement plan administrators that has developed globally accepted standards for reporting investment performance. Level I Verification means the manager

Independently verifies that it has met the requirements of the AIMR-PPS standards on a firm-wide basis.

Has included each of the firm’s discretionary fee-paying portfolios in at least one performance composite and indicates that procedures to fulfill this requirement have been consistently applied. (The composite performance for a group of portfolios of similar styles represents the manager’s reported performance for that style of investing.)

Uses an outside auditing or verification entity to examine how its compliance procedures calculate total time-weighted returns and ensures that the manager made appropriate disclosures and that their presentation of results complies with AIMR guidelines.

Verify that the money manager has the flexibility to work with you to customize tax strategies for the client. Ask potential managers if they are willing to work with you to do tax loss selling in individual client accounts.

Review the manager’s investment performance. (Exhibit 2, below, explains how.)

Exhibit 2: Evaluating a Manager’s Performance
Are the numbers risk-adjusted, meaning they are analyzed according to the amount of deviation from the manager’s average return?

How does the manager’s performance compare to its peers and to objective indexes?

Are all accounts in the investment style included in the performance numbers?

Is the performance audited?

Are the numbers reported net or gross of fees?

Do the numbers comply with AIMR guidelines?

At this point a CPA firm should be ready to introduce money managers into their practices. Exhibit 3, below, summarizes the steps a CPA should follow.

Exhibit 3: Steps to Follow when Using Money Managers
  1. Decide whether your firm will use a search consultant or conduct the search itself.
  2. Screen for managers that fit asset class selections; perform due diligence; select the right manager for each asset class.
  3. Establish a relationship with the manager by agreeing on fees and the level of personalized service you will receive; change clearing and custody relationship for client assets, if necessary.
  4. Identify top prospects among existing clients and make sales presentations.
  5. Ask for business.
  6. Ask for referrals.


Once you place a client’s assets with a professional money manager, you need top-notch back office administration to report performance and monitor the managers. Search consultants can do much of the ongoing monitoring. CPAs who hire managers directly can monitor them using the same resources they employed to search for and select them.

Managers must be evaluated quantitatively and qualitatively to make sure they continue to deliver what the client needs. The manager’s internal operations have to be reviewed for any changes in portfolio management personnel that could affect future performance. Portfolios must be analyzed to detect any “style drift,” which would mean the manager’s choices no longer reflect client needs. Performance must be benchmarked and analyzed to detect any underperformance. “The monitoring services are very important to me,” says Mathre. “The search consultant I use fires three to five managers a year for not maintaining their style or performance.”

Each quarter the managers report performance and CPAs, in turn, report to their clients. CPAs can access much of this information directly from the manager and blend it into performance reports for the client’s overall portfolio, using software such as Advent or Centerpiece.


Money managers can make it possible for CPAs to build on their role as trusted financial adviser. Customized asset management can set the CPA firm’s investment advisory practice apart from the competition and provide a way to create immediate value for a client. Such value can translate into client loyalty and mutually profitable long-term relationships.

Resource List


Advent Software, Inc., San Francisco, 800-727-0605

Centerpiece Software, Performance Technologies, Inc., Raleigh, North Carolina, 800-528-9595

Mobius Group, Research Triangle, North Carolina, 919-549-0444

Manager Search

BARRA, Berkley, California, 510-548-5442

Brinker Capital, King of Prussia, Pennsylvania, 610-879-5500

Callan Associates, San Francisco, 415-974-5060

Charles Schwab & Co., Schwab Institutional, San Francisco, 800-648-6021

Effron Enterprises, White Plains, New York, 914-640-0200

Lockwood Financial Services, Malvern, Pennsylvania, 800-200-3033

Portfolio Management Consultants, Denver, 800-345-6762

Publications and Web Sites, 216-241-6473

Money Market Directories, The Directory of Registered Investment Advisers, 800-446-2810

Money Manager Review, 415-386-7111

Nelson Investment Management Network


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