ob Adams punched the buttons on his cell phone. “Hi, Mary, it’s Bob Adams, your CPA firm’s insurance partner. My calendar says we had a three o’clock with your client to discuss $10 million in life insurance.”
“Ah…right, Bob. I canceled that meeting. I showed your analysis to another insurance agent not affiliated with our firm. He said it was wrong and that your commissions were way out of line.”
“You should have told me. There’s always something we can do—lower the premiums, adjust the terms.”
If your CPA firm has an insurance practice, you already may have been part of such a conversation. If not, it’s probably in your future unless you take steps to prevent it. CPA firms that already have an insurance affiliate—or those contemplating setting one up—need to recognize the symptoms that ultimately lead to failure. Bumps in the road don’t necessarily mean the relationship is doomed. However, all parties need to know how to spot the signs that a firm’s insurance practice is failing and what steps to take to prevent it.
The relationship most CPAs have with their insurance affiliate’s agents typically goes through a life cycle. During the first stage each participant works hard to figure the other one out. Both voice enthusiasm about the new relationship and its prospects for success. The CPA firm may even develop a plan to assess the insurance needs of each of its clients who may benefit from the affiliate’s insurance services. Joint CPA/insurance agent/client meetings are frequent and productive. The relationship creates a pipeline for insurance transactions that are likely to close. Prospects for insurance services seem destined to grow.
ANALYZE THE SYMPTOMS AND FIND THE CURE
Like most relationships, there usually are three views of what’s happening: The CPA firm’s, the insurance affiliate’s and the truth. Quite often, the truth makes little or no difference; all that matters is each party’s perceptions. For CPA firms with existing or contemplated insurance affiliations, here’s a checklist of the most common problems they may encounter, their symptoms and cures:
Declining revenue. Money—or lack of it—often signals a greater problem. One astute CPA firm noticed a problem not on its insurance affiliate’s P&L but in the pipeline of projected insurance transactions. Firms that allow the pipeline to empty often find it’s too late to meet revenue targets. The cure is to monitor—at least monthly—not only insurance revenue but also the number of deals in the pipeline, their potential revenue and the time required to close them.
Lack of professional regard. This happens when both the CPAs and their insurance partners begin missing meetings—sometimes with clients, often with each other. This indicates a lack of perceived value for time spent together and a disregard for the other’s time. The opening vignette is an example of how this problem starts. To cure it, don’t let the decline in communication fester. Confront the issue when it first occurs and fix it.
Distrust of technical abilities. Watch for the perceived need to double- and triple-check each other’s work on insurance matters. Sometimes the CPA firm brings in other insurance agents for a second opinion, as in the opening example. This indicates a belief on the CPA firm’s part that its own agents don’t understand the client’s needs. It also questions the insurance agent’s motivation (a focus on generating commissions rather than on accomplishing the client’s financial goals).
Both parties—the CPA firm and the insurance affiliate—should determine the reasons for this distrust and whether it’s well founded, then take whatever steps are needed to correct the problem.
Hours, commissions and disclosure. Complaints about commissions are endemic. This is a cultural issue. CPA firms sell their time. Creating client value that bills at say $50,000 usually requires at least 150 hours of work. On the other hand, insurance agents sell a product that pays a commission unrelated to the time spent. Thus, an insurance agent might earn the same $50,000 fee in less than 20 hours of work. However, it likely took the agent an entire career to develop the expertise necessary to get to that point.
CPAs often have difficulty embracing a commission-based revenue model. Insurance agents have the same problem with a model that sells time. The solution is be sure each party understands and accepts the other’s revenue model and the work behind it. Managers should insist each side respects the other’s professionalism, motivation and credentials.
One tip to smooth the friction between CPA and agent is to base the agent’s commission on customary industry standards. As an investor in the insurance entity, the CPA firm will receive its share of the entity’s income—after payment of a fair commission.
In any case, the cure for revenue conflict is to ensure both parties understand neither model is any more or less ethical when employed by principled people. The fact is, most clients understand and accept that professionals are compensated for the results they achieve. Disclose the commission sharing arrangement to the client and then move on—the client certainly has.
ACT BEFORE THE RELATIONSHIP IS TERMINAL
Client protectiveness and suspicion often come between a CPA firm and its insurance affiliate. Client lists are sometimes at the center of the problem. Ultimately, for the partnership to be successful, the CPA firm must cull from its client list the individuals and businesses that can benefit from the insurance affiliate’s services and then contact them. The key to making this process work is to focus exclusively on the benefits for the client—not on what a client can be persuaded to buy or on billable hours. CPAs must work closely with their affiliate’s insurance expert to select clients for whom insurance is the best route to a desired financial goal. This allows the CPA to retain control of the client relationship while adding a new level of value.
CPAs are independent thinkers. Managing partners who fail to realize this and order their partners and staff to use the firm’s insurance affiliate are asking for the relationship to fail. Most CPAs already know insurance agents they would rather use who refer them business in exchange for the favor. The solution is for the CPA firm to take the time necessary up front to build a strong relationship with its insurance affiliate. Professionals from both entities should meet regularly to assess, enhance and correct the relationship. Like a marriage, the parties should make the commitment to speak frankly and fix problems when they happen rather than letting them fester.
From the start, the managing partner’s job is to get the CPAs and insurance agents comfortable with each other. Of course, this takes more time than simply yielding to the urgency of closing the first few deals. However, without this base of comfort from the beginning, the entire relationship is doomed to failure.
The best way to avoid money problems in the insurance relationship is to set realistic financial goals from the start. The insurance affiliate’s business plan must project reachable, quantitative revenue targets, net income levels, client value added and lead-generating capabilities. Since most CPA firms have never been in the insurance business, they will have to rely on the advice of their affiliate’s insurance professionals and on their own common sense to help them determine what targets are realistic.
Both parties should review the actual results against the plan on a monthly basis. If there’s friction between the CPA firm and the insurance affiliate, work it out together. If actual experience isn’t tracking against the plan, determine where things are going wrong, why and then fix them.
CPAs are continuing to gain more experience working with nontraditional revenue models such as consulting services, investment products and insurance. This experience is key to the long-term success of a firm’s insurance affiliation. As CPAs become more comfortable offering insurance and other services to their growing client base, the value the client gets from his or her relationship with the firm will increase. And so will insurance revenue. Any lingering reluctance on the part of CPAs to bring other professionals into their client relationships will disappear as accountants seek resources to help them remain competitive in the financial services marketplace.
Neil Alexander, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is firstname.lastname@example.org .