s a growing number of CPA firms build insurance practices, one key to a thriving venture is clear: The most successful firms focus their resources on just a few insurance strategies that will help clients accomplish tar-geted goals. They know the details of every insurance transaction, their client-base can meet specific financial goals by implementing each type of insurance strategy and they recognize that constant marketing drives the flow of business. By organizing your firm’s insurance practice accordingly, you can maximize its value to clients and its profitability to the firm.
CREATE THE RIGHT ENTITY
All participants involved in any insurance sales transaction must carry a license issued by the insurance department of the insured’s home state. Only licensed insurance practice members are permitted to receive commissions.
Given the cost, few firms want to license every employee receiving a share of the insurance business’ profits. Some mistakenly believe licensing the existing CPA firm and an individual licensee will clear the way for commission participation. Instead, insurance commissions intermingle with other firm income, in effect, paying unlicensed individuals.
Establishing a separate company for insurance transactions is the answer, according to Steve Insel, professional practices partner at the Los Angeles law firm of Jeffer, Mangels, Butler & Marmarow. He says “the best way for CPA firms to operate an insurance practice is to create a separate limited liability company owned by the partners or by the firm.” The insurance LLC carries a state insurance department license and employs at least one person with an insurance license, enabling the entity to receive commissions on insurance transactions. Unless every owner is licensed, Insel says, “the LLC’s owners must participate in profits divided pro rata, according to their fixed ownership percentage.”
If the LLC wants to sell variable annuities or variable life insurance, an employee must also have a series 6 or 7 license issued by the National Association of Securities Dealers and the CPA firm must be a licensed broker-dealer. CPA firms should seek specific legal counsel on any issue that is important to the kind of insurance business the firm wants to do.
STRUCTURING THE WORK FLOW
It’s a good idea to bring in an insurance professional to head up the LLC. As business develops, his or her compensation should depend on profits. This individual isn’t necessarily an insurance salesperson but, rather, an insurance expert. His or her tasks include
Acting as gatekeeper to the insurance industry to control access to the CPA firm’s personnel and clients.
Selecting the financial goals that can best be accomplished using insurance. The insurance professional makes this decision based on the needs of the firm’s client base.
Matching potential clients with each of the carefully selected insurance strategies.
Supervising the sale of insurance products through the CPA firm to its clients.
Along with the insurance professional, the LLC also should have a technical-services group formed of people from the CPA firm. This group defines each transaction under consideration, assesses the tax and legal aspects, verifies how it works for the firm’s clients and gauges the overall impact on the practice. The LLC should not offer any insurance transaction without this group’s advance approval.
Example: Wait and see buy/sell agreement. Let’s say an outside insurance agent approaches the LLC’s insurance manager proposing a strategy using “wait and see buy/sell agreements.” (This is an instrument designed to benefit the partners of an enterprise in the event of death or dissolution. Funded by life insurance that doesn’t specifically identify the purchaser or price until after one owner’s death, it provides funds for one or more partners to buy out the others. The concept would flow through the LLC as follows:
The insurance professional searches the CPA firm’s client base and discovers 20 clients who would benefit from this strategy. Fees for such transactions average about $40,000 each, creating a potential revenue pool of $800,000. The LLC insurance professional determines this is sufficient to merit the firm’s continuing interest.
The technical services staff reviews and approves the concept.
The insurance professional or a separate group—sometimes called entrepreneurial services at larger firms— reviews each client for whom this type of transaction would be beneficial with the CPA firm partner who handles that client.
The licensed insurance professional explains the transaction to the clients. These meetings may include the partner handling the client and the insurance professional.
For those clients who decide to implement the strategy, all insurance applications, associated paperwork and funds flow through the LLC and the professional insurance licensee’s office.
Under this arrangement, CPAs don’t sell insurance. Yet they are able to add new value to existing client relationships with a structured mechanism that identifies and achieves a specific financial goal for their clients using insurance.
No matter how well organized, no insurance operation will succeed unless it occupies an important position in the CPA firm’s hierarchy. Three things drive the LLC’s stature at a CPA firm:
The firm’s reliance on insurance products to add new value to existing client relationships.
The ability of the firm to attract new clients based on the availability of insurance services.
The revenue generated.
To ensure the LLC gets the attention necessary to make it a strategic asset to the firm, the insurance professional should be at partner level. The most successful operations have the LLC’s CEO reporting directly to the CPA firm’s managing partner.
If possible, locate the LLC on the CPA firm’s premises for easy access and interaction with the firm’s professional staff. The LLC’s board of directors should include the CPA firm’s managing partner, the LLC’s insurance professional, an outside insurance expert, the CPA firm’s head of regulatory compliance and its head of technical services. (These positions will vary based on the CPA firm’s size.)
Firms should make the LLC a profit center with its own set of books and records. While the seed capital comes from the CPA firm, beyond that the LLC should be self-sustaining. Its business plan should be comprehensive and followed by those accountable to its board of directors. As much as possible, make the LLC independent from the CPA firm in things such as computer systems and office services. Additionally, marketing and advertising should be independent; otherwise, you risk placing the cultural constraints all CPA firms have on the LLC.
In the future, the success of CPA firms that provide insurance will depend largely on how well organized they are. Insurance departments that were quickly constructed and poorly designed will either continue to struggle at handling even simple matters such as client communications and commission questions or give up on their insurance endeavors altogether. Strategically planned and thoughtfully maintained insurance operations, however, stand to flourish and cultivate more diverse and nontraditional opportunities for both client and firm.
Neil Alexander, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is firstname.lastname@example.org .