Consider a CPA heavy-tax practice with a lot of 1040 clients. I hate to break the bad news, but most CPA firms do not want to acquire that practice. The exception will be very high-end 1040 fee clients, but even then, unless the firm has a wealth management practice, it is much less attractive. The good news is Registered Investment Advisors (RIAs) are becoming more interested in these types of practices.

Why does an RIA want a tax heavy accounting practice? They want to mine the individuals for potential wealth management opportunities. It makes sense. Take a practice doing 1,000 1040’s. Assume 900 of them are not good fits for wealth management. If 10% have the potential of $1M to $5M in assets to manage, that converts to 100 wealth clients. Let’s consider this scenario with a more conservative assessment. Estimate only 25% of the 100 can be converted, with an average balance of $2M of assets to manage. 25 clients times $2M is $50M at 1% is $500,000 of annuity wealth management income.

Break these numbers down a little further.

  1. The example assumed only a 2.5% conversion of the 1040’s. Do 97.5% of the tax clients have a measurable retirement accounts or other assets to manage? If not, you might want to pass on that firm, but the odds are there is more potential than 2.5% of the clients.
  2. It also assumes a $2M average balance. Is that too high or too low? Keep in mind when you add in retirement accounts that have accumulated over thirty or forty years, outside investments, real estate, inheritances or potential inheritances, cash in banks, etc. It does add up. Furthermore, if a few of them sell businesses they own, the average net worth goes up significantly. Most likely the numbers being used are conservative examples of the potential.
  3. In this example, there are no ‘big-fish’ included. Every firm has a few high net worth clients. A few clients at $10M each can add a few hundred thousand dollars in investment income, and just two of them at $10M each is another $200,000 in investment income.
  4. Who do these clients know? Image the whale who also has whale-sized friends or family with similar wealth positions. Why file the tax return for free for these clients? Because it is an incentive for them to talk to you, and it fosters a positive relationship. If a whale brings $10M in assets to the table and you make $100,000 managing it at the cost of a $1,500 1040 fee that is a pretty good outcome. In 10 years, assuming no-growth in the asset base (just to make this number conservative), you would have made $1M less $15,000 in tax return fees.

What is a bad fit for an RIA? An RIA can hire personnel to do the tax work. Many do it for free for their clients in order to retain the wealth management. That’s where the money is to them. A bad fit is assurance work. Unless the RIA owner is a CPA, audits and reviews are an automatic out. Compiled financial statements are a bit of a gray area, and that might vary state by state. In addition to the legal and technical issues of an RIA doing assurance work, the bigger question is- why would they do that unless they already are in a CPA firm? Stay focused on wealth management and use the tax returns to fuel that growth.

Are you an RIA looking to grow and use M&A in perhaps a non-traditional way? If so, please contact Bob Lewis. Bob is the President of The Visionary Group & CPA Growth and can be reached at 800.995.9186 or blewis@ThinkVisionary.com. Visionary provides growth services and customized merger and acquisition searches for the CPA profession.

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