Using money managers.

Author:Harrington, Cynthia
Position:CPA firms

The right relationships can increase client satisfaction.

The 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.


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...

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