APES 230 set to irrevocably alter the accounting landscape
There has been much debate around the regulatory environment for accountants flowing from APES 230 – and Queensland-based accountant Greg Holman writes that it could irrevocably alter the landscape for accounting organisations.
Running a profitable and successful accounting practice requires hard work, constant review and changes of practice strategies, as well as providing continued value-added high quality services to your client base.
The accountant’s role is unique: we are trusted advisers who exert a great influence over our client’s financial well-being.
To build a successful accounting practice requires you to act always in the client’s best interest (if you don’t, before too long you will have no clients).
It also requires you to always place the client’s interest before your own. To most accountants this goes without saying.
I believe many of the proposals contained in APES 230 pose a serious threat to the success and profitability of many forward-thinking accounting firms throughout Australia, and may lead to many of them questioning the value provided by belonging to either the Institute of Chartered Accountants in Australia, CPA Australia or the Institute of Public Accountants.
The proposals also appear to attack the ethics, professionalism and honesty of the vast majority of accountants who currently may have financial and/or referral arrangements with providers of financial services, whether they receive a share of revenue calculated as a percentage of total revenue on a fee-for-service basis, or commission basis (risk and lending).
Firstly, let me state my credentials. Eighteen years ago, in Noosa, I put out a shingle and commenced an accounting firm with three clients.
Through a lot of hard work and a bit of luck (funny how the harder I worked the luckier I got), I built a sizable multi-disciplinary accounting firm with annual revenue in excess of $5 million, employing 50 staff, both full-time and part-time.
I never purchased any fees. It has all been self-generated.
I was also lucky to have some great staff, some of whom became partners with me and helped to create our growth and success.
Thirteen years ago I saw the need to embrace financial services (risk, lending and planning) as a key part of our service offering to our clients.
This was due to four major reasons:
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I believed that, as an accountant and business adviser, I had a duty of care to talk to all my clients about the need for personal risk insurance, especially those clients with debt and/or dependants. Most clients I saw had little or no insurance.
They were brought up to insure their house and car, but had little understanding of the importance of insuring their most important asset – their ability to earn an income. - By offering this service I was assisting my clients to become financially independent, and also protecting them and their loved ones in times of illness, injury, and death.
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Importantly, it was also putting a fence around my clients, as they had advisers I knew and trusted looking after their financial needs, rather than seeing an adviser in “adviser land”, whom I didn’t know, and who may be trying to take my client to their own accounting connection.
It also meant that my client saw an adviser who wasn’t tied to one product provider, but received impartial non-product-specific advice. - It was a profitable business strategy. After all, one of the major reasons I borrowed money, using the house I jointly owned with my wife as security, to grow my business, was to make a profit. Also, the reason I was working long hours was to make money.
Why else would I take such personal risks and devote so much time and effort to building my business, often at a personal sacrifice to my family and loved ones?
But, if I didn’t have ethics, I would never be able to build a profitable business in the longer term.
Our fees from planning services were generated from a mixture of fee-for-service and asset-based fees.
Our lending and risk insurance revenue were purely commission-based. I do have a major problem with an industry body telling me what type of fee-for-service I can charge?
Why pick one, they all have inherent conflicts.
I do have major issues with the banning of insurance commissions which I know, having actively referred my clients to insurance advisers, will only lead to further under-insurance in Australia.
Clients, in most circumstances, will not pay a fee to have an insurance plan prepared. I also have issues with the accountant not being able to receive a percentage of total revenue generated from the referral.
As accountants, we operate one of the most flawed systems to determine how and what we charge a client. In effect, the longer we take to complete a client’s work, the more they pay us.
Potentially, the more inefficient we are, the more our clients are charged. Or, if the client was happy to pay me $2,000 last year, with no fee queries, I can perhaps charge them $2,500 this year.
This is a somewhat flawed and out-dated costing model that is not fair and equitable to all clients.
Commissions on risk and lending
Ninety per cent of the clients I have seen over the last 18 years did not have sufficient insurance coverage in place. Less than one quarter had income protection insurance.
It was an ongoing strategy of our firm to ensure as many clients as possible took the advantage of an obligation-free meeting with an adviser for an insurance review.
A full disclosure was made to each and every client of any commissions we might receive if the client proceeded with the insurance recommendations.
Interestingly, not one client in 13 years ever raised or questioned how my firm was remunerated.
The most important factor for the client was that we were not tied to any one particular insurance provider, so as to ensure our client had access to a number of companies regarding price and features, and the person I referred them to had the required skill, expertise and professionalism to look after their needs.
Over the last 13 years we have had many clients suffer illness, injury and at times, unfortunately, death.
The fact that we embraced, as part of our service offering, the need for an obligation-free insurance review has been a saving grace to a number of our clients, and their loved ones.
I know if I had told my clients, when they were being referred, that they would be charged a plan fee by an adviser to have insurance recommendations made, they would not have proceeded with the meeting.
This would only have further compounded the massive under-insurance issue in this country.
We have had countless clients over the years referred to our mortgage brokers, with many clients having saved considerable sums of interest and cash flow, by having a review of their loans, and associated refinancing of these loans where suitable.
Once again, all referrals were based on commission, and not one client has ever questioned how or why we were remunerated via this means.
And again, if we had charged a review fee, they would have taken their lending to a mortgage broker unrelated to our firm, who was paid via commission.
We only assisted clients to make them better off – not worse off.
Funny that we managed to achieve this outcome, even though we received commissions for providing this valuable service.
A common way for the accountant to be rewarded for their referral is a percentage share of the revenue, whether this is as a percentage of commission or fee-for-service charged by the relevant adviser.
The most important thing to the accountant is that his or her client will be looked after by a suitably qualified professional adviser not tied to any one institution.
Independence, quality of advice, impartiality of advice and professionalism are the key matters important to most accountants when referring their clients to an adviser.
If they referred a client to an adviser who did not have such skills, the client would soon let them know and the accountant would be in danger of losing that very client.
It’s what’s called market forces – if you don’t look after clients, they will leave your business and you will go out of business.
I have recently disposed of the interest in my accounting firm, Holman’s, so as to focus entirely on my new business, called GPS Wealth.
GPS Wealth is a boutique new category of financial services licensee, developed by accountants and advisers for accountants and advisers.
We suggest a split of revenue between the accountant and adviser on a referral basis.
This enables the accountant and adviser to each build a very profitable advice business. GPS Wealth operates on a fee-for-service planning model, but suggests commissions on both risk and lending.
My accounting firm consisted of both CPAs and CAs.
I am a CPA holding a public practice certificate. Interestingly, not once has a client ever asked me if I was a CPA or CA.
Clients were simply interested that I could provide timely, high quality, taxation and business advice, as well as refer them to a specialist adviser for their planning, risk and lending needs.
They valued my judgment in referring them to an adviser I trusted and had confidence in. They valued my ethics and expertise.
Some 15 years ago, our firm ceased attending CA and CPA professional development courses and training.
Why? A new group called the National Tax and Accountants’ Association was launched, offering seminars, workshops and training tailored specifically to the public accounting firm.
All of a sudden, we had a proactive organisation providing first- class solutions, to enable us to offer timely, understandable taxation and accounting advice to our clients.
With the advent of APES 230, the three peak professional bodies are at risk of losing touch with their common public practice members.
It may well lead to the advent of a new professional body, which would still maintain the principles of integrity, objectivity and professional competence and due care, but would also understand and recognise that even though we may utilise a commission-based remuneration model for insurance and lending, we would also maintain the highest ethics.
Importantly, we would still always place our clients’ interests before our own.
Although APES 230 intends to provide guidelines on how we charge our clients for financial planning advice, it fails to have any understanding of the reality of looking after clients’ needs whilst still operating a profitable and successful accounting firm.
It places a broad-brush approach over what it perceives as being the ideal way to charge clients for services provided.
It fails to understand that the vast majority of accounting firms always only act in the client’s best interest, under a remuneration model we and others have successfully used for many years.
No matter what rules and regulations are in place, there will always be cowboys. This applies equally across all professions and all walks of life.
History shows us that those companies and institutions that fail to understand the needs of their members and customers do so at their own peril.
Greg Holman is a director of GPS Wealth.
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