WIREHOUSES TRY TO LURE CPA REFERRALS SMITH BARNEY, MERRILL OFFER ACCOUNTANTS PIECE OF ACTION

As more certified public accountants are allowed to accept commissions and referral fees, an unusual and potentially controversial alliance is springing up between mega-brokerages and CPAs.

The brokerages, particularly Salomon Smith Barney Holdings Inc. and Merrill Lynch & Co. Inc., have established programs to pay thousands of CPAs who refer customers to their asset management businesses.

Such a scenario would have been unthinkable – and illegal – a decade ago. Although CPAs have referred business to brokerages for years, most CPAs were forbidden by state laws to accept referral fees for their efforts.

As state laws have loosened, now allowing CPAs in about half the states to accept referral fees, Salomon Smith Barney and Merrill Lynch have stepped up their efforts to recruit CPAs as asset conduits. Moreover, two powerful CPA regulatory bodies, the American Institute of CPAs and the National Association of State Boards of Accountancy, recently agreed to allow CPAs to accept commissions and referral fees for certain clients, as long as the business relationship is disclosed.

The CPA organizations’ revision to the uniform accountancy act could spur more states to drop their ban on commissions, which will drive Salomon Smith Barney and Merrill Lynch to take their CPA alliance programs on a national campaign. Already, San Diego-based discount broker Jack White & Co. has a CPA referral program in place.

“The UAA will allow CPAs to get into the investment business,” says Tom Matthews, Salomon Smith Barney executive vice president and director of national sales. “We have 10,400 financial consultants in 434 markets who have potential relationships with them.”

The core of Salomon Smith Barney’s program, called Smith Barney Professional Alliance, is the relationship between the brokerage’s local financial consultant and the CPA. The accountant is kept abreast of – and benefits from – the performance of his client’s portfolio. Under the program, the CPAs share in the brokerage’s ass
et-based compensation. Under asset-based compensation programs, the more the brokerage earns for the client referred by a CPA, the more the brokerage receives as payment. The CPA shares in those yearly earnings, although company officials declined to say by how much. Merrill Lynch’s program also uses the asset-based compensation program, sources say, although firm officials didn’t return calls.

one-way street

“When I was in production, I got referrals from accountants, but the CPA didn’t get to see the results until he got the client’s Schedule D,” Mr. Matthews says, referring to the federal tax form documenting capital gains and losses.

CPAs also didn’t see any financial reward for their referrals.

“They’ve done a lot of work, but they don’t get paid for it,” says Lloyd “Buddy” Turman, executive director of the Florida Institute of CPAs. “It’s not unusual for a CPA to recommend $50 million to $60 million in (for example) life insurance for their clients in one year. So the CPAs feel like saying ‘Think of me when you spend the money.’ ”

With potential financial gain, however, comes responsibility and liability that many CPAs would shy away from, says Mr. Turman, whose state allowed its CPAs to accept commissions six months ago. So most CPAs will not become full-time financial advisers who select specific investment products.

“It doesn’t meet everyone’s personality,” Mr. Turman says. “You won’t see 50% of CPAs getting actively involved in it. But at least 50% will want to be compensated by a referral fee.”

And some are uncomfortable with the whole notion of CPAs accepting referral fees, viewing it as compromising their reputation for objectivity.

But Roger Ochs, director of marketing for Irving, Texas-based, CPA-oriented brokerage H.D. Vest Inc., says CPAs would still leave one problem about referrals unsolved: keeping control of their clients.

“How is this any different than what they’ve had for the last 30 years, except that now
they receive some type of compensation?” Mr. Ochs says.

Vest recruits CPAs and other tax professionals to select and sell investment products. Their reps, Mr. Ochs explains, don’t share their commissions.

salomon on different tack

In comparison, Salomon Smith Barney consultants will perform the bulk of the investment management work. They will offer CPAs’ clients risk-tolerance, analysis, asset-allocation and specific fund and investment selection.

While the CPA receives the brokerage consultant’s investment know-how, the broker benefits from the CPA’s solid reputation.

“CPAs are very trusted advisers to clients,” says Salomon Smith Barney’s Mr. Matthews. “When we get their endorsement, it’s extremely important.”

As the UAA commissions provisions are adopted by more states, Salomon Smith Barney representatives will appear at meetings to sell their alliance. The next stop is Massachusetts, says Doug Hedley, director of the Smith Barney Professional Alliance Group. The Bay State allowed CPAs to accept commissions as of Jan. 10.