Executive Summary
Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis, of course!) and my response, in the hopes that the discussion may be useful food for thought.
In this week's MailBag, we look at a question of whether it’s better to pursue an MBA degree or a CPA license after completing CFP certification (or whether some other post-CFP education would be even better!), and the problems that can arise when solo advisors try to satisfy the recent NASAA Model Rule on continuity planning by arranging a “criss-cross” buy-sell agreement with each other (when they don’t necessarily have the client capacity to actually execute it!).
MBA Degree Or CPA License After CFP Certification?
Question/Comment: I am 25 years old and currently work at a private bank as an associate for our wealth management team. I will become a junior advisor for the team in the near future. I recently passed the CFP exam and will have the designation by March 2016.
I am currently trying to assess if it would be better to obtain the MBA or CPA. I feel that the CPA designation would be much more beneficial when I start working with clients, and I do not think the MBA is worth it unless I attend a top tier graduate school.
Any feedback you have regarding which route to take would be very helpful. I ultimately would like to be in the independent RIA space.
Congratulations to you on passing your CFP exam, and kudos on recognizing that getting post-CFP education is essential for continuing down your career path in today’s environment.
When it comes to choosing educational paths, though, I must admit my ‘bias’ up front – which is that in the end, I think the benefits of education are not about the pedigree of the school, or the letters after your name. It’s about the education itself. And therefore, the “best” educational path is the one that you can most relevantly apply to the real-world demand of your job and career path.
So in that context, it’s important to recognize the fundamental difference between an MBA degree and getting a CPA license.
An MBA is a graduate degree to provide you with education and insight about how to run and operate a business (or at least, how to understand someone else’s business more intimately). By contrast, a CPA license (and it’s a state license, not merely a designation or degree program) grants you the ability to prepare tax returns, represent clients before the IRS and in Tax Court, and to conduct (or attest) an audit.
And frankly, in the context of pursuing wealth management, I’m not necessarily certain how relevant either of these really are for you.
Unless your ultimate goal is to work directly with business owners (including working with them on their business issues), or you hope to someday run your own (large) independent RIA, I’m not entirely certain an MBA degree is really useful for you (although if one of those really is your long-term goal, go for it!). Remember, this is a “Master’s in Business Administration” – and it doesn’t sound like you’re really looking to be a business administrator! In addition, unless you’re specifically looking for non-advisory-industry business partners to start your next business (i.e., you’re looking for ‘networking’ benefits of an MBA), I’m really not certain how necessary a “top tier graduate school” really is, especially given the cost. And frankly if you’re looking to network, there are much cheaper ways to do it than an expensive “top tier” MBA program.
Similarly, if you don’t actually want to be doing auditing work and actually preparing tax returns (or representing clients before the IRS or Tax Court), I’m not certain how relevant the CPA license is either. Again, if that really is the path that you want, that’s great and go for it. And I’ll certainly grant that having a CPA license gives you a decent amount of flexibility to choose various paths in the future. But when you’re talking about ultimately going out to the world of independent RIAs and staying on the path of wealth management… do you actually want to do tax and audit work, or just have tax planning knowledge?
If what you’re ultimately seeking here is a graduate degree (but more relevant than an MBA) that can improve your knowledge and capabilities regarding tax issues (without the audit classes and experience that may be required to get a CPA license), you might consider simply going that route – and getting a Master’s degree in Taxation. In point of fact, that’s ultimately the path I chose as well – because I wanted education that was relevant, and getting a CPA license would have required me to take numerous courses in auditing, which I had no plans or desire to pursue! While there is arguably some “credibility marker” for having the letters C-P-A after your name, I can vouch from experience that ultimately, clients will judge you by your competency to execute tax planning strategies and your tax knowledge, and an “MTAX” is more than sufficient to convey the educational point. Especially if you don’t really desire to prepare their tax returns, audit their businesses, or represent them in front of the IRS (none of which I wanted to do!).
The good news is that in today’s environment, there are a lot of programs available for deepening your tax knowledge and getting a Master’s in Taxation. Depending on where you are geographically, there may be some local programs in your area. There are a growing number of online distance-based Master’s in Taxation programs (and while an MBA is something I would do on-site at a school for the networking opportunities, a Master’s in Taxation is pretty conducive to the online format). Golden Gate University even has a nice dual program that gives you a Master’s in Financial Planning and Taxation! And frankly, if you really want a CPA license, it will likely only be a handful of separate/additional auditing classes from there and you could go out and sit for the CPA exam in the future too, if you want.
Ultimately, I will acknowledge that pursuing something like a Master’s in Taxation is a narrower focus, and that an MBA or getting a CPA license is a bit broader and perhaps keeps more doors open for you. But those are generally open doors in a different direction than the wealth management and financial planning path that you’re currently on, so perhaps the most fundamental question is really just to ask: do you really want to go deeper in wealth management and financial planning, or not? If you really want to go deeper, get a degree that’s relevant. If you’re trying to “keep your options open”, one of the others may be more appropriate. But recognize that if you go with the broader degree, it may become a self-fulfilling prophecy, as the educational path that takes you away from your financial planning focus may in fact do just that.
A Criss-Cross Buy/Sell Agreement Between Solo Advisors For Continuity Planning
Question/Comment: Regarding the NASAA model rule requiring business continuity planning for solo practitioners, I'm curious what a best practice might be for two or more solo shops that want to partner up. I'm aware that solo firms can agree in advance to sell to a larger firm, but what I'm thinking about is the process of forming a partnership, perhaps where two solos act as silos for cost sharing and business continuity. Any thoughts?
Solo advisors choosing to create a ‘loose’ partnership to share expenses and overhead is a long-standing arrangement, especially in a world where the ‘traditional’ branch structure of insurance companies and wirehouses has increasingly given way to independent advisory firm offices (whether as an independent RIA or under an independent broker-dealer). For some, it’s about splitting the expense of a physical office; for many, it’s also about sharing staff members (e.g., a front-office “secretary” or even operations and other administrative support).
However, ultimately those are just arrangements for managing the expenses of the business. And it may be a very reasonable way to help bring down the overhead expenses of the business (unless you just want to eschew a physical office altogether and become a ‘location-independent’ advisor, and/or utilize virtual assistants and virtual staff, which is also increasingly feasible these days!). But this is not actually a continuity plan in my view.
The reason this is not a continuity plan is two-fold. The first is simply that, from a legal perspective, operating as a sole proprietor still means the business (and your broker-dealer or investment-adviser registrations) die with you; sharing an office and overhead expenses doesn’t actually create a formal legal business entity that can survive beyond your death as the advisor, which is crucial for executing a continuity plan under the NASAA Model Rule (unless your continuity plan is simply to execute “an orderly wind-down of the business”). Now, you could make an actual partnership business entity (a formal partnership under state law, or an LLC, depending on what makes sense in your state), and just operate as independent silos, but if you don’t actually have any commonality of shared mission and purpose, is there really much value to doing this? Or have you just hitched your wagon to someone with whom you weren’t that serious about being a partner in the first place, which just risks having an expensive and time-consuming unwind/separation process in the future if you have a disagreement?
The second and more substantive reason why I don’t view this criss-cross arrangement as a viable continuity plan for clients, though, is simply that in most cases it’s not actually feasible for one silo/solo to take over the clients of the other. The reason, in a word, is “capacity”. If you’ve got a comfortable client base of 75 households, and your business-continuity-partner has a comfortable client base of 75 households, that’s fine for each of you, but if something happens to one of you, the other suddenly needs to service 150 households! Which isn’t exactly realistic, and can quickly snowball into a very damaging situation. If something happens to the other person, now you’re on the hook to service all of those clients, at the risk of neglecting and losing your own. And if you serve your clients first and the other clients second, you’re not really being a great continuity solution. And if your continuity agreement includes a buy/sell arrangement, you may actually have a significant debt obligation to service a large chunk of clients you don’t have the time and capacity to service, which makes the situation lose-lose – either underserve the new clients and you can’t pay off the buy/sell agreement, or underserve your clients and damage your own business trying to manage the one you were just compelled to buy as a continuity plan.
In point of fact, this is really the primary reason why you see larger firms offering continuity planning solutions for solo advisors (including our own Pinnacle Advisor Solutions “PRISM” program). Because a larger firm tends to have more capacity to actually take on and service a sudden influx of clients, and/or have the financial wherewithal to do the (immediate) hiring necessary to staff up accordingly. In other words, a larger firm is better positioned to manage the capacity issues of executing a continuity plan for someone else’s clients and continuing to service the firm’s own clients, in a manner that just isn’t realistic (at least in most cases) when two solo advisors agree to do so for each other.
So in the end, while I do think there’s validity to operating in a ‘loose’ partnership to share some overhead expenses of an advisory firm (unless you want to leverage some of today’s technology tools and virtual outsourcing instead), if such a criss-cross arrangement is going to be your actual continuity planning solution for your clients as well, give serious scrutiny to whether the advisor on the other end of the deal really would be capable of handling the influx of clients if/when the time comes. And make sure that you can too, in case it turns out you are the other advisor’s continuity plan, and not the other way around!
So what do you think? Did you pursue an MBA degree or a CPA license after your CFP certification? Which do you think is more relevant? Are you a solo advisor whose continuity plan is a buy/sell agreement with another solo advisor? Do you actually have the capacity to take over the other advisor's clients if something really happened and the continuity plan have to be executed?
