Ocotober 2002

Commission-Based Services

By Roccy M. DeFrancesco, Jr.

An accounting firm must consider a number of issues before deciding whether offering commission-based services is right for the firm. There are important differences between the kinds of commission services that might be offered, most notably the risks and rewards they present. Once the decision has been made to provide certain commission-based services, a firm has several alternatives in how to structure the offering of those services.

Life Insurance

Life insurance is the staple of many insurance agents and is the product most widely used in estate planning by attorneys and CPAs. While the commissions vary by company, the following is a good thumbnail for the commission structure:

The following examples further illustrate how the commission structure traditionally works:

The CPA, who gives the advice that will save a client thousands of dollars in income and estate taxes, made a total of $4,000 in the above two examples. The insurance agent and WBP expert, who merely sold the policies that fit the CPA’s advice, made $150,000.

Pension Planning

CPAs help their clients set up, review, or choose a pension plan for their business on a regular basis. In addition, some CPAs will do the annual record keeping and paperwork for their clients’ pension plans.

There are two ways of making a commission on pension products. First, a CPA can get a Series 6 or Series 7 license, and refer the client to a securities firm where the client’s money will be put in mutual funds or individual stocks. Second, a CPA can obtain a life insurance license, and refer or put the client in a pension plan administered through an insurance company.

For example, a CPA has a small business client, The Medical Group (TMG), a 10-doctor clinic, with 30 other employees. Nine of the 10 doctors are contributing $25,000 a year, and the office is contributing $60,000 for the staff every year, for an annual total of $285,000 in contributions. As of today, TMG has $10 million in the plan. The annual commission for the agent or broker who has TMG as a client could be anywhere between $10,000 and $75,000. Assuming the plan’s assets double in six years, the commission will be approximately $21,710 to $162,825 per year.

As with the previous life insurance example, the CPA may charge $5,000 to help set up a pension plan for a client, only to turn it over to a broker or agent who will make $10,000 per year and after six years could be making up to $100,000 annually.

Health Insurance

Most small offices containing less than 50 employees use fully insured products through companies like Anthem and John Alden. The commission on a 50-person fully insured small business product varies, but a good estimate would be approximately $2,000 per month or $24,000 per year. Larger offices are usually partially self-insured; this commission is less than half that of a fully insured product.

Property & Casualty

Property and Casualty (P&C) products (automobile, business owner’s, and worker’s compensation insurance) generate fairly low commissions. P&C commissions are usually 15%, with the exception of a few specialty items like malpractice insurance for physicians, where the commission runs from 7.5% to 10%. Revisiting the above example, TMG’s automobile, worker’s compensation, and business owner’s insurance might generate $10,000 in annual commissions. The malpractice insurance, which varies considerably by state, could generate from $9,000 to $60,000 in annual commissions.

Options for Implementing Commission-Based Products

There are three main options available to CPA firms that want to offer commission-based services. The first option is to hire additional knowledgeable staff inside the firm, and provide the service to clients directly. If the firm is going to be a full service office, the firm needs to find at least one competent insurance agent for life insurance, another one for health insurance, and one for P&C insurance. CPAs from the firm can deal with pension planning after they spend 200 hours researching the options in the marketplace. If securities sales are involved, the firm must hire a broker with all the appropriate licenses and knowledge of the stock market in general and individual stocks specifically.

The firm’s second option is to form a separate corporation that will hold itself out to deal solely with insurance, pensions, and securities. To do this, a CPA must form the new LLC, find office space, hire new employees, and, possibly, deal with the ownership of the new company by the CPA firm’s new consultants. This option requires a greater commitment from the CPA firm, and more money to start up.

The third option is to partner up with an insurance agency or securities firm and refer all clients to that firm, for a simple percentage of the commissions. Under this plan, the partner does all the work, pays their own employees, and simply cuts the CPA a check for referrals that result in commissions. (Note that CPAs can never collect revenue from insurance or securities sales unless licensed.)

Which Option Is Right?

The first option is best for a large CPA firm that wants to maximize control over commission-based products. New agents and brokers work for the firm itself, giving the office complete control over the products sold and the advice given. Additionally, almost all the profits from commission-based products go to the licensed CPA partners, not split with another party. The issue of internal referral may not be a problem for large multi-state or national CPA firms if the client perceives that large firms have many consulting arms that are independent from the rest of the company.

This strategy is not a viable option for the regional to small CPA firm because of the up-front costs of hiring and staffing an internal consulting division, and the appearance of self-referral. Whatever money can be made from commission-based sales is insignificant if it costs a firm its reputation and client base.

Setting up a separate corporation is an option for both large and small CPA firms. Because the consulting company has a different name and a different address, the appearance of impropriety is lessened. This method is probably too expensive for the smaller CPA firm, because of the start-up costs for hiring a new staff, finding a new office, and furnishing that office. Additionally, the time needed by the partners to get such a venture up and running may be too great.

Partnering with another provider has many advantages for both small and large CPA firms: There are no start-up costs and no need to hire additional employees, buy new furniture and computers, or rent new office space. In addition, there is more independence between the CPA and the consultant than the previous two options. This strategy can allow the firm to test the waters a bit, and lowers risk.

The substantial downside to this option is that, because the consultant is not an employee of the CPA firm or the firm’s separate consulting company, the CPA is relying on the outside insurance agent or broker to give quality advice. Partnering up directly with a national company (bank, insurance company, or security firm) may assure quality service but can create problems if most of the products that will be offered to clients will be from that large entity. Instead of having the consultant shop an insurance product or pension product with many different companies, the consultant may be forced to shop the product within their company. Clients should be allowed to explore the best options available in the marketplace. Other problems exist when partnering with local insurance agents or stockbrokers. Local consultants may not give clients the best products at the lowest rates. The CPA firm’s reputation is at stake; if the consultant does a poor job, there is a possibility that the CPA will lose a client because of the poor advice and performance of the local agent or broker.

Roccy M. DeFrancesco, Jr., is the vice president of wealth preservation for the Planning Group and can be contacted at

Robert H. Colson, PhD, CPA
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