My wife is a legal assistant for an estate lawyer. Regularly, she gets involved in settling estates for clients in their 80’s and 90’s who have left behind hundreds of thousands, if not millions, of dollars. As she gets to know the estate better, she finds out that the deceased was living comfortably on pensions and was drawing little, if any, from the portfolio to fund the retirement lifestyle. As a result, the client has amassed a fortune over many years due to a combination of diligent saving, market growth, rising real estate values and living within his/her means.
Many advisors whom I support as a case coach prepare tax returns for clients, mostly as a way of providing value-added service. I am told that many tax returns show investment income that the clients are simply re-investing in taxable vehicles rather than spending in their retirement. As a result, their portfolios continue to grow for no apparent reason other than they don’t need the money.
With increasing frequency, I get calls from advisors who have clients in their 50’s, 60’s and 70’s who have recently received five and six figure inheritances that they don’t know what to do with. These clients have accumulated sufficient wealth for their retirement years while either not knowing the size of an inevitable inheritance or not including an inheritance their retirement planning.
As the baby boomers and their parents grow old and die, these scenarios will grow exponentially. There has never been a time in modern history where so much wealth will pass from one generation to the next. Advisors have done a tremendous job of helping clients accumulate wealth over the past twenty to thirty years. But, based on the above scenarios, it seems that much of that wealth may have been amassed for no other purpose than amassing it. And the accumulation vehicles that worked so well to amass wealth for retirement income purposes, may need to be re-evaluated to determine if they create the most value for a different purpose.
I have said for many years that there has never been a better time to be “in the life insurance business”. While life insurance began as a risk management tool, which continues to be it’s most important purpose, it has come of age as an intergenerational wealth distribution solution. There are several well-known insurance strategies that have been flogged for years by wholesalers which can significantly grow the value of estate assets. Assets which, whether a client realizes it or not, are currently being managed for children or charity. In many cases, these insurance strategies can increase the estate value of assets by two to four times when compared to traditional fixed income or equity investments.
There may be those who choose to give wealth to their heirs or charities while alive. However, as we have seen in the scenarios above, there are still many who prefer not to distribute their estates before they die. For those individuals, a very popular way to maximize estate value is to purchase a universal life insurance policy and transfer wealth into the policy over a few years. Most UL policies have a guaranteed minimum return which makes sure that the policy delivers the projected estate value. Aside from the tax advantage of an exempt policy, the biggest estate benefit is the immediate value gained by virtue of the policy face amount of insurance, a benefit that’s not possible with any other investment.
A case that I worked on recently involved a couple in their late sixties. Through some financial planning with their advisor, they realized that they had $300,000 that they wouldn’t need to support their retirement lifestyle. The advisor presented an insurance proposal showing annual deposits of $50,000 into a joint-last-to-die policy over six years. Assuming the second death occurred in twenty-five years, the guaranteed estate value of the policy would be just over $1,000,000. Whereas if they invested $300,000 in a 4% GIC and paid the tax out of the annual interest, the estate value would only be $535,000. Similar comparisons can be made if equity-type investments are preferred. But in this case, the math was so compelling that this was not a difficult decision for the client to make.
But the key is to help clients assign purpose for wealth. Only then can clients realize that they may have wealth that’s destined for different purposes. And as opposed to piling it up and investing it all the same way, it would seem to make more sense to help clients identify purpose for each dollar that they have and invest it to create the most value for it’s ultimate use. As advisors, isn’t that what clients look to us for?
Friday, May 14, 2010
Tuesday, May 11, 2010
Different Compensation Structures for Junior/Associate Financial Advisors
Examples of Compensation Structures for Junior/Associate Advisors
With the average age of a financial advisor in Canada being 54, many advisors are considering semi-retirement and starting to plan for succession. My first blog article discussed how to find the right person to take over for you, the second blog article discussed the importance of having an action plan once you find the right person, and now we’ll examine different compensation strategies.
Succession plans can vary with advisors depending on their product focus, length of time in the business, the size of their block, staff members, etc, but they all have one thing in common. The advisor selling his block of business wants the best price and the buyer wants a discount. There is no one-size fits all formula when it comes to succession planning so educating yourself on what works for others may help you decide what is best for your situation. Let’s look at three actual succession plans that (with a bit of tweaking perhaps) may work for you as well.
The first successful succession plan involves a 59 year old advisor who owns a block of mutual fund business generating gross commissions of $200,000 per year. He has found the perfect junior advisor to take over for him and his asking price is 2.5 times the commission currently being generated which means an asking price of $500,000. He would like half up front with the balance due over 5 years with no interest. The junior advisor cannot finance this transaction so they agree to a 60/40 split of commission over 8 years. The junior advisor will earn $120k (60% of 200k) and the advisor selling will earn $80k (40%) for 8 years which actually gives him $640,000 for the business. The formal agreement (completed by a lawyer which includes a non-solicit clause) states that the established advisor will work part time for 2 years during the transition. The agreement also states it can be terminated with thirty days notice during the first 2 years by either advisor.
The second plan involves a 57 year old advisor who owns a block of life insurance business and mutual fund business generating gross commissions of $150,000. He has found the perfect junior advisor but wants to stay active in the business and mentor the new advisor while spending more time with his family. He agrees to pay him a base salary of $500 per week for three years and assigns him his C & D clients while he focuses on his A & B clients. All new commissions generated by the new advisor, from the existing block of C & D clients, get split 50/50 and the established advisor maintains ownership of the client during the three years. Any new clients that the junior advisor finds on her/his own are 100% owned by the new advisor. The salary stops after 3 years and the junior advisor has the option to buy the total block of business as per the conditions in the formal agreement. (This agreement can be terminated by either party with thirty days notice at any time during the 3-year period). Although the established advisor earns less commission in the first year ($150,000 minus $24k salary) the new advisor should generate 24K of commission through sales to the C & D clients. With a 50/50 split this means the established advisor is only out of pocket 12k in the first year. If $36k of commissions is generated by the new advisor in the second year, the established advisor is only out of pocket $6000 (24k salary minus 50/50 split on 36K (18k) = $6000). If the amount of commissions generated by the new advisor is $48k in the third year, the established advisor is not out of pocket (24k salary minus 50/50 split on 48K=0).
The third plan involves a 54 year old advisor who owns a block of mutual fund business generating gross commissions of $300,000 (approximately 30 million under management). Her succession plan includes offering life, critical illness and long term care insurance to her clients. She has found the perfect junior advisor who will focus on educating her existing clients about the benefits of these products. The formal agreement states that a salary of $40,000 will be paid to the new advisor and all commissions generated from sales within the block of business will be split 50/50. The established advisor maintains ownership of the clients for 5 years at which time the option to buy the block of business will be made available to the junior advisor. The formal agreement includes a termination of agreement with thirty days notice by either advisor at any time during the 5 year period and includes a non-solicit clause. The price will be based on market value at the point of sale.
All three advisors mentioned above agreed that the reason their succession plans are successful is due to the fact that;
· they all took the time to find to find the right person to work with;
· they all had a detailed written business plan outlining expectations and time frames;
· they all completed a formal legal agreement with a lawyer experienced in this area; and
· they were willing to mentor the new advisor.
Mentoring plays a huge part in the success of any partnership and the best way to learn the ropes of any business is through “hands-on” experience especially in this field where there is so much to learn. Working side by side, answering questions, introducing clients, sitting in on appointments, and reviewing client files is the best training an established advisor can give to a junior advisor.
Many new advisors that I have met hold licenses, business degrees, CFPs and possess strong business, marketing, technical and entrepreneurial skills. What they may lack in experience and clientele they make up for in knowledge, energy and fresh ideas that can compliment an existing practice. They have been educated on the opportunities and options of working with independent financial advisors and the business potential this career offers. These individuals would welcome an opportunity to work with an established advisor.
Just like advisors who focus on building relationships, an established advisor who focuses on finding the right person to work with, rather than focusing on how to pay them, increases her/his chances of a successful partnership.
Julia Chapman
jchapman@joinipg.com
With the average age of a financial advisor in Canada being 54, many advisors are considering semi-retirement and starting to plan for succession. My first blog article discussed how to find the right person to take over for you, the second blog article discussed the importance of having an action plan once you find the right person, and now we’ll examine different compensation strategies.
Succession plans can vary with advisors depending on their product focus, length of time in the business, the size of their block, staff members, etc, but they all have one thing in common. The advisor selling his block of business wants the best price and the buyer wants a discount. There is no one-size fits all formula when it comes to succession planning so educating yourself on what works for others may help you decide what is best for your situation. Let’s look at three actual succession plans that (with a bit of tweaking perhaps) may work for you as well.
The first successful succession plan involves a 59 year old advisor who owns a block of mutual fund business generating gross commissions of $200,000 per year. He has found the perfect junior advisor to take over for him and his asking price is 2.5 times the commission currently being generated which means an asking price of $500,000. He would like half up front with the balance due over 5 years with no interest. The junior advisor cannot finance this transaction so they agree to a 60/40 split of commission over 8 years. The junior advisor will earn $120k (60% of 200k) and the advisor selling will earn $80k (40%) for 8 years which actually gives him $640,000 for the business. The formal agreement (completed by a lawyer which includes a non-solicit clause) states that the established advisor will work part time for 2 years during the transition. The agreement also states it can be terminated with thirty days notice during the first 2 years by either advisor.
The second plan involves a 57 year old advisor who owns a block of life insurance business and mutual fund business generating gross commissions of $150,000. He has found the perfect junior advisor but wants to stay active in the business and mentor the new advisor while spending more time with his family. He agrees to pay him a base salary of $500 per week for three years and assigns him his C & D clients while he focuses on his A & B clients. All new commissions generated by the new advisor, from the existing block of C & D clients, get split 50/50 and the established advisor maintains ownership of the client during the three years. Any new clients that the junior advisor finds on her/his own are 100% owned by the new advisor. The salary stops after 3 years and the junior advisor has the option to buy the total block of business as per the conditions in the formal agreement. (This agreement can be terminated by either party with thirty days notice at any time during the 3-year period). Although the established advisor earns less commission in the first year ($150,000 minus $24k salary) the new advisor should generate 24K of commission through sales to the C & D clients. With a 50/50 split this means the established advisor is only out of pocket 12k in the first year. If $36k of commissions is generated by the new advisor in the second year, the established advisor is only out of pocket $6000 (24k salary minus 50/50 split on 36K (18k) = $6000). If the amount of commissions generated by the new advisor is $48k in the third year, the established advisor is not out of pocket (24k salary minus 50/50 split on 48K=0).
The third plan involves a 54 year old advisor who owns a block of mutual fund business generating gross commissions of $300,000 (approximately 30 million under management). Her succession plan includes offering life, critical illness and long term care insurance to her clients. She has found the perfect junior advisor who will focus on educating her existing clients about the benefits of these products. The formal agreement states that a salary of $40,000 will be paid to the new advisor and all commissions generated from sales within the block of business will be split 50/50. The established advisor maintains ownership of the clients for 5 years at which time the option to buy the block of business will be made available to the junior advisor. The formal agreement includes a termination of agreement with thirty days notice by either advisor at any time during the 5 year period and includes a non-solicit clause. The price will be based on market value at the point of sale.
All three advisors mentioned above agreed that the reason their succession plans are successful is due to the fact that;
· they all took the time to find to find the right person to work with;
· they all had a detailed written business plan outlining expectations and time frames;
· they all completed a formal legal agreement with a lawyer experienced in this area; and
· they were willing to mentor the new advisor.
Mentoring plays a huge part in the success of any partnership and the best way to learn the ropes of any business is through “hands-on” experience especially in this field where there is so much to learn. Working side by side, answering questions, introducing clients, sitting in on appointments, and reviewing client files is the best training an established advisor can give to a junior advisor.
Many new advisors that I have met hold licenses, business degrees, CFPs and possess strong business, marketing, technical and entrepreneurial skills. What they may lack in experience and clientele they make up for in knowledge, energy and fresh ideas that can compliment an existing practice. They have been educated on the opportunities and options of working with independent financial advisors and the business potential this career offers. These individuals would welcome an opportunity to work with an established advisor.
Just like advisors who focus on building relationships, an established advisor who focuses on finding the right person to work with, rather than focusing on how to pay them, increases her/his chances of a successful partnership.
Julia Chapman
jchapman@joinipg.com
Tuesday, April 13, 2010
The first 90 days with a new and/or experienced associate advisor
So you’ve found the perfect advisor to work with – Now what do you do?
In our experience, many senior financial advisors that are looking for a junior advisor do not properly execute their 90 day plan. Many senior advisors believe that a new advisor should be able to parachute into their practice with minimal support, training and supervision. Unfortunately, a poor 90 day plan usually becomes a frustrating experience for all concerned.
Michael Gerber, author of the best selling E-Myth, correctly states that entrepreneurial mom and pop style companies fail to move to the next level because their owners work in the business and not on the business. Financial advisors are no different. Many financial advisors would find it difficult to embrace the full potential of a junior advisor because they do not make the time or have the energy to properly train and mentor these individuals. Like training a new administrator, it takes time to educate the new person on your business, your style, your clients, habits and other pertinent business matters.
Training & Development
Depending on the person’s qualifications and experience a training schedule based on your priorities, goals, objectives and expectations is important. Listed below are areas of training to consider;
· Working with your clients (what are your expectations)
· Client management system for tracking and follow-up
· Mutual Funds & Segregated Funds (companies you deal with)
· Financial planning software
· Fact finding & needs analysis
· Insurance quote systems/companies and contact people
· Life Insurance products (Term, Ulife & Whole Life)
· Living Benefits (CI, DI & LTC)
· Estate Planning
· Target Marketing
· Networking with Centers of Influence
· Prospecting, handling objections, closing and referrals
Ask your MGA/Dealership for help. Independent Planning Group, for example, requires all new advisors attend their Institute for Professional Growth which involves a one week boot camp followed by weekly and monthly training sessions covering all aspects of full financial planning during their first year.
Introduction to your clients
The biggest challenge for most new advisors is not having a network of clients to work with and a lack of confidence. The opportunity to work with an established advisor who is willing to mentor the right person and share their clients has huge benefit to both parties. As the associate advisor learns and gains confidence they will add value and revenue to the business by adding their own referrals, networking groups, centers of influence, new products and target markets.
Many established advisors benefit from having the associate start out working with their C & D clients so they have more time to focus on the A & B clients instead of expecting them to find their own clients right away. Consider sending a letter to your clients explaining your practice is growing and you have added a licensed advisor to your team and he/she will be calling them in the near future to introduce themselves. Make the first few calls yourself in front of the advisor to demonstrate the process. Then have the new advisor make calls while you listen. This practice combined with constructive feedback will help build their confidence quickly and help them overcome both rejection and objections sooner.
Meeting clients face to face
Providing a fact finding sheet for the associate advisor, so they know what questions to ask clients, is also key to gaining confidence. Complete the fact finding sheet (basic needs analysis) with the advisor first so they understand its purpose and how it builds relationships and trust. Explain how it quickly determines other products and services the clients may need and also educates them about all the other services and products you provide. Conduct the first few appointments with the clients yourself while the associate advisor listens and learns. Discuss each appointment after and then have the associate advisor conduct future appointments while you observe. The feedback after the appointment is very beneficial to their training and development.
Tracking System - If you can’t measure it you can’t manage it
Training a new advisor on your system for tracking existing business, new business, compensation, client notes, follow ups, reminders, marketing initiatives, centers of influence, networking events and referrals ensures the new advisor stays focused and tracks business growth. This information is also vital for the established advisor when completing performance reviews, planning future business and marketing strategies and future training.
Challenges
The biggest challenge for established advisors is finding the right person, taking the time to train them and effectively incorporating that person into their business plan. There is no shortage of people interested in bringing value, revenue, energy and fresh ideas to your business. You just have to know where to find them and I can help with that.
So you’ve found the perfect advisor to work with – Now what do you do?
In our experience, many senior financial advisors that are looking for a junior advisor do not properly execute their 90 day plan. Many senior advisors believe that a new advisor should be able to parachute into their practice with minimal support, training and supervision. Unfortunately, a poor 90 day plan usually becomes a frustrating experience for all concerned.
Michael Gerber, author of the best selling E-Myth, correctly states that entrepreneurial mom and pop style companies fail to move to the next level because their owners work in the business and not on the business. Financial advisors are no different. Many financial advisors would find it difficult to embrace the full potential of a junior advisor because they do not make the time or have the energy to properly train and mentor these individuals. Like training a new administrator, it takes time to educate the new person on your business, your style, your clients, habits and other pertinent business matters.
Training & Development
Depending on the person’s qualifications and experience a training schedule based on your priorities, goals, objectives and expectations is important. Listed below are areas of training to consider;
· Working with your clients (what are your expectations)
· Client management system for tracking and follow-up
· Mutual Funds & Segregated Funds (companies you deal with)
· Financial planning software
· Fact finding & needs analysis
· Insurance quote systems/companies and contact people
· Life Insurance products (Term, Ulife & Whole Life)
· Living Benefits (CI, DI & LTC)
· Estate Planning
· Target Marketing
· Networking with Centers of Influence
· Prospecting, handling objections, closing and referrals
Ask your MGA/Dealership for help. Independent Planning Group, for example, requires all new advisors attend their Institute for Professional Growth which involves a one week boot camp followed by weekly and monthly training sessions covering all aspects of full financial planning during their first year.
Introduction to your clients
The biggest challenge for most new advisors is not having a network of clients to work with and a lack of confidence. The opportunity to work with an established advisor who is willing to mentor the right person and share their clients has huge benefit to both parties. As the associate advisor learns and gains confidence they will add value and revenue to the business by adding their own referrals, networking groups, centers of influence, new products and target markets.
Many established advisors benefit from having the associate start out working with their C & D clients so they have more time to focus on the A & B clients instead of expecting them to find their own clients right away. Consider sending a letter to your clients explaining your practice is growing and you have added a licensed advisor to your team and he/she will be calling them in the near future to introduce themselves. Make the first few calls yourself in front of the advisor to demonstrate the process. Then have the new advisor make calls while you listen. This practice combined with constructive feedback will help build their confidence quickly and help them overcome both rejection and objections sooner.
Meeting clients face to face
Providing a fact finding sheet for the associate advisor, so they know what questions to ask clients, is also key to gaining confidence. Complete the fact finding sheet (basic needs analysis) with the advisor first so they understand its purpose and how it builds relationships and trust. Explain how it quickly determines other products and services the clients may need and also educates them about all the other services and products you provide. Conduct the first few appointments with the clients yourself while the associate advisor listens and learns. Discuss each appointment after and then have the associate advisor conduct future appointments while you observe. The feedback after the appointment is very beneficial to their training and development.
Tracking System - If you can’t measure it you can’t manage it
Training a new advisor on your system for tracking existing business, new business, compensation, client notes, follow ups, reminders, marketing initiatives, centers of influence, networking events and referrals ensures the new advisor stays focused and tracks business growth. This information is also vital for the established advisor when completing performance reviews, planning future business and marketing strategies and future training.
Challenges
The biggest challenge for established advisors is finding the right person, taking the time to train them and effectively incorporating that person into their business plan. There is no shortage of people interested in bringing value, revenue, energy and fresh ideas to your business. You just have to know where to find them and I can help with that.
Wednesday, April 7, 2010
Will New Regulatory Regime hit the Life Insurance Industry too?
As a principal heading up a Managing General Agency (MGA) in Canada, we are starting to see more regulatory interest in the Canadian Life Insurance industry. This includes the increasingly popular Segregated Fund product too.
Recently our firm’s compliance officer and I participated in a compliance review on our firm conducted by one of our insurance distribution partners. They were keenly interested to learn about our firm’s compliance organization, the screening of representatives, their sales practices, and our licensing and monitoring process. They further wanted to know how we monitor advisor suitability to distribute insurance products, the documentation advisors leave with their clients to fully disclose how they hold themselves out to the public.
In discussion with some regulatory leaders, they appear to want to gain a better understanding of current business models and the relationship between insurance company supplier, their distribution offices and the licensed advisor. Questions being asked are what are the relationship between advisors, MGA’s and insurer? What responsibilities do insurers delegate to MGA’s? What supervision do MGA’s conduct? Is there consistency in our industry with all MGA’s or does it vary significantly?
It hasn’t helped when articles get produced such as MGAs thrive in Industry’s “Wild West.” MGA’s, the middlemen in the sales process, are unregulated, but no one seems to care.
As advisors we are responsible for the overall sales presentation and appropriateness of the insurance recommendations. We as MGA’s cannot be expected to monitor the prudence of an advisor’s recommendation given that we did not speak with the client directly and are seldom apprised of what was discussed. In addition, as advisors are allowed to deal with more than one MGA, even with the same client, an MGA would have no way of knowing a client’s needs, goals, and objectives. Besides, the advisor is in the best position to access what coverage is appropriate for the client based upon their discussions.
So that the regulatory authorities feel more comfort in our roles and responsibilities, it will be critical that advisors demonstrate a sufficient fact-finding needs assessment to properly access the client’s circumstances, goals, and objectives. As well advisors must fully and accurately complete all required documentation, disclosure forms, etc., in addition to following the code of conduct of their individual licenses, their MGAs code on conduct and as well as adopting a Best Practice process such as the one from Advocis at all times.
As MGA’s we must make sure we review applications for insurance to ensure they are complete and accurate, and follow the underwriters guidelines for handling incomplete documentation, while maintaining proper records in a safe and confidential manner. Accuracy of information between the insurer and advisor is critical.
While we as advisors and MGA’s believe it is not necessary to impose additional responsibilities on neither life insurance advisors nor MGA’s, we must not lend reason to send off alarm bells. Only our actions and time will tell if Mutual Fund type guidelines are necessary in the Canadian Life Insurance world too. Are you doing your part in all your actions and procedures to comfort the regulatory authorities or are you playing just lip service and as a result, your bad actions will result in more rules based regulation in our industry too.
Recently our firm’s compliance officer and I participated in a compliance review on our firm conducted by one of our insurance distribution partners. They were keenly interested to learn about our firm’s compliance organization, the screening of representatives, their sales practices, and our licensing and monitoring process. They further wanted to know how we monitor advisor suitability to distribute insurance products, the documentation advisors leave with their clients to fully disclose how they hold themselves out to the public.
In discussion with some regulatory leaders, they appear to want to gain a better understanding of current business models and the relationship between insurance company supplier, their distribution offices and the licensed advisor. Questions being asked are what are the relationship between advisors, MGA’s and insurer? What responsibilities do insurers delegate to MGA’s? What supervision do MGA’s conduct? Is there consistency in our industry with all MGA’s or does it vary significantly?
It hasn’t helped when articles get produced such as MGAs thrive in Industry’s “Wild West.” MGA’s, the middlemen in the sales process, are unregulated, but no one seems to care.
As advisors we are responsible for the overall sales presentation and appropriateness of the insurance recommendations. We as MGA’s cannot be expected to monitor the prudence of an advisor’s recommendation given that we did not speak with the client directly and are seldom apprised of what was discussed. In addition, as advisors are allowed to deal with more than one MGA, even with the same client, an MGA would have no way of knowing a client’s needs, goals, and objectives. Besides, the advisor is in the best position to access what coverage is appropriate for the client based upon their discussions.
So that the regulatory authorities feel more comfort in our roles and responsibilities, it will be critical that advisors demonstrate a sufficient fact-finding needs assessment to properly access the client’s circumstances, goals, and objectives. As well advisors must fully and accurately complete all required documentation, disclosure forms, etc., in addition to following the code of conduct of their individual licenses, their MGAs code on conduct and as well as adopting a Best Practice process such as the one from Advocis at all times.
As MGA’s we must make sure we review applications for insurance to ensure they are complete and accurate, and follow the underwriters guidelines for handling incomplete documentation, while maintaining proper records in a safe and confidential manner. Accuracy of information between the insurer and advisor is critical.
While we as advisors and MGA’s believe it is not necessary to impose additional responsibilities on neither life insurance advisors nor MGA’s, we must not lend reason to send off alarm bells. Only our actions and time will tell if Mutual Fund type guidelines are necessary in the Canadian Life Insurance world too. Are you doing your part in all your actions and procedures to comfort the regulatory authorities or are you playing just lip service and as a result, your bad actions will result in more rules based regulation in our industry too.
Sunday, April 4, 2010
Flaherty denies new taxes on financial services
Reprinted from the Toronto Sun, April 4th, 2010
By JULIAN BELTRAME, The Canadian Press
OTTAWA — Finance Minister Jim Flaherty insisted Friday he is not raising new taxes on financial services, saying reports to the contrary are misplaced.
With cries of foul shouted in the House of Commons, the finance minister moved to stem fears that his department is applying a new definition of financial services that would see the five-per-cent GST applied to a whole new range of transactions.
With the harmonized sales tax coming into force in Ontario and British Columbia, some suggested the tax grab on the financial services sector could reach $1 billion a year.
“There seems to have been some confusion,” Flaherty said in Oshawa, Ont., on Friday.
“The intention in the Department of Finance has been to clarify the definition of financial services because of a couple of court cases that seem to have muddied the waters. There’s no intention of changing tax policy.”
An official said there would be no expanding of categories that would see the sales tax applied to areas that previously were not subject to taxation.
“This is longstanding Government of Canada policy with respect to the definition of financial services. It was the policy of the previous government, it’s our policy as well. We are going to maintain that definition and take whatever steps we have to make it absolutely clear that the longstanding definition remains the same,” Flaherty said.
Asked if he was giving an assurance to the services industry, Flaherty replied in the affirmative.
“That’s the reassurance we want them to have. We will have the tools in the first budget implementation act to make sure we get back to the status quo before the court cases so people can rest assured that the tax treatment of defined financial services will not change.”
The controversy was a focus of opposition attacks on the government during question period Friday.
Liberal MP Wayne Easter accused the Conservatives of a “conniving deception,” saying since financial services firms will pass on the tax hike, consumers will ultimately wind up paying.
Flaherty’s parliamentary secretary Ted Menzies responded that the new provisions in the budget were “simply technical clarifications to a court case.”
Ottawa had announced in December that clarifications on how the GST would be applied on financial services were coming as a result of the court decisions.
The industry became alarmed about just how much they would affect services following a Canada Revenue Agency note that left the door open to many more activities being subject to the sales tax, including commissions paid to mutual fund dealers and to auto dealers to arrange credit for car buyers.
By JULIAN BELTRAME, The Canadian Press
OTTAWA — Finance Minister Jim Flaherty insisted Friday he is not raising new taxes on financial services, saying reports to the contrary are misplaced.
With cries of foul shouted in the House of Commons, the finance minister moved to stem fears that his department is applying a new definition of financial services that would see the five-per-cent GST applied to a whole new range of transactions.
With the harmonized sales tax coming into force in Ontario and British Columbia, some suggested the tax grab on the financial services sector could reach $1 billion a year.
“There seems to have been some confusion,” Flaherty said in Oshawa, Ont., on Friday.
“The intention in the Department of Finance has been to clarify the definition of financial services because of a couple of court cases that seem to have muddied the waters. There’s no intention of changing tax policy.”
An official said there would be no expanding of categories that would see the sales tax applied to areas that previously were not subject to taxation.
“This is longstanding Government of Canada policy with respect to the definition of financial services. It was the policy of the previous government, it’s our policy as well. We are going to maintain that definition and take whatever steps we have to make it absolutely clear that the longstanding definition remains the same,” Flaherty said.
Asked if he was giving an assurance to the services industry, Flaherty replied in the affirmative.
“That’s the reassurance we want them to have. We will have the tools in the first budget implementation act to make sure we get back to the status quo before the court cases so people can rest assured that the tax treatment of defined financial services will not change.”
The controversy was a focus of opposition attacks on the government during question period Friday.
Liberal MP Wayne Easter accused the Conservatives of a “conniving deception,” saying since financial services firms will pass on the tax hike, consumers will ultimately wind up paying.
Flaherty’s parliamentary secretary Ted Menzies responded that the new provisions in the budget were “simply technical clarifications to a court case.”
Ottawa had announced in December that clarifications on how the GST would be applied on financial services were coming as a result of the court decisions.
The industry became alarmed about just how much they would affect services following a Canada Revenue Agency note that left the door open to many more activities being subject to the sales tax, including commissions paid to mutual fund dealers and to auto dealers to arrange credit for car buyers.
Friday, March 19, 2010
Using a Buy/Sell Strategy to Fund a Continuity Agreement
Recently, I met for a scheduled coaching session with one of the independent advisors who I support. He has a successful and well-established financial-planning practice. He was concerned with the potential impact on the value of his books of insurance policies and mutual funds should he die or become incapacitated. As Vince Valenti pointed out in a recent article in this blog (Sample Continuity Agreement posted on January 8) , a well thought-out and drafted Continuity Agreement could protect the value of one’s book in the event of one of these contingencies, assuming a willing purchaser can be found. Until such an agreement is put into place, the risk of not realizing full value for years of sweat equity and ingenuity is very significant. Even if a Continuity Agreement can be put into place whereby there is a buyout in the event of death or disability, where will the purchaser come up with the funds to complete the agreement if a triggering event occurs? Insurance would seem to be the obvious answer so let’s take a look at the options.
As with buy/sell agreements between business partners, insurance is regularly used to fund these agreements. However, as an independent advisor, one may not have a business partner that shares profits from a book of business. Could one enter into a Continuity Agreement with a purchaser with whom there is no business relationship? Of course. But would insurers be willing to underwrite life and disability policies on the life of the seller owned by the purchaser? Recent inquiries with the underwriting departments of several major insurers found differing opinions. Some insurers felt that there was sufficient insurable interest in insuring an agreement for otherwise unrelated parties. Others were not comfortable with this approach. It seems that there is a need for advisors to educate and influence some underwriters until they understand and are comfortable with the business reason for insurance funding under these circumstances.
In his article, Vince also suggests that the dealership/MGA might be party to the agreement. One would think that since the advisor is contracted with the dealership/MGA, there would be an insurable interest. The buyer (in this case, the dealership/MGA) would own insurance on the life of the advisor to fund the Continuity Agreement. Again, responses from insurers have varied with some agreeable to insuring such an agreement while others not.
If, for whatever reason, it proves difficult to get a policy underwritten for a Continuity Agreement, consideration could be given to transferring the ownership of an inforce policy on the life of the seller to the buyer who subsequently makes himself/herself the beneficiary. If this is a recently issued policy without cash value, there are not likely to be any significant adverse tax consequences attributed to the seller. However, transferring ownership of a policy that has been inforce for some time or contains significant cash value could trigger a taxable disposition or give rise to policy valuation issues. So careful consideration should be given before doing so.
In the absence of a Continuity Agreement, an independent advisor could simply buy sufficient, life, disability and critical illness insurance to mitigate the potential loss caused by these events occurring. This gives either the advisor or his/her estate options at a time of crisis rather than being forced to sell the book of business at a fire sale price.
As advisors, we encourage business people to use insurance for risk management purposes. Aside from protecting the value of our practices, we should be a model for our business owner clients by implementing these types of insurance solutions for ourselves.
As with buy/sell agreements between business partners, insurance is regularly used to fund these agreements. However, as an independent advisor, one may not have a business partner that shares profits from a book of business. Could one enter into a Continuity Agreement with a purchaser with whom there is no business relationship? Of course. But would insurers be willing to underwrite life and disability policies on the life of the seller owned by the purchaser? Recent inquiries with the underwriting departments of several major insurers found differing opinions. Some insurers felt that there was sufficient insurable interest in insuring an agreement for otherwise unrelated parties. Others were not comfortable with this approach. It seems that there is a need for advisors to educate and influence some underwriters until they understand and are comfortable with the business reason for insurance funding under these circumstances.
In his article, Vince also suggests that the dealership/MGA might be party to the agreement. One would think that since the advisor is contracted with the dealership/MGA, there would be an insurable interest. The buyer (in this case, the dealership/MGA) would own insurance on the life of the advisor to fund the Continuity Agreement. Again, responses from insurers have varied with some agreeable to insuring such an agreement while others not.
If, for whatever reason, it proves difficult to get a policy underwritten for a Continuity Agreement, consideration could be given to transferring the ownership of an inforce policy on the life of the seller to the buyer who subsequently makes himself/herself the beneficiary. If this is a recently issued policy without cash value, there are not likely to be any significant adverse tax consequences attributed to the seller. However, transferring ownership of a policy that has been inforce for some time or contains significant cash value could trigger a taxable disposition or give rise to policy valuation issues. So careful consideration should be given before doing so.
In the absence of a Continuity Agreement, an independent advisor could simply buy sufficient, life, disability and critical illness insurance to mitigate the potential loss caused by these events occurring. This gives either the advisor or his/her estate options at a time of crisis rather than being forced to sell the book of business at a fire sale price.
As advisors, we encourage business people to use insurance for risk management purposes. Aside from protecting the value of our practices, we should be a model for our business owner clients by implementing these types of insurance solutions for ourselves.
Wednesday, March 10, 2010
Consolidating Two Financial Planning Businesses - The 2nd 100 Day Action Plan
Congratulations, you’ve closed the deal after spending an extensive amount of time, money and energy dealing with legal agreements, bankers and accountants...whew, time to relax, right? Wrong!! It’s now time to begin implementing your second 100 Day Action Plan.
Why is this necessary?
History is littered with many business mergers and acquisitions that have failed due to poor planning after the deal is signed. Many business people will get so involved in “making the deal happen” that they believe everything will automatically fall into place once the contracts are signed. Sadly, this is not the case.
The second 100 day plan is absolutely critical to ensure a successful acquisition. The second 100 day planning should be discussed and mutually agreed to before the deal is closed so that both parties can begin its implementation immediately. This plan should deal with many important matters such as client introductions and transition, employee considerations and office amalgamation.
Your Client Message is Critical
During the initial due diligence, the vendor may have structured his/her clients in A, B, C and D categories. Plan to visit the A, B and C clients together and develop an aggressive strategy to accomplish this. It is important to have a dialogue with each client as quickly as possible.
What will be the main theme of your message to these clients? Rehearse your client message with family members or staff members prior to visiting clients. Clients may be nervous of the new ownership and will want to have assurances that their accounts will not be affected and service levels will at least continue, if not improve. It’s important to have new stationary available for the clients you meet along with any new or relevant marketing materials.
It is important to note any client nervousness or apprehension and develop an action plan on how to deal with it. You may decide that you may need to meet with the client again and provide the client with samples of financial plans and promote the typical quality of work that they can expect from you. You may consider leaving the client with testimonials from other satisfied clients.
Clients may ask the vendor how long the vendor plans to stay in the business. This is a critical question that must be answered carefully. Put yourself in the client’s shoes, would you want to hear that your long trusted advisor is leaving the business? You may consider communicating that you will continue to have access to the vendor for longer than the transition period. Clients may feel encouraged to hear that an agreement has been developed whereby you can ask the vendor to work on a contractual basis if the need should arise.
New stationary – Develop a Co-Brand for Stationary and Newsletters
Consider developing new stationary to show a co-brand of both individual or company names and communicate a sense of a joint venture rather than an out-right purchase. You may want to continue using this stationary even after the vendor’s transition period has expired, with the vendor’s permission.
Employee Management
By now, both parties should have a plan for each of their respective employees. In many cases, the vendor and purchaser may insist on the vendor’s assistant(s) staying on the payroll to help with the transition and to help reassure clients that not everything is changing.
It is very important to keep your employees informed of your plans from the beginning, especially for vendors. Employees can become nervous about their future employment status when their employer is considering a change of ownership. Employees will want to know how they will fit within the new company. Will they have new responsibilities and will they need additional training.
Develop a “To Do” List
Both parties along with their administrators should discuss the various details that will need attention. As an example, will signage need to be changed, offices and staff relocated, new training for staff, changes to existing forms, bank account updates, re-directing commissions and so on.
If you have access to a competent administrator that is able to manage complex projects, you may consider asking this individual to be the transition coordinator and be responsible for planning, tracking and organizing the changes that will have to be done.
In closing, planning, planning and implementation is key to a successful acquisition of another advisor’s book. If you fail to plan, you are planning to fail!
Why is this necessary?
History is littered with many business mergers and acquisitions that have failed due to poor planning after the deal is signed. Many business people will get so involved in “making the deal happen” that they believe everything will automatically fall into place once the contracts are signed. Sadly, this is not the case.
The second 100 day plan is absolutely critical to ensure a successful acquisition. The second 100 day planning should be discussed and mutually agreed to before the deal is closed so that both parties can begin its implementation immediately. This plan should deal with many important matters such as client introductions and transition, employee considerations and office amalgamation.
Your Client Message is Critical
During the initial due diligence, the vendor may have structured his/her clients in A, B, C and D categories. Plan to visit the A, B and C clients together and develop an aggressive strategy to accomplish this. It is important to have a dialogue with each client as quickly as possible.
What will be the main theme of your message to these clients? Rehearse your client message with family members or staff members prior to visiting clients. Clients may be nervous of the new ownership and will want to have assurances that their accounts will not be affected and service levels will at least continue, if not improve. It’s important to have new stationary available for the clients you meet along with any new or relevant marketing materials.
It is important to note any client nervousness or apprehension and develop an action plan on how to deal with it. You may decide that you may need to meet with the client again and provide the client with samples of financial plans and promote the typical quality of work that they can expect from you. You may consider leaving the client with testimonials from other satisfied clients.
Clients may ask the vendor how long the vendor plans to stay in the business. This is a critical question that must be answered carefully. Put yourself in the client’s shoes, would you want to hear that your long trusted advisor is leaving the business? You may consider communicating that you will continue to have access to the vendor for longer than the transition period. Clients may feel encouraged to hear that an agreement has been developed whereby you can ask the vendor to work on a contractual basis if the need should arise.
New stationary – Develop a Co-Brand for Stationary and Newsletters
Consider developing new stationary to show a co-brand of both individual or company names and communicate a sense of a joint venture rather than an out-right purchase. You may want to continue using this stationary even after the vendor’s transition period has expired, with the vendor’s permission.
Employee Management
By now, both parties should have a plan for each of their respective employees. In many cases, the vendor and purchaser may insist on the vendor’s assistant(s) staying on the payroll to help with the transition and to help reassure clients that not everything is changing.
It is very important to keep your employees informed of your plans from the beginning, especially for vendors. Employees can become nervous about their future employment status when their employer is considering a change of ownership. Employees will want to know how they will fit within the new company. Will they have new responsibilities and will they need additional training.
Develop a “To Do” List
Both parties along with their administrators should discuss the various details that will need attention. As an example, will signage need to be changed, offices and staff relocated, new training for staff, changes to existing forms, bank account updates, re-directing commissions and so on.
If you have access to a competent administrator that is able to manage complex projects, you may consider asking this individual to be the transition coordinator and be responsible for planning, tracking and organizing the changes that will have to be done.
In closing, planning, planning and implementation is key to a successful acquisition of another advisor’s book. If you fail to plan, you are planning to fail!
Wednesday, February 24, 2010
Selling your Financial Planning practice to a family member
Selling your practice to a family member
Although the number of financial advisors nearing retirement age is growing, less than 20% have a formal succession plan. Many are hoping to sell their practice to another advisor and some are bringing their children into the business with the expectation that they will take over. Involving family doesn’t guarantee success but with proper planning and strategy it can be the ideal situation. The experienced advisor will have a more vested interest in the arrangement when it involves a family member and will probably remain “only a phone call away” from that family member for many years. Blood is thicker than water and it is natural to want the family member to be successful. This brings added trust, comfort, security, and loyalty to clients often leading to an increase in retention and growth.
Before bringing a family member into your practice it is important to look at the partnership objectively. Is this person really a good fit or are you bringing them into your practice because they are family and you want to help them succeed in life? You may want to step back and ask yourself the following questions before proceeding;
· Did they approach you about this business or did you approach them?
· Can you step back as a parent (or family member) and communicate as a business partner?
· Has this family member handled constructive criticism well in the past?
· Have they demonstrated initiative in being involved in this business? (ie; taken courses)
· Do they a passion for helping people? (ie; what past jobs/career did they have)
· Are they willing to work nights, weekends, and go the extra mile to build their business?
· Are they good at building and maintaining relationships?
· Are they self-disciplined, self-motivated and able to multi-task?
· How have they demonstrated they are serious about this career? (ie; talked to other
advisors, taken courses, put together a business plan, etc)
· Are they mature, responsible, organized, and goal oriented?
Having a clear written plan is even more important when family is involved. Outlining objectives, expectations, roles, responsibilities, check points and a backup plan is essential. Although they are family they must be treated as a business partner. Other family partnerships have failed in the past due to personal feelings, lack of honest communication and having a biased opinion. Considerations you should look at when adding a family member to your team are;
· Have you clearly outlined your objectives and expectations?
· Does the person have the required skills and knowledge?
· What are their strengths and weaknesses?
· Do you expect them to find their own clients or will they work with your clients from the beginning?
· Is your office administrator clear on the arrangement and their role moving forward?
· Do you they require training in specific areas? Are you prepared to coach them?
· What is your current process when dealing with clients? What may need to be changed?
· Have you analyzed, segmented, and reviewed your book of business with them?
· Which clients, products, procedures, do you want your family member to focus on?
· What is the compensation structure now and in the future?
· What is your system and schedule for performance reviews?
· What is your plan and time frame for exiting the business?
· What is your backup plan if the arrangement does not work?
Having a family member take over your practice does not come without challenges. I recently spoke with an IPG associate who brought his son into his practice. When I asked him about any challenges he was facing he said balancing pushing too hard or not hard enough was a concern. He also said leaving business discussions at the office and not at the dinner table was important.
It is a great feeling of joy and satisfaction knowing you have coached your child and prepared her/him to take over your business. Where she/he may lack in experience they make up for in technical skills, energy, fresh ideas and commitment. Children and other family members can be a great asset to your succession plan if you have done your due diligence and carefully assessed their potential objectively. If you are unable to analyse the situation without being biased then ask someone else to do it for you. It will be well worth the time and effort in the end.
Although the number of financial advisors nearing retirement age is growing, less than 20% have a formal succession plan. Many are hoping to sell their practice to another advisor and some are bringing their children into the business with the expectation that they will take over. Involving family doesn’t guarantee success but with proper planning and strategy it can be the ideal situation. The experienced advisor will have a more vested interest in the arrangement when it involves a family member and will probably remain “only a phone call away” from that family member for many years. Blood is thicker than water and it is natural to want the family member to be successful. This brings added trust, comfort, security, and loyalty to clients often leading to an increase in retention and growth.
Before bringing a family member into your practice it is important to look at the partnership objectively. Is this person really a good fit or are you bringing them into your practice because they are family and you want to help them succeed in life? You may want to step back and ask yourself the following questions before proceeding;
· Did they approach you about this business or did you approach them?
· Can you step back as a parent (or family member) and communicate as a business partner?
· Has this family member handled constructive criticism well in the past?
· Have they demonstrated initiative in being involved in this business? (ie; taken courses)
· Do they a passion for helping people? (ie; what past jobs/career did they have)
· Are they willing to work nights, weekends, and go the extra mile to build their business?
· Are they good at building and maintaining relationships?
· Are they self-disciplined, self-motivated and able to multi-task?
· How have they demonstrated they are serious about this career? (ie; talked to other
advisors, taken courses, put together a business plan, etc)
· Are they mature, responsible, organized, and goal oriented?
Having a clear written plan is even more important when family is involved. Outlining objectives, expectations, roles, responsibilities, check points and a backup plan is essential. Although they are family they must be treated as a business partner. Other family partnerships have failed in the past due to personal feelings, lack of honest communication and having a biased opinion. Considerations you should look at when adding a family member to your team are;
· Have you clearly outlined your objectives and expectations?
· Does the person have the required skills and knowledge?
· What are their strengths and weaknesses?
· Do you expect them to find their own clients or will they work with your clients from the beginning?
· Is your office administrator clear on the arrangement and their role moving forward?
· Do you they require training in specific areas? Are you prepared to coach them?
· What is your current process when dealing with clients? What may need to be changed?
· Have you analyzed, segmented, and reviewed your book of business with them?
· Which clients, products, procedures, do you want your family member to focus on?
· What is the compensation structure now and in the future?
· What is your system and schedule for performance reviews?
· What is your plan and time frame for exiting the business?
· What is your backup plan if the arrangement does not work?
Having a family member take over your practice does not come without challenges. I recently spoke with an IPG associate who brought his son into his practice. When I asked him about any challenges he was facing he said balancing pushing too hard or not hard enough was a concern. He also said leaving business discussions at the office and not at the dinner table was important.
It is a great feeling of joy and satisfaction knowing you have coached your child and prepared her/him to take over your business. Where she/he may lack in experience they make up for in technical skills, energy, fresh ideas and commitment. Children and other family members can be a great asset to your succession plan if you have done your due diligence and carefully assessed their potential objectively. If you are unable to analyse the situation without being biased then ask someone else to do it for you. It will be well worth the time and effort in the end.
Monday, February 15, 2010
Purchaser Due Diligence – The First 100 Days
Congratulations, you’ve found a financial advisor that is interesting in selling their book to you. Now the hard work begins as you must begin your due diligence and planning prior to closing the deal. If organized properly, both parties should be able to accomplish this within about 100 days.
Jointly Develop your 100 Day Action Plan
A 100 Day Action plan is essentially a business plan that both parties will follow. A 100 Day Action plan will include:
– Purchaser and Seller Due diligence
– Getting your legal work done
– Developing a script for stakeholder communication
– What has to be changed with banks, dealers, MGAs, suppliers etc
– Decide on the Purchaser’s and Seller’s roles during the transition period
– Map out a game plan for the 2nd 100 days
Confidentiality Agreement
A prudent seller should insist on both parties signing a Confidentiality Agreement prior to starting any due diligence. A good agreement should also include a client non-solicitation in favour of the seller.
Letter of Intent and Exclusivity Agreement
A Letter of Intent should be signed that states the purchaser’s intent on pursing a deal subject to a mutually acceptable due diligence process from both parties. Purchasers would be wise to request an Exclusivity Agreement that states that the seller will not pursue or entertain other 3rd party offers during the due diligence phase.
Secure Financing
A seller should insist on proof that the purchaser is able to finance the acquisition. Please refer to future blog articles on financing options.
Purchaser and Seller Due Diligence
- Obtain a breakdown of the client list, revenues generated, products and services used and size of their holdings
- Obtain and review the last three year tax returns to confirm revenue and expenses related to the book.
- Obtain a list of all appropriate licenses held and proof of errors and omissions coverage continuity.
- List of all provincial jurisdictions where clients reside along with any out of country situations.
- Listing of all prior dealer and MGA relationships
- Listing of all client complaints along with details of resolution and all compliance department correspondence.
- Details and documentation of any dealership and regulator audits including deficiencies and plan of action.
- Listing of all non insurance and industry activities.
- Details of any employment matters
- Referral Arrangements
Purchase Agreement
If you’ve reached this point, congratulations, it’s closing day. Now you must start your 2nd 100 Day Action Plan. Stay tuned for our upcoming article on the 2nd 100 Day Action plan.
Get professional legal help
This is not a good time to skimp on professional legal advice and help. Be sure to have a competent lawyer draft your legal agreements and be prepared to share the legal costs.
Jointly Develop your 100 Day Action Plan
A 100 Day Action plan is essentially a business plan that both parties will follow. A 100 Day Action plan will include:
– Purchaser and Seller Due diligence
– Getting your legal work done
– Developing a script for stakeholder communication
– What has to be changed with banks, dealers, MGAs, suppliers etc
– Decide on the Purchaser’s and Seller’s roles during the transition period
– Map out a game plan for the 2nd 100 days
Confidentiality Agreement
A prudent seller should insist on both parties signing a Confidentiality Agreement prior to starting any due diligence. A good agreement should also include a client non-solicitation in favour of the seller.
Letter of Intent and Exclusivity Agreement
A Letter of Intent should be signed that states the purchaser’s intent on pursing a deal subject to a mutually acceptable due diligence process from both parties. Purchasers would be wise to request an Exclusivity Agreement that states that the seller will not pursue or entertain other 3rd party offers during the due diligence phase.
Secure Financing
A seller should insist on proof that the purchaser is able to finance the acquisition. Please refer to future blog articles on financing options.
Purchaser and Seller Due Diligence
- Obtain a breakdown of the client list, revenues generated, products and services used and size of their holdings
- Obtain and review the last three year tax returns to confirm revenue and expenses related to the book.
- Obtain a list of all appropriate licenses held and proof of errors and omissions coverage continuity.
- List of all provincial jurisdictions where clients reside along with any out of country situations.
- Listing of all prior dealer and MGA relationships
- Listing of all client complaints along with details of resolution and all compliance department correspondence.
- Details and documentation of any dealership and regulator audits including deficiencies and plan of action.
- Listing of all non insurance and industry activities.
- Details of any employment matters
- Referral Arrangements
Purchase Agreement
If you’ve reached this point, congratulations, it’s closing day. Now you must start your 2nd 100 Day Action Plan. Stay tuned for our upcoming article on the 2nd 100 Day Action plan.
Get professional legal help
This is not a good time to skimp on professional legal advice and help. Be sure to have a competent lawyer draft your legal agreements and be prepared to share the legal costs.
Tuesday, February 9, 2010
IPG Advisors Raise $5,800 for Haiti Relief
We are proud to announce that the financial advisors of Independent Planning Group have raised $5,800 for Haiti Relief. The Canadian federal government, in conjuction with World Vision, will match this amount. A special thanks to the financial advisors that contributed.
Monday, February 8, 2010
Selling to an internal partner
Methods and Various Options of Selling a Book
Selling to an internal partner
The definition of retirement to many people is being able to do exactly what they like to do. For financial advisors this often translates to managing a small number of clients and having more free time to spend time with family, friends, golfing and travelling. The beauty of this business is that with proper planning, strategizing and delegating you can do just that. The first step is finding the right partner to take over for you. You may not have to look very far. This partner could be someone already working with you.
There are many advantages to selling your book of business (or part of it) to someone who not only knows you and how you work but also who knows your clients. The transition will be more seamless when the person taking over for you has already established a relationship and trust with your biggest asset, your clients. This could be an existing staff person or an associate advisor.
Financial advisors who invest in the development and training of their staff and associate advisors, with the intention of making them partners in the future, increase the probability of a smooth and successful transition in the future. Communicating your plan to your clients demonstrates your professionalism and care for their financial future. They like knowing who will be there to take care of them after you retire.
Considerations when selling to an internal partner;
· Do your clients trust and respect them?
· Are they entrepreneurial and business minded?
· Do they have similar values, goals and business style?
· Are they ambitious and knowledgeable?
· Are they dually licensed?
· Are they furthering their education?
· Have you discussed business agreements (ie; confidentially, non-solicitation, buy-sell)
· What are their strengths and weaknesses?
· What is their business plan?
If you are working solo in this business you may want to consider adding a partner to your team as part of your succession plan. This allows time for both you and your clients to get to know one another. Many young people graduating from universities and colleges with a business degree have completed the courses required for licensing and in some cases they have completed the required CFP courses. They possess business and technical skills, fresh ideas and will bring energy to your practice. If you are prepared to invest your time, knowledge, trust, and money the possibility of a successful partnership is quite high.
Adding other professionals to your business allows you to delegate and focus on doing the things you like to do best. It will free up more of your time and allow you to properly prepare for your succession. It has taken you many years to build your business. Consider adding a partner that you or your dealership already know and trust to carry on what you have worked hard to build. It will feel like a big load off your shoulders.
Selling to an internal partner
The definition of retirement to many people is being able to do exactly what they like to do. For financial advisors this often translates to managing a small number of clients and having more free time to spend time with family, friends, golfing and travelling. The beauty of this business is that with proper planning, strategizing and delegating you can do just that. The first step is finding the right partner to take over for you. You may not have to look very far. This partner could be someone already working with you.
There are many advantages to selling your book of business (or part of it) to someone who not only knows you and how you work but also who knows your clients. The transition will be more seamless when the person taking over for you has already established a relationship and trust with your biggest asset, your clients. This could be an existing staff person or an associate advisor.
Financial advisors who invest in the development and training of their staff and associate advisors, with the intention of making them partners in the future, increase the probability of a smooth and successful transition in the future. Communicating your plan to your clients demonstrates your professionalism and care for their financial future. They like knowing who will be there to take care of them after you retire.
Considerations when selling to an internal partner;
· Do your clients trust and respect them?
· Are they entrepreneurial and business minded?
· Do they have similar values, goals and business style?
· Are they ambitious and knowledgeable?
· Are they dually licensed?
· Are they furthering their education?
· Have you discussed business agreements (ie; confidentially, non-solicitation, buy-sell)
· What are their strengths and weaknesses?
· What is their business plan?
If you are working solo in this business you may want to consider adding a partner to your team as part of your succession plan. This allows time for both you and your clients to get to know one another. Many young people graduating from universities and colleges with a business degree have completed the courses required for licensing and in some cases they have completed the required CFP courses. They possess business and technical skills, fresh ideas and will bring energy to your practice. If you are prepared to invest your time, knowledge, trust, and money the possibility of a successful partnership is quite high.
Adding other professionals to your business allows you to delegate and focus on doing the things you like to do best. It will free up more of your time and allow you to properly prepare for your succession. It has taken you many years to build your business. Consider adding a partner that you or your dealership already know and trust to carry on what you have worked hard to build. It will feel like a big load off your shoulders.
Monday, February 1, 2010
Succession Planning - Preparing your Client Book to Sell
At one time or another, most of us have been in a situation to compare the products or services of two competing companies. One sales representative has not properly planned their presentation and is “shooting from the hip” whereas the competitor has prepared a professional presentation, collateral sales material, and third party testimonials and has the confidence to answer all questions…which rep will get the business and also demand a premium on their product or services? The same rules apply to selling a book of business.
How will potential buyers view your business?
Before listing a business for sale, financial advisors should take an inventory on their business and develop an information package for perspective buyers. In my opinion, a perspective buyer is someone that has demonstrated a strong interest in buying your book and has the ability to finance the acquisition. All perspective buyers should sign a Confidentiality Agreement prior to receiving your information folder.
An information folder would provide an overview of your book and would include some or all of the following details:
- Total assets under administration (Broken down by front-end, back-end, no-load, fee for service assets, LPs, mortgages) for the past three years
- Demographic and geographic breakdown of client base including list of all provincial jurisdictions where clients reside along with any out of country clients.
- Gross revenue and trailer fees generated across various product and service lines for the past three years
- There are some organizational documents that might be important to include such as, an organizational chart, list of the professional staff, employment contracts, compensation plans, resumes and biographies.
- Details and documentation of any dealer and regulator audits including deficiencies and plan of action.
- Previous or outstanding compliance/client complaints or claims with details of resolution and all compliance department correspondence.
- Listing of all non insurance and funds industry activities.
Prior to putting your practice up for sale you may consider sending a survey to ask clients what they are most satisfied with and what new services they would like. This feedback would be invaluable to the new buyer and should be included with the documents.
Another good action to undertake would be to fire any problem clients so that they are not included in the sale. It’s almost like putting on a fresh layer of paint on your home, so that all blemishes have disappeared prior to viewing.
Finding the Right Opportunity
Regardless of the type of succession, it is critical to allocate sufficient time to conduct appropriate due diligence. The type and scope will depend upon either being involved in an internal succession or an external transition. The external transition is far more extensive. But, too many times the sellers neglect to conduct the appropriate due diligence, believing that due diligence is the buyer’s exercise. However, it is just as important for you to conduct due diligence, so as to determine whether the buyer has any past, current or anticipated regulatory, legal or financial issues that could adversely impact the buyer’s ability to fulfill its payment obligations under the agreement and/or cause your clients to discontinue their relationship with the buyer.
You can accomplish most of your due diligence by speaking to the buyer’s present dealer, MGA and consider requesting a credit report if you believe it’s added comfort.
Planning for a Perfect Match
Finding the perfect match should not be an accident. Look for a firm that meets your precise criteria, of having a similar investment philosophy, fee structure and approach to client service, with no conflicts of interest. You should be willing to stay on board after the transition to help clients feel comfortable with the transition and to support ongoing development of new business. Carefully defining what you wanted in an acquisition partner should allow the transition to move along smoothly. All the planning and analysis on the front end will be critical.
How will potential buyers view your business?
Before listing a business for sale, financial advisors should take an inventory on their business and develop an information package for perspective buyers. In my opinion, a perspective buyer is someone that has demonstrated a strong interest in buying your book and has the ability to finance the acquisition. All perspective buyers should sign a Confidentiality Agreement prior to receiving your information folder.
An information folder would provide an overview of your book and would include some or all of the following details:
- Total assets under administration (Broken down by front-end, back-end, no-load, fee for service assets, LPs, mortgages) for the past three years
- Demographic and geographic breakdown of client base including list of all provincial jurisdictions where clients reside along with any out of country clients.
- Gross revenue and trailer fees generated across various product and service lines for the past three years
- There are some organizational documents that might be important to include such as, an organizational chart, list of the professional staff, employment contracts, compensation plans, resumes and biographies.
- Details and documentation of any dealer and regulator audits including deficiencies and plan of action.
- Previous or outstanding compliance/client complaints or claims with details of resolution and all compliance department correspondence.
- Listing of all non insurance and funds industry activities.
Prior to putting your practice up for sale you may consider sending a survey to ask clients what they are most satisfied with and what new services they would like. This feedback would be invaluable to the new buyer and should be included with the documents.
Another good action to undertake would be to fire any problem clients so that they are not included in the sale. It’s almost like putting on a fresh layer of paint on your home, so that all blemishes have disappeared prior to viewing.
Finding the Right Opportunity
Regardless of the type of succession, it is critical to allocate sufficient time to conduct appropriate due diligence. The type and scope will depend upon either being involved in an internal succession or an external transition. The external transition is far more extensive. But, too many times the sellers neglect to conduct the appropriate due diligence, believing that due diligence is the buyer’s exercise. However, it is just as important for you to conduct due diligence, so as to determine whether the buyer has any past, current or anticipated regulatory, legal or financial issues that could adversely impact the buyer’s ability to fulfill its payment obligations under the agreement and/or cause your clients to discontinue their relationship with the buyer.
You can accomplish most of your due diligence by speaking to the buyer’s present dealer, MGA and consider requesting a credit report if you believe it’s added comfort.
Planning for a Perfect Match
Finding the perfect match should not be an accident. Look for a firm that meets your precise criteria, of having a similar investment philosophy, fee structure and approach to client service, with no conflicts of interest. You should be willing to stay on board after the transition to help clients feel comfortable with the transition and to support ongoing development of new business. Carefully defining what you wanted in an acquisition partner should allow the transition to move along smoothly. All the planning and analysis on the front end will be critical.
Monday, January 25, 2010
How to Develop a Succession Plan
Selling a book of business can take several years to complete. If you’re thinking of retirement over the next 3 to 5 years, now is the time to start planning your exit strategy.
A written and well planned Succession Plan will help you to ensure that your clients and employees are transitioned to the right person(s) and that you’ll receive the maximum value for one of your most valuable assets.
Take inventory of your objectives- The Early Stages
You’ll have to ask yourself a number of thought provoking questions in order to develop a Succession plan. Let’s start with some of the obvious questions that you’ll want to answer.
What is your succession timeline?
If you would like to be fully retired within 4 years, you have to keep this end date in mind and start planning accordingly. Many vendors often underestimate the time that is necessary to go through each step of the selling and transition process. As an example, the time required to find a suitable buyer, go through the buyer and seller due diligence work and have all of the legal work completed can take 3 to 6 months alone.
How will potential buyers view your business?
You never have a second chance to make a good first impression! When selling a house, a real estate agent would advise the vendors to spruce up the house to give the best possible impression to perspective home buyers. You’ll want to do the same to present your business in the most professional manner to get the most interest and value from potential buyers.
Whether it’s a coat of paint, updating some old and tired looking furniture or having the carpets steam cleaned, start with obvious physical items. Next, you’ll want to put some effort into developing an information folder that would provide serious buyers with an overview of your business and the important facts.
Sign up for our automatic blog updates to receive our upcoming article on Preparing Your Book for Sale.
Prepare your employees for the sale
Ensure that your key employees are aware of your intentions to sell. They will be concerned about their employment status after the sale and you’ll want to give serious thought to how you will answer their questions. Typically, most new owners will want to retain some or all of the key employees. New owners understand that keeping key employees, especially employees that have had extensive client dealings, is important to ensure an efficient transition to a new owner.
Develop a buyer profile?
You’ll want the new owner to share similar philosophies and continue to offer the same level of service that your clients have grown custom to. If a new owner can provide new services and benefits such as income tax preparation, your clients would view this as a positive.
Be prepared to itemize and describe your service offering in your information folder to potential buyers. You may also consider developing a checklist of questions that you’ll want to ask each prospective buyer.
What financial arrangements are you looking for?
Depending on whether you’re selling a corporation or proprietorship, you may need to consult with an accountant to help you establish the best way to sell your business. As well, an accountant can help you do some income forecasting from an income tax point of view.
Prepare your financial statements for potential buyers to view.
Nothing will scare away a potential buyer quicker than messy or aggressive financial reporting. A buyer must be able to easily understand the revenue and expenses that flow through the business. Potential buyers will want to see your financial statements for the past three years and will want to know that all taxes have been paid.
Remove any personal expenses from the business and clean up your financials. Again, you may need to consult with an accounting professional.
Inform your dealer or managing general agent about your plans
Dealers and MGAs are always keen to keep all of the business they have so they would be open to providing helpful information for your plan, suggest potential buyers that fit your criteria and may be able to provide details on available financing options.
Sign up for our Free Blog Updates
We’re planning to include many more helpful articles on Succession planning for financial advisors. Click on our link near the top right hand corner of the screen titled “Free- Click here for regular updates…” and you’ll automatically receive all new blog postings by email.
Good luck
A written and well planned Succession Plan will help you to ensure that your clients and employees are transitioned to the right person(s) and that you’ll receive the maximum value for one of your most valuable assets.
Take inventory of your objectives- The Early Stages
You’ll have to ask yourself a number of thought provoking questions in order to develop a Succession plan. Let’s start with some of the obvious questions that you’ll want to answer.
What is your succession timeline?
If you would like to be fully retired within 4 years, you have to keep this end date in mind and start planning accordingly. Many vendors often underestimate the time that is necessary to go through each step of the selling and transition process. As an example, the time required to find a suitable buyer, go through the buyer and seller due diligence work and have all of the legal work completed can take 3 to 6 months alone.
How will potential buyers view your business?
You never have a second chance to make a good first impression! When selling a house, a real estate agent would advise the vendors to spruce up the house to give the best possible impression to perspective home buyers. You’ll want to do the same to present your business in the most professional manner to get the most interest and value from potential buyers.
Whether it’s a coat of paint, updating some old and tired looking furniture or having the carpets steam cleaned, start with obvious physical items. Next, you’ll want to put some effort into developing an information folder that would provide serious buyers with an overview of your business and the important facts.
Sign up for our automatic blog updates to receive our upcoming article on Preparing Your Book for Sale.
Prepare your employees for the sale
Ensure that your key employees are aware of your intentions to sell. They will be concerned about their employment status after the sale and you’ll want to give serious thought to how you will answer their questions. Typically, most new owners will want to retain some or all of the key employees. New owners understand that keeping key employees, especially employees that have had extensive client dealings, is important to ensure an efficient transition to a new owner.
Develop a buyer profile?
You’ll want the new owner to share similar philosophies and continue to offer the same level of service that your clients have grown custom to. If a new owner can provide new services and benefits such as income tax preparation, your clients would view this as a positive.
Be prepared to itemize and describe your service offering in your information folder to potential buyers. You may also consider developing a checklist of questions that you’ll want to ask each prospective buyer.
What financial arrangements are you looking for?
Depending on whether you’re selling a corporation or proprietorship, you may need to consult with an accountant to help you establish the best way to sell your business. As well, an accountant can help you do some income forecasting from an income tax point of view.
Prepare your financial statements for potential buyers to view.
Nothing will scare away a potential buyer quicker than messy or aggressive financial reporting. A buyer must be able to easily understand the revenue and expenses that flow through the business. Potential buyers will want to see your financial statements for the past three years and will want to know that all taxes have been paid.
Remove any personal expenses from the business and clean up your financials. Again, you may need to consult with an accounting professional.
Inform your dealer or managing general agent about your plans
Dealers and MGAs are always keen to keep all of the business they have so they would be open to providing helpful information for your plan, suggest potential buyers that fit your criteria and may be able to provide details on available financing options.
Sign up for our Free Blog Updates
We’re planning to include many more helpful articles on Succession planning for financial advisors. Click on our link near the top right hand corner of the screen titled “Free- Click here for regular updates…” and you’ll automatically receive all new blog postings by email.
Good luck
Tuesday, January 19, 2010
Succession Planning - Will You Ever Retire?
In our travels and discussions with hundreds of financial advisors over the years, we have discovered that many independent financial advisors do not intend to retire from until they are forced to do so. Why is this? Many financial advisors will say that they love the business, love to help people with their financial objectives, and lastly, do not feel that current book valuations properly represent the true value of their business. One advisor once commented, “Why should I sell my book for three times annual gross revenue when I can stay in the business and earn more?” This logic could spell trouble for these advisors and our industry for many reasons.
Competition keeps heating up for Independent Advisors
The main competitors for the typical financial advisor in Canada are the major banking institutions. In recent years, banks have expanded their financial advisory businesses into effective and competitive units that not only retain assets but collect new assets from other sources. As banks continue to grow their business, established financial advisors are happy to just maintain their businesses and this could spell competitive trouble for financial advisors. If you’re not growing, you’re dying!
Clients want their Advisors to Plan too!
Clients of financial advisors, especially the ones that are younger than their advisor, have developed a long and trusted relationship with their advisor and they want to know that their needs will be looked after even after their advisor is no longer able to. A responsible advisor should have a plan that at a minimum would deal with an unexpected death or illness (see our sample Continuity Agreement below).
Selling to an employee or junior advisor
One of the main benefits of being a financial advisor is having so many options when it comes to retirement. You can choose to sell 100% of your business, 80%, 60%, 40% or perhaps you just want to keep a hand full of clients, maintain your self-employed status and have more free time. Once you decide, the most important step to ensure a smooth transition is finding the right person to take over. There is no shortage of buyers out there but finding the right person who compliments you and your business is of utmost importance. You have set the bar with your clients so the person taking over must maintain (or surpass) the level of service you have provided them over the years. Otherwise, they may look for a new advisor and the value of your business decreases.
Colleges and Universities are training future advisors
The number of young people taking business and finance courses in college and university has increased over the last decade. Where they may lack in experience, they make up for in knowledge, strong business and technical skills related to this field. For example, Algonquin College offers a 3 year Business program with a major in Finance that includes the completion of the Canadian Securities Course, all CFP courses and a complimentary membership to Advocis (The Financial Advisors Association of Canada) during the course and for their first year in the business. They are also encouraged to attend the quarterly professional development days at Advocis during their school year which is a great opportunity for them to interact and network with their peers. It is also an opportunity for established advisors to meet potential partners.
Once you find the right person, the secret ingredient to their success is your guidance and mentorship. The best training for a new advisor is to sit in on client appointments with you and discuss the situation after. You cannot learn this from a text book.
You may also consider selling your business to one of your employees. Employees offer huge value because they already have a relationship with your clients and this often helps to make the transition seamless. As well, an easier transition of clients would also make your business more valuable. They know you and how you work, the products, procedures, systems and will probably require minimum training.
Take inventory of your employees skill set
If your employee is not licensed or may need additional training, take a moment to document a list of what the employee must accomplish prior to buying your book.
You may want to consider a training program focused on specific areas like networking, marketing, fact finding, compliance, business planning, financial planning software, and the client interview process. (IPG has a training program like this for new financial advisors which is also available to our affiliated offices).
As a Business Development Manager for Independent Planning Group, my objective is to help established financial advisors meet junior advisors. If you have any questions, please feel free to contact me at jchapman@teamipg.com.
My next discussion will be “Now that you found the right person, what are you options on paying them and how will they purchase your business”?
Competition keeps heating up for Independent Advisors
The main competitors for the typical financial advisor in Canada are the major banking institutions. In recent years, banks have expanded their financial advisory businesses into effective and competitive units that not only retain assets but collect new assets from other sources. As banks continue to grow their business, established financial advisors are happy to just maintain their businesses and this could spell competitive trouble for financial advisors. If you’re not growing, you’re dying!
Clients want their Advisors to Plan too!
Clients of financial advisors, especially the ones that are younger than their advisor, have developed a long and trusted relationship with their advisor and they want to know that their needs will be looked after even after their advisor is no longer able to. A responsible advisor should have a plan that at a minimum would deal with an unexpected death or illness (see our sample Continuity Agreement below).
Selling to an employee or junior advisor
One of the main benefits of being a financial advisor is having so many options when it comes to retirement. You can choose to sell 100% of your business, 80%, 60%, 40% or perhaps you just want to keep a hand full of clients, maintain your self-employed status and have more free time. Once you decide, the most important step to ensure a smooth transition is finding the right person to take over. There is no shortage of buyers out there but finding the right person who compliments you and your business is of utmost importance. You have set the bar with your clients so the person taking over must maintain (or surpass) the level of service you have provided them over the years. Otherwise, they may look for a new advisor and the value of your business decreases.
Colleges and Universities are training future advisors
The number of young people taking business and finance courses in college and university has increased over the last decade. Where they may lack in experience, they make up for in knowledge, strong business and technical skills related to this field. For example, Algonquin College offers a 3 year Business program with a major in Finance that includes the completion of the Canadian Securities Course, all CFP courses and a complimentary membership to Advocis (The Financial Advisors Association of Canada) during the course and for their first year in the business. They are also encouraged to attend the quarterly professional development days at Advocis during their school year which is a great opportunity for them to interact and network with their peers. It is also an opportunity for established advisors to meet potential partners.
Once you find the right person, the secret ingredient to their success is your guidance and mentorship. The best training for a new advisor is to sit in on client appointments with you and discuss the situation after. You cannot learn this from a text book.
You may also consider selling your business to one of your employees. Employees offer huge value because they already have a relationship with your clients and this often helps to make the transition seamless. As well, an easier transition of clients would also make your business more valuable. They know you and how you work, the products, procedures, systems and will probably require minimum training.
Take inventory of your employees skill set
If your employee is not licensed or may need additional training, take a moment to document a list of what the employee must accomplish prior to buying your book.
You may want to consider a training program focused on specific areas like networking, marketing, fact finding, compliance, business planning, financial planning software, and the client interview process. (IPG has a training program like this for new financial advisors which is also available to our affiliated offices).
As a Business Development Manager for Independent Planning Group, my objective is to help established financial advisors meet junior advisors. If you have any questions, please feel free to contact me at jchapman@teamipg.com.
My next discussion will be “Now that you found the right person, what are you options on paying them and how will they purchase your business”?
Tuesday, January 12, 2010
Next decade's hottest industries? Retirement planning near top
From the Investment News for Financial Advisors.
If you can't work in development of voice-over-Internet protocol, a career in retirement planning may be just the ticket for the coming decade, according to a study by industry and market research firm IBISWorld Inc.
With an estimated cumulative revenue growth of about 134%, the retirement planning industry comes in second on IBISWorld's list of winning industries for 2010 to 2019, right after VoIP. The alternative to traditional telephony, To learn more, click on the link below.
View the Investment News article
If you can't work in development of voice-over-Internet protocol, a career in retirement planning may be just the ticket for the coming decade, according to a study by industry and market research firm IBISWorld Inc.
With an estimated cumulative revenue growth of about 134%, the retirement planning industry comes in second on IBISWorld's list of winning industries for 2010 to 2019, right after VoIP. The alternative to traditional telephony, To learn more, click on the link below.
View the Investment News article
Monday, January 11, 2010
The Psychological Impact of Retiring
In a few succession planning discussions I’ve had with advisors, I’ve heard the comment, “maybe I should sell my practice and just retire!” From that comment I’d ask, “So you really want to stop working? Well, no, not really! I’d just like to have more time to enjoy my life while remaining in the business!”
I remember reading a recent Canadian Association of Retired People (CARP) study of the next retirement generation - the boomers – it found that 80% of retirees expect to work at least part-time during some of their retirement years. From that I wonder does retirement no longer mean "not working?" You might want to ask yourself, is retirement an option or a mistake?
Some important things to perhaps ask yourself are you truly ready to retire if your spouse is still working? The sitting at home waiting for your spouse to come home from work might not be your idea of enjoying retirement. Have you also considered the potential changes in your family dynamics? Recently I asked a spouse if she was looking forward to her husband’s retirement, and her reply was “not at all.” “I have my routine and enjoy our time away from each other too, so I’m concerned his retirement will disrupt all that.”
Another question to ask yourself is, will you miss working with your associates? For sure there will be a few you’re looking forward to getting away from, but you’ve spent perhaps 2-3 decades with some outstanding associates and suddenly this association stops. Another associate mentioned that “they used to value my opinion on many things when I was there, but now they don’t even tell me what’s going on anymore.” Will you miss the problem solving and the feeling of making the successes happen?
Think too of the places in the world that your business has taken you! Perhaps as a perk or opportunity that only unfolded because of your business and its success. Will you miss the travel and perks associated with your work? Will you be able to afford these luxuries when you start paying for them with after tax retirement dollars?
Have you considered the things that your practice provides you that you will now have to provide for by yourself? The tax deductible automobile expense, the lunches and private memberships, can you still maintain those in your new “current” lifestyle? Assess the impact of not only loosing your business associates, but if you have to give up your lifestyle associates too, how will that impact your retirement enjoyment?
Have you spent time contemplating what’s next? Listening to recently retired gentlemen saying that he started delivering pizza, not because he needed the income, but because he had to get “out of the house and missed the human interaction work offered, might not be what you wanted your retirement to be. But then again, I hear that Walmart is still hiring greeters!
In summary, there’s several things that you need to take into consideration before deciding to find a successor for your practice. You might want to start with your psychological impact of retiring first. From that each of us will have our own personal meaning of succession planning.
I remember reading a recent Canadian Association of Retired People (CARP) study of the next retirement generation - the boomers – it found that 80% of retirees expect to work at least part-time during some of their retirement years. From that I wonder does retirement no longer mean "not working?" You might want to ask yourself, is retirement an option or a mistake?
Some important things to perhaps ask yourself are you truly ready to retire if your spouse is still working? The sitting at home waiting for your spouse to come home from work might not be your idea of enjoying retirement. Have you also considered the potential changes in your family dynamics? Recently I asked a spouse if she was looking forward to her husband’s retirement, and her reply was “not at all.” “I have my routine and enjoy our time away from each other too, so I’m concerned his retirement will disrupt all that.”
Another question to ask yourself is, will you miss working with your associates? For sure there will be a few you’re looking forward to getting away from, but you’ve spent perhaps 2-3 decades with some outstanding associates and suddenly this association stops. Another associate mentioned that “they used to value my opinion on many things when I was there, but now they don’t even tell me what’s going on anymore.” Will you miss the problem solving and the feeling of making the successes happen?
Think too of the places in the world that your business has taken you! Perhaps as a perk or opportunity that only unfolded because of your business and its success. Will you miss the travel and perks associated with your work? Will you be able to afford these luxuries when you start paying for them with after tax retirement dollars?
Have you considered the things that your practice provides you that you will now have to provide for by yourself? The tax deductible automobile expense, the lunches and private memberships, can you still maintain those in your new “current” lifestyle? Assess the impact of not only loosing your business associates, but if you have to give up your lifestyle associates too, how will that impact your retirement enjoyment?
Have you spent time contemplating what’s next? Listening to recently retired gentlemen saying that he started delivering pizza, not because he needed the income, but because he had to get “out of the house and missed the human interaction work offered, might not be what you wanted your retirement to be. But then again, I hear that Walmart is still hiring greeters!
In summary, there’s several things that you need to take into consideration before deciding to find a successor for your practice. You might want to start with your psychological impact of retiring first. From that each of us will have our own personal meaning of succession planning.
Friday, January 8, 2010
Sample Continuity Agreement for Advisors
As a follow-up to our previous article on Continuity Agreements for financial advisors, we have posted a Sample Continuity Agreement for your review. To access the agreement, click on the link below.
Download the Sample Continuity Agreement
Download the Sample Continuity Agreement
Sunday, January 3, 2010
Succession Planning Series – What Happens if you Die Unexpectedly?
Each year, we hear of a financial advisor that has become seriously ill, disabled or has died unexpectedly. When this happens, one of the most valuable assets that an advisor owns (his or her client book) is left unattended and the beneficiaries and/or executors are left scrambling to sell the book, with little or no understanding of the value. With very little up-front planning, situations such as this can be easily avoided.
Financial advisors are so busy educating and helping clients with their own estate planning needs and we sometimes neglect to organize our own affairs. In some cases, advisors believe that their dealer or MGA will take care of everything in the event of a disaster, but this is an irresponsible assumption to make for many reasons.
Upon the death of an advisor, the dealer must immediately assign the clients of the deceased advisor to another advisor to ensure clients continue to be serviced. In most situations, the deceased spouse or beneficiaries will not be licensed and therefore commissions must be put in abeyance until a new owner is found. If the deceased was the main bread winner of the family, this could result in serious income problems for the living family members. To further compound problems for the estate, an executor that is not familiar with our industry’s valuations and practices will be at a significant disadvantage when trying to find a buyer and negotiate a fair price for the book of business.
A Continuity Agreement can help you to avoid these problems
Simply stated, a Continuity Agreement is an agreement that you should set up with another financial advisor and it would provide authority for the other party to step in to service clients and to buy the client book in the event of a sudden illness or death.
A properly drafted Continuity Agreement should be stored with your last Will. This will allow your executor immediate access to the important details, such as; the contact information of the person and the pre-defined price (more on valuations later). The agreement would also list other important contact information such as a dealer or MGA name. Your dealer, MGA and other product providers should also have a copy of the agreement in their files.
Your Dealer and MGA can help
It is imperative that your dealer/MGA is aware of your desire to protect your estate and in some cases, should be a party to the agreement.
Set up temporary income payments to spouses or children
A Continuity Agreement should provide direction to your dealer/MGA on terms to pay your family members or beneficiaries an income while your commissions are in abeyance and pending a new owner taking over the book. You should be prepared to pay your dealer/MGA a fee to offer this benefit.
How do you find an Advisor to take over your book?
If you do not already have a business partner or colleague in mind and cannot easily find an individual that would be suitable to take over your book, you should speak to your dealer/MGA to see if they can help you find a suitable candidate. A dealer/MGA would have a general knowledge of the advisors associated with the firm and may be able to suggest individuals that would match your objectives for a suitable replacement.
Structuring the Deal
There are many ways and options to structure the purchase of an advisor’s book. The purchaser may request that the purchase price be subject to a revenue or asset retention test for the first year of ownership. Clients of the deceased advisor may decide to move their business to a different advisor and this will result in lower revenue levels for the purchaser. This is a common concern among purchasers and can be easily managed if you properly communicate your Continuity Agreement to your clients, particularly your best clients. Your clients will be reassured knowing that you’ve structured your practice with a succession plan.
Payment Structure and Valuations
Consider basing your calculations on actual revenue generated by the client book rather than assets or other methods. Furthermore, the agreement should give direction to your dealer/MGA to release your gross annual revenue figures for the past three years to the purchaser. The purchaser can use the average of your last three years to calculate the final purchase price.
There are many ways to structure the purchase of a client book. One example is:
1. 1.25 to 1.75 times annual gross revenue
2. 0 to 50% of the purchase price as a down payment
3. balance paid in equal installments over a 3 to 7 year period
a. No interest and payments made quarterly
Retention Clause
Let’s assume for this example that a client book has typically generated $100,000 in gross annual revenue and that the purchaser has paid $150,000 with 50% down. The purchaser has also negotiated to pay the remaining $75,000 over a 5 year period with quarterly payments ($3,750) with no interest. After the first year, if the book generates less income than $100,000, here’s how a retention clause could work;
Annual Revenue $75,000 $80,000 $90,000
Selling price (1.5 x) 112,500 120,000 135,000
Less down payment (75,000) (75,000) (75,000)
Less 1st year pymts (15,000) (15,000) ( 15,000)
Balance 22,500 30,000 45,000
New Qrtly payments
for remaining 4 years 1,406 1,875 2,812
Under this example, the purchaser’s quarterly payment would change to reflect the new quarterly payment calculation for the balance of the four remaining years.
Any Plan is Better than No Plan
In closing, do not procrastinate. The first step in any succession plan is to investigate your options. You should develop of a Continuity Agreement, which is relatively easy to do. Protect your loved ones from financial loss and help plan for the unexpected.
If you would like to share any of your experiences on how to develop a Continuity Agreement or valuation formulas, please feel free to comment.
Financial advisors are so busy educating and helping clients with their own estate planning needs and we sometimes neglect to organize our own affairs. In some cases, advisors believe that their dealer or MGA will take care of everything in the event of a disaster, but this is an irresponsible assumption to make for many reasons.
Upon the death of an advisor, the dealer must immediately assign the clients of the deceased advisor to another advisor to ensure clients continue to be serviced. In most situations, the deceased spouse or beneficiaries will not be licensed and therefore commissions must be put in abeyance until a new owner is found. If the deceased was the main bread winner of the family, this could result in serious income problems for the living family members. To further compound problems for the estate, an executor that is not familiar with our industry’s valuations and practices will be at a significant disadvantage when trying to find a buyer and negotiate a fair price for the book of business.
A Continuity Agreement can help you to avoid these problems
Simply stated, a Continuity Agreement is an agreement that you should set up with another financial advisor and it would provide authority for the other party to step in to service clients and to buy the client book in the event of a sudden illness or death.
A properly drafted Continuity Agreement should be stored with your last Will. This will allow your executor immediate access to the important details, such as; the contact information of the person and the pre-defined price (more on valuations later). The agreement would also list other important contact information such as a dealer or MGA name. Your dealer, MGA and other product providers should also have a copy of the agreement in their files.
Your Dealer and MGA can help
It is imperative that your dealer/MGA is aware of your desire to protect your estate and in some cases, should be a party to the agreement.
Set up temporary income payments to spouses or children
A Continuity Agreement should provide direction to your dealer/MGA on terms to pay your family members or beneficiaries an income while your commissions are in abeyance and pending a new owner taking over the book. You should be prepared to pay your dealer/MGA a fee to offer this benefit.
How do you find an Advisor to take over your book?
If you do not already have a business partner or colleague in mind and cannot easily find an individual that would be suitable to take over your book, you should speak to your dealer/MGA to see if they can help you find a suitable candidate. A dealer/MGA would have a general knowledge of the advisors associated with the firm and may be able to suggest individuals that would match your objectives for a suitable replacement.
Structuring the Deal
There are many ways and options to structure the purchase of an advisor’s book. The purchaser may request that the purchase price be subject to a revenue or asset retention test for the first year of ownership. Clients of the deceased advisor may decide to move their business to a different advisor and this will result in lower revenue levels for the purchaser. This is a common concern among purchasers and can be easily managed if you properly communicate your Continuity Agreement to your clients, particularly your best clients. Your clients will be reassured knowing that you’ve structured your practice with a succession plan.
Payment Structure and Valuations
Consider basing your calculations on actual revenue generated by the client book rather than assets or other methods. Furthermore, the agreement should give direction to your dealer/MGA to release your gross annual revenue figures for the past three years to the purchaser. The purchaser can use the average of your last three years to calculate the final purchase price.
There are many ways to structure the purchase of a client book. One example is:
1. 1.25 to 1.75 times annual gross revenue
2. 0 to 50% of the purchase price as a down payment
3. balance paid in equal installments over a 3 to 7 year period
a. No interest and payments made quarterly
Retention Clause
Let’s assume for this example that a client book has typically generated $100,000 in gross annual revenue and that the purchaser has paid $150,000 with 50% down. The purchaser has also negotiated to pay the remaining $75,000 over a 5 year period with quarterly payments ($3,750) with no interest. After the first year, if the book generates less income than $100,000, here’s how a retention clause could work;
Annual Revenue $75,000 $80,000 $90,000
Selling price (1.5 x) 112,500 120,000 135,000
Less down payment (75,000) (75,000) (75,000)
Less 1st year pymts (15,000) (15,000) ( 15,000)
Balance 22,500 30,000 45,000
New Qrtly payments
for remaining 4 years 1,406 1,875 2,812
Under this example, the purchaser’s quarterly payment would change to reflect the new quarterly payment calculation for the balance of the four remaining years.
Any Plan is Better than No Plan
In closing, do not procrastinate. The first step in any succession plan is to investigate your options. You should develop of a Continuity Agreement, which is relatively easy to do. Protect your loved ones from financial loss and help plan for the unexpected.
If you would like to share any of your experiences on how to develop a Continuity Agreement or valuation formulas, please feel free to comment.
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