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
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