Financing Options - How to Buy a Financial Advisor’s Book of Business

As you read through our blog, you’ll notice that we’ve written several articles on the do’s and don’t’s of selling and buying a financial advisor’s book of business.  One of the most important things that a buyer should do prior to approaching any potential seller is to do their homework.

As an example, if you’re shopping around for a new home, an experienced real estate agent will suggest that you obtain pre-approved financing prior to beginning your search.  Pre-approved financing helps the purchaser understand what they can afford to buy and furthermore, gives the potential seller confidence to enter into negotiations with the pre-approved purchaser.  Nothing can be worse for the seller to enter into negotiations, take their home off the market only to find that the purchaser’s request for financing has been declined.

The same should hold true for financial advisors that would like to purchase another advisor’s business.  Several options are available to the potential purchaser such as applying for a secured and/or unsecured line of credit, speaking to the current dealer or MGA about internal financing options and also running some financial analysis on a potential offer that would include some cash and seller financing.  A purchaser that can confidently offer a prospective seller some assurance with regard to financing will be held in higher regard than a purchaser that is unsure of their financing arrangements.

One of the questions that I’m commonly asked is “ If an advisor’s business is valued based on their annual revenue, how can I easily know if I can afford to buy the business without asking them some personal questions about their annual revenue figures?” Well, you don’t have to.  A rough rule of thumb is the rule of 0.70%. That is, if an advisor tells you that they manage a mutual fund book of $10,000,000, then multiple their assets by 0.70% to come up with a ball park annual revenue figure ($70,000).  Advisors are more open to discussing their assets under administration and this will give you a general idea if you can afford to buy the advisor’s business or not. If you can’t afford to buy a $100 million book, then don’t waste your time.

In my future blogs, I will expand on various financing options that you can use to purchase a book without having to put down a lot of cash. Stay tuned.

Fee for Service

Compensation disclosure to investors is on the rise in Canada.  Both recent and pending legislation will require financial advisors to disclose their compensation, embedded or otherwise, to investors at the point of sale and on a cumulative basis if certain proposed legislation is approved.

Embedded (or hidden) compensation such as back-end loads and trailer fees are reported to clients in prospectuses and information folders but many investors say that they do not read or in some cases, understand this important information. 

Over the past several years, many financial advisors have begun to opt for a Fee for Service compensation arrangement whereby their compensation is collected by charging the client a fee on the total investment assets under management.  This is a transparent and disclosed fee to the investor and in many cases, some of the investor’s holdings are redeemed to collect the fee. As well, through regular reporting, the investor is informed of the fee collected and in certain circumstances, can use the advisor’s fee as an income tax deductible expense.

No Bias on Fixed Income or Equities

When you charge a standard fee on the total assets managed, you, as the financial advisor, get paid the same amount regardless of the asset class in the investor’s account.  As an example, if an investor’s account is holding fixed income mutual funds and equity mutual funds in a non-Fee for Service account, you will be paid a lower trailer fee on the fixed income mutual funds. This could lead to a bias for equities.  With a Fee for Service account, you can hold many types of investments within an account and your account fee is collected on the account rather than asset type.

Annuitize Your Book – Increase your Book Value

Recurring revenue on a fee for service book of business can be worth more when it comes time for an advisor to think about their succession planning.  Typically, fee revenue is more predicable and profitable than a variable commission based business.

Develop your own Wrap Service Offering

Fee for service accounts gives full pricing flexibility to the advisor which can help the advisor develop a business plan/ wrap account offering for their practice.  As an example, an advisor can opt to charge a lower fee based on the amount of assets under administration to encourage larger accounts. Furthermore, an advisor can add specific services and benefits based on account sizes and fees.  Another example would be to advertise for accounts over $250,000 and for a 1% fee, I will offer a comprehensive financial plan, one income tax preparation, a will review and one annual portfolio review.  If the account totals $500,000 or more, then the fee will become 0.90% and I will offer the same services but add one more income tax preparation.

In conclusion, the industry is moving toward more compensation disclosure and a fee for service approach is one way not only maintain your competitive advantage but to also improve your offering.  

Career Opportunities for Women

A career opportunity as an independent financial advisor can be an ideal career for many women as explained in Julia Chapman's video below. Please take a moment to view the video.


http://www.youtube.com/watch?v=K10G339cb5Y&feature=related