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
Tuesday, May 11, 2010
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.
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