This case study is based on the situation of a client of the Covenant Group. Names and details have been changed to preserve privacy.

Jake Smithers was as excited as I had ever seen him in the two years I had been coaching him.

“One of the guys in our office is retiring and he wants me to take over his book,” Jake exclaimed. “This will really kick-start the long-term plans I have for my business!”

“Congratulations, Jake,” I responded. “That sounds like great news.”

I was concerned, however. I had been working with Jake for some time, and buying a book of business had never come up as his ideal method for growing his business. He had decided previously that developing his book through referrals and increasing business with his existing client base was the way to go.

“I am curious, though,” I said. “How did this come about? I don’t recall it being part of our recent discussions about your ambitions for developing your practice. In fact, didn’t you tell me that you felt organic growth was the way you preferred to grow your business because you didn’t want ‘all the hassle’ — as you put it — of integrating another advisor’s clients with your own?”

“Yeah, I know,” Jake agreed, “and, in general, I still think that way. But this came out of the blue. And if I don’t snap it up, someone else will. It’s a great book and the deal is pretty attractive.”

“A great book of business and a good deal — that is something to be excited about,” I said. “Tell me more.”

Jake continued: “As I said, it was unexpected. But old Percy in our office has decided to retire. He has been having some health issues and they are catching up to him more and more. And although he always told me, ‘I’ll die with my boots on,’ he has now decided to ease out of the business and spend more time travelling with his wife, visiting his grandchildren and so on. He’ll keep a handful of clients who have been with him for years, but, basically, he wants to transition the rest of his clients to someone he trusts to take care of them. He has been very successful as a broker as well as with his own account. So, he doesn’t need cash. He is willing to let me pay him out over the next two to three years from revenue generated by the clients I assume. It doesn’t get much better than that, does it?”

“It does sound like the perfect situation and, as such, almost too good to be true, Jake,” I cautioned. “Now, please don’t think that I am in any way not happy for you and confident in your ability to make the most of this opportunity. But I’d be negligent in my role as your practice-management coach if I didn’t ask you a few questions, just to make sure you have at least thought about some of the important aspects of buying a book of business. Is that OK?”

“Somehow, I knew you’d have a way to slow me down to take a more sober look at this. That’s why I offered to buy you lunch,” Jake said jokingly. “Go ahead, ruin my day!”

I suggested we start with something positive. I asked: “Why did Percy offer his book to you rather than anyone else in the office?”

“Good question,” Jake replied. “Because he likes me! Seriously, we get along very well. Many of the other brokers don’t really have time for Percy. They see him as old-fashioned because he is a cautious investor on behalf of his clients. He doesn’t jump on every new issue. He uses conservative, traditional securities. He very much follows a buy-and-hold strategy and wouldn’t know how to use a computer-generated investment policy statement if his life depended on it.

“On the other hand,” Jake continued, “I love talking to Percy. He has so much insight and experience. I think of him as a friend. When the markets are unkind to us, he always has some sage advice for me to pass along to my clients. He picks me up when I am feeling a little down. His clients adore him because he is so candid with them — if he doesn’t agree with something they want to do, he says so, and normally persuades them to follow a different course, usually to their ultimate benefit. He is a true professional who places his clients’ interests first.”

@page_break@“You are definitely alike in that last regard, Jake, so I can see why you’d get along,” I offered. “Let me ask you this, however: what will happen to all those wonderful client relationships when Percy hangs up his spurs? Will the clients you acquire be as loyal to you as they are to him? Will some of them use his retirement as a convenient time to move to another advisor?”

“Percy is confident most will stay with me,” Jake replied. “He has offered to introduce me personally to anyone I want to meet, particularly the top clients. He has also committed to working with me through the transition. And, as he said, ‘If I didn’t feel you would keep most of my clients, I’d be a fool to let you pay me out of future revenue. It is in the best interest of both of us to have maximum retention’.”

“That’s the right approach and attitude, Jake,” I replied. “Your description of Percy’s investment philosophy and methodology brings another question to mind: is there any inconsistency between the way you manage your clients’ investments and the way Percy has handled his?

“For example,” I continued, “you said that Percy was not a big proponent of investment policy statements, but I know that you are. You also like to complete wealth-management questionnaires with all your clients to identify their needs and priorities. Do you intend to try to indoctrinate everyone to your way of doing things and, if so, how do you think your new clients will react?”

“Percy and I have actually talked about this in the past,” Jake responded. “Percy admitted that he should have a more rigorous process because, in his words, people expect it these days. But he concedes that he is too set in his ways and ‘too stubborn to learn.’ On one occasion, he even mused about hiring me to do that work for his clients and sharing any resulting commissions with me. If we present the concept together, I am confident we will get good buy-in.”

“Excellent!” I congratulated Jake. “In fact, if I were you, I would insist on meeting all the clients and getting new know-your-client forms completed. Not to suggest that Percy hasn’t kept them up to date, but, in my experience, many advisors who have deep, personal relationships with their clients can be a bit lax about ensuring that the existing portfolio parallels the risk profile and objectives information on the KYC they have on file.

“They feel they know their clients better than any standard printed form could reflect,” I continued. “However, when you assume those clients, you accept the responsibility and liability for appropriate investments. So, you should satisfy yourself that everything is in sync in that regard.

“You can position the completion of a new KYC as ‘standard operating procedure’ if, in fact, it isn’t already so in your firm. Most clients will see the value of you having current information.”

“Seems like a bit of work, but I see the importance,” Jake said. “I hadn’t really thought about the fact that I inherited the liabilities along with the assets. What else should I bear in mind?”

“There are other issues around legal, accounting, valuation, taxation and such for which I am going to encourage you to seek experienced professional advice,” I replied. “I can provide you with some questions to pose to these people. But I suspect they will already know what to consider if they have done this type of transaction before. You should also, of course, consult your own company as to its policies and procedures in this area.

“There is also the question of staff,” I continued. “Does Percy have a support team that you are going to assimilate into your practice?”

“Martha has been with him for years,” Jake answered, “but Percy feels she will retire when he does.”

“That will make it easier for you in some respects,” I suggested. “I have seen deals like this fall apart because of clashes among merged staff members who had different ways of doing things.

“Be sure to speak to your lawyer about managing Martha’s retirement,” I added, “so that you aren’t liable for compensation with respect to her many years of service to Percy.”

“Wow, there is a lot more to this than I anticipated,” Jake admitted. “This is not going to be an overnight exercise.”

“Nor should it be,” I agreed. “It is too important to both you and Percy. Take your time; three to six months to get everything in order would not be unusual. Position it as a ‘merger’ or ‘transition’ rather than a sale, and I am confident the time spent will pay off very handsomely.” IE



George Hartman is a coach and facilitator with the Covenant Group in Toronto. He can be reached at george@covenantgroup.com.