External succession planning heats up

Geller has been a longtime advocate for succession planning. He says that too many advisors are leaving it too late, when the value of their books start to decrease. In fact, Geller set up the website www.sellyourpractice.ca so advisors would have a platform on which both to list their practices and to access industry articles on how to transition a book of business successfully.

“We need to start helping advisors learn more about how to transition their business and to do so while they’re still alive,” Geller says. “We aren’t asking them to retire right away. They can continue to be involved in the transition for as long as they want.”

Brian Curry, owner of Burlington, Ont.-based Curry-Henry Group Inc., heard similar concerns from advisors who were looking to exit the business, so he set up his consultancy practice four years ago.

“Many advisors are getting near retirement,” says Curry, “and don’t want to do another cycle in the market. They think they can do it themselves, but then get overwhelmed. They have an interest in succession planning and, in turn, valuating their books. But they don’t know where to go.”

Setting the right price tag for a book can be a daunting task. Jerry Butler, president of Queenston Consulting Inc. in Winnipeg, began working with advisors and providing book valuations two years ago. His services include setting up a documented succession plan, an online listing platform for advisors who are selling their books and providing practice valuations.

Although financial services firms have also been ramping up their internal support for succession planning services, for some advisors, the potential to draw top dollar in today’s market is worth stepping outside the company’s walls. Furthermore, one of the biggest benefits of having a third-party consultant, Butler says, is remaining anonymous when your book hits the market.

“It provides a platform in which buyers are able to see just the numbers,” he says. “It’s tough if colleagues start calling you for your book and there’s a personal connection [so] you might feel you need to provide them with a great deal.”

Butler fell into the valuation business after a colleague approached him for help to find a book of business. Given that today’s market sees 30 to 40 buyers for every seller, Butler knew it was an opportunity.

“We take the time,” Butler explains, “to narrow those buyers down to five candidates who are qualified, so the seller doesn’t have to sift through every response.”

Similar to the real estate model, there is no fee for buyers to log into Queenston’s listings site. Butler charges the seller of a book based on the selling price: 10% on the first $100,000, and 5% thereafter.

To date, Butler has helped 25 advisors sell their books, ranging from $10 million in assets under management (AUM) to north of $100 million in AUM.

Historically, books of business have sold for around two times the recurring revenue. But, Butler says, in today’s market, he is able to sell for twice that amount.

Michael Silver, an independent financial advisor with Winnipeg-based Wealth Planning Group Inc., has purchased two books of business through Queenston and is in the process of purchasing a third. Says Silver: “For a buyer, it’s extremely hard to find a seller in today’s market because most people just aren’t looking to sell. This was the best option for my team to grow our business, and a much easier process than doing it on our own.”

Silver and his partner, Jason Bonneteau, added a book of $70 million in AUM, which held an insurance component with additional trailer compensation. As well, the practice also acquired a group-benefits business. Silver and Bonneteau will work alongside one of the vendors over the next five to 10 years; Silver and Bonneteau have been able to retain 90% of the selling advisors’ clients.

But not every seller wants to remain involved. In Silver’s case, there is one advisor who will spend one year transferring the book. But the deal Silver currently is working on will see the exiting advisor stay on for only eight months.

An emerging player in the Canadian book-succession market is Portland, Ore.-based FP Transitions LLC. FP has been helping advisors buy and sell practices for the past 15 years, initially as an online database in which advisors could post their books of business for sale.

Today, FP provides training and coaching regarding valuation and documented succession plans. Although 95% of FP’s business is within the U.S., David Grau Sr., president and founder of FP, says the Canadian component of the firm’s clientele has been growing.

FP is completing 90 valuations a month for advisors; over the past five years, the firm has completed 5,000 valuations. Among the number of books being transferred, 90% of them are set up with long-term succession plans in mind; the remaining 10% are advisors who are selling their books and exiting the business altogether.

In 2013, Grau was able to set up several hundred book transitions with advisors who were looking to sell their book of business to a younger successor, who then would take over the business over the course of a decade.

“Advisors are still very much in favour of introducing their clients to the next generation [of advisors],” says Grau, “and supporting the transition years in which they have a very strong presence in the practice.”

The best time for advisors to consider selling their books is when they’re between the ages of 55 and 65, Grau says, as the book is no longer in growth mode and has plateaued.

“Once an advisor hits 65 and his book starts to decline in value,” Grau explains, “then we are faced with a book in full attrition mode.”

For an advisor who may not want to retire fully at age 65, Grau helps to set up long-term succession plans that could go as long as 15 to 20 years out. Says Grau: “Many advisors can’t tell you an exact time for when they want to exit the business. All they know is that they want to have a prolonged career and drive it out as long as possible. We want to be able to set up a plan that works best for the client – the older advisor as well as the advisor buying into the business.”

George Hartman, managing partner with Accretive Advisor Inc. in Toronto, agrees that the issue of timing is a major factor for advisors looking to sell a book of business. He’s been helping advisors sell their books of business for more than 10 years.

Hartman, through an extensive questionnaire, helps advisors determine if the timing is right, both from a financial and from an emotional standpoint. The questionnaire looks into the advisor’s background, his or her expectations on price, the timing of when he or she wants to sell the book and the type of person the advisor is looking for to take over the book.

“You can always find someone to buy the book,” says Hartman. “But would you sell your book to just anyone? Of course not. You need someone by whom your clients will continue to be well served, and someone who has a similar investment philosophy as your own.”

© 2013 Investment Executive. All rights reserved.