Managing general agencies, insurers and even banks are implementing financing strategies to help buyers pay for the books of business being made available by the growing number of advisors near retirement.

Already widespread in the mutual funds sector, where a clientele is easier to price, financing for portfolio purchases is becoming more common in life insurance. Several large firms have launched financing programs aimed at advisors.

“It’s definitely a trend everywhere in Canada, so many agents in their late fifties early sixties, thinking about succession planning. It’s on everybody’s agenda these days,” said Byren Innes, senior vice-president of the Ontario consulting firm NewLink Group.

NewLink offers advisors and managing general agencies (MGAs) with large blocks of life and investment business an evaluation program and expert valuation services in order to sell the blocks under optimal conditions.

Availability on the rise

“Large portfolios will be up for sale in the next few years,” said Steven Ross, vice-president, insurance and individual distribution at La Capitale. In March, as vive-president and general manager at LFS Financial Services, Mr. Ross designed a new index that determines the value of a portfolio of life insurance and investments clients.

Mr. Innes agreed that sales of portfolios will accelerate, especially within the next few years. It won’t be a stampede, he explained, but a number of MGAs are poised to sell within the next four or five years.

Then there are the other factors to consider. Mr. Innes believes that many ageing advisors will sell to avoid headaches. “Life business is not what it used to be; there’s a lot of stuff to worry about today, compliance, licenses, education, etc.”

Robert Frances, president of Peak Financial Group in Montreal, sees the transfer of clientele as a tool to facilitate succession. “By and large, these financing modes were launched to counter the phenomenon of ageing professionals. Presently, most advisors in the field are aged between 48 and 65.”

Quebec leads

According to Sam Albanese, president of AFG Canada, an MGA in Ontario, the trend is slow to gain momentum in Canada. To date, Quebec is leading the rest of the country. But it is only a matter of time before this financing spreads across the country, he said.

Mr. Albanese pointed out that this type of financing is more popular in Quebec because of the highly structured MGA network. Quebec has an edge because the province pioneered the brokerage firm model in Canada, explained Mr. Albanese. He added that MGAs in the rest of Canada look to Quebec for guidance.

He also mentioned that blocks of business up for sale in Quebec are much larger, hence the need for substantial financing. “The MGA system is relatively new in Canada. In Quebec (…) that system has been in place longer. Look at my company, for example. It’s 14 years old….[Quebec based] Copoloff [Insurance Agencies] has been around for 40 years!”

Acquisitions accumulate

Many firms have been gobbling up portfolios in recent years. Herbert Braley, a top-flight seller who mainly deals with Manulife Financial through its network of independent advisors, recently purchased seven portfolios to boost the business of his firm. His modus operandi: acquire portfolios and then offer the selling advisor a place at his firm to serve the clients acquired. “In most cases, the producer stays with me. I only have one block of business without a producer.”

Mr. Braley does not turn to institutions for financing when he acquires a portfolio. Rather, he pays cash for each acquisition. He then offers a commission to the seller, who teams up with the firm to serve his former clientele.

AFG has used book of business financing only four times, all following the premature deaths of affiliated advisors, Mr. Albanese reported. “In these rare cases we have provided the funding. It wasn’t large amounts of money because they weren’t large blocks. AGF has provided the funding then the advisor paid us over a period of 12 months.”

Mr. Albanese confirmed that for now, the transfer of a book of business between advisors rarely involves financial transactions. “What we have done is pair up our older agents with younger ones who are interested in building a block. One gets slowly phased out while the other gets slowly phased in.”

Initiatives that parallel those of Mr. Braley, who hires the advisor in addition to buying the book of business, are surfacing. Valerie Osland, a B.C. investment and insurance advisor, was offered not only a price for her clientele, comprising 98% funds and 2% life, but also a job within the purchasing firm. “They basically said ‘what would it take to get you to come here?’”

At Peak, financing has been used for nearly two years, for life insurance and mutual funds alike. This financing is issued as a pre-approved mortgage loan, Mr. Frances explained. It is tailored to advisors seeking to acquire client portfolios from colleagues or competitors.

Loans are conditional. First, the target block of business must have a significant client volume. Representatives must also demonstrate that they are able to retain 70% of the business purchased.

Terms and conditions may vary: “It’s case by case,” Mr. Frances said. “Financing operates the same as for any other personal loan. However, the bank gives us a preferred rate,” he revealed without elaborating further. The repayment terms are 5 to 10 years, depending on the financing granted. In return, Peak offers the bank renewal commissions and compensation of purchasing advisors as a loan guarantee.

Mr. Innes added that all these systems have a cost. Especially those that offer detailed portfolio valuation. For instance, the use of the NewLink service is not worthwhile for advisors that have only small portfolios. “We’re used to valuating MGAs’ multi-million dollar deals, not $500,000.”

One bank stands out

Under programs developed by general agents such as Assep and Peak, advisors can obtain financing from BMO Financial Group.

BMO is a notable exception in the market: the other banks contacted by The Insurance Journal said that they had little or no presence in this market.

MGAs perceive banks as generally disinterested in advisors’ needs related to book of business purchasing.

“Arranging financing is even trickier as most lenders do not understand our business either. Many insurance companies will lend but often only for their in-force products,” Mr. Innes complained.

BMO replied that it takes into account the long-term value of the portfolio. The institution scrutinizes the target portfolio to ascertain that it generates regular income. Elements analysed include renewal commissions in life insurance and service commissions on mutual funds.

Many MGAs contact BMO when they want to obtain financing for a broker, particularly Peak.

Portfolio management

Other MGAs have chosen the portfolio management route. Advisors that want to download administrative tasks and sales activities hand the keys to the book of business over to their firm. This is the crux of programs launched by Proteck Financial Network, an MGA specialized in non-cancellable disability insurance, based in the Montreal area.

“For about 40% of your renewal commissions, Proteck will take care of all your files: updating the financial needs analysis, reviewing medical statements and verifying compliance with the AMF,” said Robert Jeanneault, president of Proteck.

What’s more, advisors must generate new sales based on the clientele under management, in return for 30% of this income. He added that clientele management is by far the most popular option. “Nine out of 10 advisors choose portfolio management,” confirmed Mr. Jeanneault.

Proteck is buying portfolios as well. “We acquired over fifty this year. These purchases total between $400,000 and $500,000 of premiums in force, including an acquisition of $150,000 in premiums concluded two weeks ago,” Mr. Jeanneault revealed in September.