Recession puts red light on investment transactions

By Alain Thériault | March 26 2009 09:54PM

As the recession erodes the value of investment clienteles, buyer interest is fading. Investment products with guarantees are shining in this bleak environment.

Several specialists confirm that the recession is slowing the pace of purchases and sales of books of business.

Sellers are feeling the pinch. Investment fund assets are shrinking in these difficult markets, which reduces income from charges or fees. This lowers the value of the book even more. Several advisors that planned to sell may wait for the recovery first.

Bob Labrecque director of succession planning, Independent Advisor Channel, of Manulife Financial told The Insurance Journal he sees a slowdown in activity in the clientele transfer market. He thinks that declining assets have dampened enthusiasm for investment clienteles. "Sales of books will be down this year, that's for sure," he says.

Mr. Labrecque makes it clear he is not referring to the activities he supervises at Manulife. Rather, his prediction that transfers of books will slow in 2009 is based on his observations of the market in general.

Succession programs

As for Manulife, he says that he is spending more time building succession programs for advisors that plan to hire a junior associate, for example, or prepare an emergency plan in case of death or illness.

"It's a good time to buy, but not as good to sell," he says. For people that decide to sell anyway, Mr. Labrecque advises them to structure the transaction so that they can recoup the loss of value caused by the decline in assets.

For example, the seller can ensure that the price of the transaction reflects the average income the block of business has produced in the past two to three years.

Mr. Labrecque says he has seen a few sales in the market that factor in a future recovery. Such sellers can take advantage of a market upswing should it happen one year or 18 months after the transaction.

Generally, blocks of business in segregated funds gain value over time. Because of the guarantees, investors remain in the funds or opt for transfers within the same fund family. They then wait patiently for the markets to regain steam.

Mr. Labrecque says that the current plight of investment funds has serious implications for book transfers. He points out that the value of a block of business is based largely on investment products rather than life insurance products.

Disability insurance products are an exception: they should retain much of their value owing to the high renewal commissions they pay, over a generally longer duration than life insurance products.

Image is another factor stunting sales during the recession. "Many potential sellers are waiting six months, even a year, to act, because they do not want to give the impression that they are dropping their books when the going gets tough."

Reassuring clients is crucial, he continues. Advisors must sit down with each client and discuss the reasons that their investment portfolio is 30% or even 40% lighter.

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