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There’s more to succession than getting the best price

By Alain Thériault | April 23 2015 09:00AM

Are older advisors sitting on their renewal commissions rather than selling their books of business? This is a myth, say experts on the subject. What they lack is a program that will encourage them to take action. Planning early for succession, the presence of the seller to support the handover, and a commission splitting formula are all key ingredients to the success of these transactions.forchuk_rick_articleMany transactions go off the rails for financial reasons. The price of a book of business will be valued differently depending on which side of the fence the advisor is on: buyer or seller. This is a lesson that Rick Forchuk, special advisor for retail insurance distribution at Empire Life, has learned from several advisors in the past.

Forchuk says that his company no longer offers a program to finance the purchase of books of business. “It’s a challenge for the advisor and it’s a challenge for the insurance and financial services industry. I think the biggest part of this challenge is that the person who sells the block of business believes that it’s worth more than the buyer wishes to pay. So, frequently, the negotiations break down over a matter of price.”

Whether it’s a question of a sales multiple based on three years or five years of commissions, Forchuk says buyers often feel they have overpaid while sellers think they have not been paid enough. He notes, in fact, that the perspective is different depending which side of the transaction one is on. The seller thinks he can collect three years of payments from the sale of his block without doing anything. However, the buyer has no guarantee that customers will stay with him for three years, nor that the block is structured to ensure regular income over the longer term. “The transactions I’ve seen that worked better are when the two advisors have worked together for a year, two years, or even three years,” he says.

Effective transitions

Thinking about succession is the key. In the transactions that worked well, Rick Forchuk points out that the two advisors met all of the clients together, having sent them a message to the effect that this transition is part of a succession plan. The seller is still only a phone call away for clients, while the buyer slowly makes his way through the new book of business. It may take years, but Rick Forchuk believes this is what works best. In some cases the seller may remain on indefinitely, with both parties agreeing to split commissions on new sales.

However, he believes that insurers, managing general agents, and advisors are not prepared to address the subject. “Succession planning is a critical issue and I don’t think that, as an industry, we have got our heads around how to deal with it yet,” he comments. Advisors should be better trained in this regard, in order to understand the real nature of this kind of transaction. This is not a final sale but the beginning of a process, insists Forchuk. “If the seller is selling because he is poor health or because he planned to do so on the first day of the year, or since he’s retiring to live in Mexico, a part of the transition may not work,” he says.

Succession planning is a critical issue and I don’t think that, as an industry, we have got our heads around how to deal with it yet

- Rick Forchuk


iA Financial Group is also trying to find a solution to the thorny problem of poorly orchestrated sales of books of business. The insurer is about to stimulate the market between buyers and sellers, a market that iA’s senior vice president of administration and sales Bruno Michaud says exists but is just dormant. Currently in its initial test phase, iA’s program will be offered to its career agent channel but Michaud reveals that it may also be rolled out to managing general agents and the Investia Financial Services network.

“The problem is not that the blocks are unavailable, it is that we must find a way to encourage advisors who are in the retirement phase to sell them. The advisor asks himself whether a particular candidate is one who will know how to take good care of his clients. (He thinks) I need to find myself a matchmaker,” he says.

Commission splitting

At the moment, the insurer is developing a formula to encourage advisors between the ages of 50 and 55 to begin their succession plans with a view to one day selling their books of business to advisors who have had time to prove themselves. Besides its financing program, which is already in place, the company is considering a formula for commission splitting that will allow the advisor who is selling off his clients to continue to earn income from the sales that the new advisor makes on the book of business he has purchased.

“It would be a triggering factor to encourage the sale,” says Michaud. “The advisor does not necessarily have to sell everything. He can segment his clients. We need to explain that he will not lose control of his clients and that he will play the role of mentor. As for the junior advisor, he is not required to purchase everything all at once. He can do it gradually.”

Michaud notes that, among financial advisors who have decided to keep some of their clients, the portion they retain often grows to become just as big as their entire customer base was before segmentation. “After segmentation, the advisor has more time to look after his preferred clientele, the clients that are the most profitable. It took one advisor who had kept two-thirds of his customers just three years to regain a similar amount of assets, with fewer customers and more time,” he notes.

The program will create more fruitful partnerships, predicts Michaud. “The advisor often asks himself: ‘What happens if it does not work out with this guy?’ They want to try to pass the torch, but not every six months.” For this kind of program to work, the insurer must bring in someone who is dedicated, and these are the kind of people that Bruno Michaud is currently looking for.

If the program will encourage the seller to take action, it will also increase the retention rate of new hires within the career channel. “It is the first two years that are the most difficult for a rookie,” he says. “If he can take advantage of an existing block of business, it becomes a lot easier to prospect and find clients.” Michaud points out that, in the career network, recruits used to draw 30% of their revenue from the orphan clients they were given when they were first hired.

The program is meant to motivate the seller to seek and find his successor, explains Michaud. But people should plan early and start thinking about it 10 or 15 years beforehand, he insists. And once a potential successor has been identified, do not start without a business plan. “First of all, we must have the financial model,” he underlines. Michaud claims he has not seen instances of advisors becoming “divorced” after a transaction when all of the steps of a succession process have been followed, rather than simply conducting a fire sale.

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