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Unlocking succession for advisors

By Kate McCaffery | October 06 2015 07:00AM

If there was ever a market needing disruption, it’s possible the buy-sell “market” for advisory practices might be it. 

Commission-oriented or otherwise, a lot of advisors believe there is equity in the businesses they’ve created for themselves over time. A surprising number though, the vast majority, appear unwilling to think about and prepare for succession, preferring to leave it to contingency and circumstance. 

For an industry full of people equipped to help clients discuss and work on their own succession plans, the phenomenon is a real life manifestation of the proverbial dentist with bad teeth. 

By the numbers, Roland Chan, director of operations (and successor) at Liland Insurance Inc., and founder of Find BoB Ltd., says his research suggests close to 80% of advisors do not have succession plans, and even fewer have business continuity plans. The effort to quantify this included an advisor survey, and in-person interviews with over 100 advisors, different service providers (valuators and accountants), and other industry stakeholders.

Leaving plans to fate

FindBoB is the brainchild developed in response to Chan’s realization that most of his own advisors too, were largely leaving their succession plans to fate, without exploring their options. It also addresses the fact that a market for practice succession simply does not exist in Canada. 

“It’s largely a frozen marketplace. It’s not at all a transactional marketplace,” he says, in describing the situation. 

If an advisor does have an interest in developing a succession plan for themselves today, discussing the matter with a managing general agency (MGA)’s director of sales, for example, is one way the business owner might take a stab in the dark at starting the process. Such efforts, and other work-around solutions, often require MGAs to redeploy existing resources, without making any real headway in a systemic way, against the growing problem. 

“It’s not really an effective use of resources,” Chan adds. “The feedback we’ve been getting is that (advisors) are not really being supported – at the MGA, or even in the captive world.”

For MGAs, meanwhile, the mess created when an advisor dies without plans for their business, is a quagmire significant enough that many are beginning to take notice of any solution, like Find BoB, which might provide some relief.

Examples of the problem were afforded some discussion at the Canadian Association of Independent Life Brokerage Agencies (CAILBA) annual general meeting, in June. The problem scenarios discussed include those where individual widows are helped by MGA presidents who, in turn need to navigate vesting agreements with every carrier, and arrange multiple buy-out offers, often needing to go back and obtain signatures from a deceased advisor’s widow, sometimes months after the fact. 

Doing your family no favours

“Every carrier has a different policy,” says Tony Bosch, executive vice president of broker development at HUB Financial. “Some carriers, if you don’t have a plan and there’s no plan in place, they will just serve the block themselves. They’ll take the renewals and there will be nothing going to the estate.”

Others, he says, have transitional provisions where renewals and trailer fees stop when the advisor dies, and carriers will pay for a certain period of time, “maybe six months,” once the advisor’s estate is settled. 

Many will force a solution onto the practice if a transitional plan is not completed within a certain time period, as well. 

Even if carrier contracts say commissions will continue once the advisor dies, transferred accounts and renewals go to the third parties who now manage those client accounts. “The market is competitive enough as it is,” he says. “When your clients know you’re gone, they’re motivated to look for someone else; the advisors in the marketplace know you’re gone, and they’re motivated to get your client. How long is your client going to stay (with your practice)?”

MGAs have an interest in protecting this value, obviously, but the sheer volume of work to do when an advisor departs in an untimely way – by dying or otherwise becoming unable to continue in the business – is undoubtedly motivating enough to look at alternative solutions. In short: When an advisor dies or becomes unable to work, the MGA notifies carriers, and carriers come back with their list of items needed from the advisor’s business and estate. The MGA might help the widow understand all this, and might attempt to arrange an equitable solution for the family and estate, but executives often find themselves in the middle as well – stuck with a block of business they can’t serve. “We’re not the agents of record,” Bosch points out. The firms also find themselves in a position of conflict too, as MGAs are likely representing both buyers and potential sellers.

“We’re kind of caught in the middle,” he adds, “because I have an advisor who wants to buy that block. I have a widow that wants information. I want to try to do what’s fair for everybody, but it’s a bit of a conflict.”

Changing the discussion

In researching the solution, Chan, meanwhile, discovered that most advisors will only think about succession as an end, without realizing the significant growth opportunity that exists, if the concept is embraced sooner than later. Among those he surveyed, for example, the majority didn’t know the difference between succession for growth, and succession as an exit strategy.

Accredited continuing education is expected to be a significant part of the FindBoB offering, combined with industry-specific, proprietary valuation tools, advisor matching tools to line up those with symbiotic practices and personalities, and a mechanism for hosting private, curated marketplaces for business practitioners interested in buying or selling – to be deployed within financial institutions. 

“We’re a technology partner that will collaborate with financial institutions to implement effective transition outcomes within the organization,” he says. “It’s a collaborative approach that we’re taking. We’re also creating affiliate relationships with post-secondary institutions, as well, to provide tools for people who are interested in getting into the business.

“That’s something that we really feel strongly about,” he adds. “It’s really one of the reasons why I started it: We spend a lot of time in our industry focusing on ‘raising the bar.’ My concern is who are we raising the bar for? We’re not bringing enough people into this industry to make it sustainable.

“I think we need to stop treating succession planning as an end, and start focusing on our advisors, treating them much the way we do our clients – by focusing on the outcomes they’re interested in...We’re not the business broker dealers, what we’re really trying to do is educate advisors, and provide tools that will allow them to create transition plans for themselves.”

Valuation: The wrong place to start

HUB Financial is the first institution to make use of Chan’s platform, with plans to roll it out nationally, within the year. 

One hope is that BoB, with its match-making, marketplaces, and accredited education, will be a deeply engaging experience that will get advisors past their current rut, where most wait and hope for a number that will be motivational enough for them to sell in a timely way. 

“You need to do a lot of thinking beforehand, about your life, and what it will be like at the various stages of your succession. What do you really want from your life? How is your business going to fit into that? Financially, what do you need from your business? There’s also purpose, and a variety of other things.” Without going through that exercise though, Bosch says “what (advisors are) hoping is that someone will offer a number that will motivate them to sell, so they don’t need to think about all of that – and that’s not going to happen. They want a price that’s going to motivate them to sell their practice. They’re not going to get it.” 

Instead, he says a more likely scenario is that advisors will hear books are only selling for two, three, or four times earnings, and will prefer to sit on their block for longer than that, in an attempt to realize more value. 

While low valuations are a common objection put forth by advisors avoiding the succession planning discussion, Chan found that 95 per cent have not had a formal valuation done for their practice at all. 

“They’re basing it on what they’re hearing, but they’ve never actually tested or benchmarked their own practices.”

Auction it off

While it may appear to fly in the face of older, softer advice, admonishing people to “find the right fit” when selecting a partner, combined with match-making it’s hoped that FindBoB will create a new urgency, set values to some extent, and perhaps develop a new market entirely, by allowing businesses to auction off blocks of business to willing buyers. 

“We’ve discovered in our research, that auctions are a great way of driving business value,” Chan says. “Let’s say you have three advisors interested in selling. You could have a private-curated auction within that organization, and sell those practices to those who are interested, in this case, in buying practices or acquiring practices within that region.”

“There are a number of things that affect valuations,” he adds. “We want to help advisors focus on transition outcomes, and growth. What we’re really trying to do is educate advisors, connect them, and provide them with the tools needed to create transition plans for themselves.”

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