How dealers are building real value

The impending demographic shift in the advisory channel represents a massive challenge for all involved.

The largest cohort of advisors will be retiring within a scant few years of each other, forcing them to compete for buyers to acquire their books of business. Worse still, many will be selling a book dominated by older clients, who will begin drawing down assets and diminishing the value of the book.

“The average age of our advisors is 52, they’ve been in the industry on average for 17 years,” says Chris Enright, executive vice-president of FundEX Investments. “I don’t know where new people are going to come from.”

He says FundEX is working with those who want to sell their books to keep the business with his firm. But finding buyers for these books isn’t easy.

“We’ve talked about banks developing people, and some of the college programs that teach someone to be a financial planner, but it’s difficult,” Enright said.

For dealerships, this demographic shift represents an opportunity to reshape the industry in a way that will preserve their own profitability. But at the same time, these companies will need to dig deep to find the capital required to invest in this future.

The problem fund dealers face is the same one confronting insurance managing general agencies: Fierce competition. Some dealers have opted to compete on payouts, undermining the profitability of the entire industry.

“The margin has always been with the independent advisor, and rightly so,” says Dave Velanoff, president and CEO of MGI Financial. “The independent advisor assumes a vast majority of the risk, and in return takes 80% of the compensation. We all should be cutting the payout to 70%, but we’d all cut each other’s throats.”

But there’s a better model at hand, he adds, which would end this erosion of profits. “I’m going to a salary model—because that’s what the banks are going to do—with performance bonuses.”

While such a model may sound shocking to current advisors, who likely cut their teeth in a career shop before fleeing to a more independent and lucrative business model, it may be aptly suited to the incoming generation of advisors, he suggests.

The stereotype of the younger generation being lazier than its predecessors has circulated for generations, and if true, would have destroyed western civilization centuries ago. But Velanoff notes Generation Y has grown up on the advice of the boomers, which included the repeated message: Don’t make the same mistakes as we did; find a better balance between work and life.

While the next crop of advisors will include many ambitious Young Turks eager to focus on their careers, there will likely be a significant contingent who will accept a moderately lower income in exchange for less stress.

Velanoff plans to hire these less aggressive young advisors as they graduate from post-secondary school, and suggests a salary of $50,000 right out of school might be tempting. The plan would be to supply them with a readymade book of business to maintain and grow, that’s made up of client accounts purchased from advisors exiting the industry.

The retiring advisors may be better served by selling their books to their dealers, rather than to other advisors, according to Velanoff. When selling to an individual, there are numerous risks: The buyer could lose his or her licence, become disabled or even die before the deal is closed. Even if the sale goes through, the vendor could face clawback provisions if too many clients defect from the new advisor.

The exiting advisors may be reluctant to sell to their dealers, assuming they’ll get a lower valuation, but that may be the price they pay for certainty that the transaction will go through. Velanoff suggests a publicly-listed dealer would be an even better bet, as these entities face tougher compliance and, presumably, are more stable because of it.

From the dealer’s perspective, buying books of business from retiring advisors may increase costs in the near term; the switch to salaried teams of advisors would raise the dealership’s margins over the long term.

He argues compliance costs are much lower for a dealership on this model, because the salaried advisor has little incentive to churn the book, or base recommendations on compensation.

“You can’t do this without money behind you,” he said. “You’ve got to do it now before the banks get out there and buy up all the books from retiring advisors. They have the money, but they can’t move quickly.”

The same problem faces the insurance industry, with many aging advisors looking to their MGAs for assistance in their own transitions to retirement. While some are happy to hold onto their books and retire on the renewal commissions, the majority would rather hand their businesses off to someone with the energy to provide service to their clients.

“The average age of insurance guys in Canada is 56 or 57,” said Keith Brown, CEO of Daystar Financial Group. “In 15 years there’s going to be a big vacuum there. If we’re not really careful, the banks will take our industry over and we’ll be out of business.”

And the banks are not the only competitors set to pounce on the insurance industry. Despite challenges to the MGA’s profitability, the industry continues to attract new entrants.

“I sell insurance to business owners who are quite wealthy, and my biggest competitor is not another insurance guy, it’s an accounting firm,” Brown said. “Unfortunately, I have some big clients who deal with a major accounting firm that happens to be selling life insurance in my market in Vancouver.”

He says this trend can only grow, as it is already common practice in the U.S.