Ensuring buyer continuity

Over the past two months, Peter Gemmell, branch manager at Assante Wealth Management in Abbotsford, B.C., has shared his book buying process, based on years of experience buying other people’s practices for the advisors in his branch. Click here to read part 1, and click here to read part 2 of Gemmell’s insights.

This month, in the final part of our series, Gemmell offers his perspective on the value of the purchase to a buyer and the strategies both seller and buyer can employ to ensure clients are retained through the transition period.

What’s a book worth to the buyer?

Gemmell says 2.5 to 3.5 times net recurring income has become a fairly widely accepted rule of thumb for the value of a book of business. For the seller, this means a maximum of only three and a half years of full salary in retirement can come from selling a practice. But, from the buyer’s perspective, he says, “It’s extremely lucrative for the guy who is in his 30s and wanting to get going with his business with 25 or 30 years of working time ahead of him. He’s going to make a very good living, and, if he does it properly, he’ll create a fair amount of wealth for himself.”

Consider an advisor who already has a $20-million book. Taking into account all the costs associated with running a business in an office setting, this advisor could expect to produce annual net income of approximately $97,000. Gemmell’s rough calculation suggests that buying an additional $20-million book of investment funds has the potential to provide additional net income of $128,000 — for a total of $225,000 on the $40-million book. That doesn’t include any possible extra income from insurance or planning fees.

This first bump of $20 million in assets is the most significant to the buyer in that the percentage retained on his or her gross earnings increases from about 51% on a $20-million book to about 61.5% on a $40-million book. Buy a $40-million book, and you could add $257,000 to your annual bottom line. With a $100-million book, bump that up by $630,000 for a total net income of about $730,000. And with a $200-million book, advisors could reasonably expect to make approximately $1.1 million each year.

“In the later examples of the mega-book purchases, the advisor should experience tremendous opportunities to add to net income through a full-service practice offering insurance and planning services,” says Gemmell.

Beyond the profits directly attributable to the purchased book, buyers can often identify revenue-enhancing opportunities in individual client accounts. Perhaps someone holds investments but no insurance, or has neglected to implement an estate plan. Maybe a simple administrative change — such as converting deferred sales charge funds to front-end load funds — can boost the buyer’s income from commissions.

And when you buy a book, Gemmell points out, you’re buying more than a finite collection of accounts. In some senses, you’re purchasing access, or introductions, to a much wider circle of people. Assuming that you do a good job of advising your acquired clients, referrals to friends and acquaintances should begin to stream in over the next few years.

“If you bought a $50-million book, at the end of the day, you’re hoping that $50 million turns into $60 or $65 million with all of the spinoff from the seed fund,” Gemmell says. He describes this as “growing books organically” and says it’s particularly rewarding with a large book of business since there are exponentially more opportunities to build secondary relationships.

How can the buyer earn client loyalty?

Of course, the first step toward maximizing the value of a book of business is to keep as many transferred clients as possible. Gemmell emphasizes that both the buyer and the seller must be actively involved in efforts to retain clients. To motivate the seller to participate fully, Gemmell makes sure the deals he oversees include a clause that makes a significant portion of the purchase price conditional on clients’ remaining with the buyer for a set period of time.

In the case we’ve been following through the previous two articles, the retention clause required the seller to replace assets or refund the purchase price of assets that left the buyer during the first 30 months. In addition, the buyer structured the sale so the 1,000-plus clients transitioned to his practice in two waves to make it easier to integrate them into his existing practice.

About half of the purchased accounts were smaller and included group RRSP holders, who wouldn’t require ongoing meetings. The buyer quickly broke the rest down into categories so he could tackle high-priority clients first.

“When you buy a book, you don’t have the relationship yet,” Gemmell says. “You have your name on the statement. You’re going to have the opportunity to be introduced to these people. But making that person a client is a gigantic step. Sometimes it’s a much tougher route than just building your business through the lug-and-slug route.”

The seller eased the way by mailing out a carefully worded letter to all of his clients, announcing his retirement and singing the praises of the buyer. Gemmell says the seller has to be a “cheerleader” who clearly communicates the strengths of the buyer — from credentials and experience to investment philosophy and commitment to high-quality service.

“The seller knows the client relationships extremely well and knows everything about their financial affairs,” says Gemmell. “Assuming they’ve done their homework properly, they’re going to put clients in front of an advisor — the buyer — who has the attributes that are going to keep the client happy.”

Articulating the similarities between seller and buyer can be persuasive to clients. An effective letter may also highlight the benefits of riding out the transition, including significantly less administrative hassle for the client and the continuity of advice that comes from accepting the seller’s hand-picked successor.

Shortly after the letters from the seller went out, the buyer’s staff started scheduling meetings with the new clients. Because of the large number of clients, and all the paperwork necessary to set them up within his practice, the buyer hired additional support to assist with this process.

“When you buy a book, depending on the size, there’s going to be a temporary spike in wages,” Gemmell observes. Beyond assisting with administration, senior staff can help increase the frequency of “client touches” — from phone calls and e-mails to in-person meetings. “Make sure that those things don’t get compromised in the process of taking on new business,” he stresses.

Gemmell estimates that an advisor can comfortably handle 200 to 300 client relationships, assuming that most require semi-annual or annual meetings — with quarterly meetings for larger or more complex accounts. Above that number, it’s a good idea to engage associates to handle defined segments of the book or to assist with certain aspects of account management.

The buyer at Gemmell’s branch prioritized meetings with larger accounts and those who had been identified as nervous investors. In most cases, the seller attended only the first meeting between the buyer and a client, but for some of the more demanding accounts, he sat in on a series of meetings before gradually stepping aside and leaving the buyer to solidify the relationship. The focus for the buyer was on convincing clients that they would get the best advice and the best service by staying put.

That said, Gemmell points out that some attrition may actually be desirable, since not every account is worth expending tremendous efforts to keep. “There are situations where the best account you ever had was the one you didn’t get — if there is a complete mismatch of personality or if they’re going to ask so many questions and be on the phone so much,” he says. “I’d say sometimes the mistakes that happen are advisors will hold on to accounts that are not intended to be. Letting some accounts go really does make sense for everyone.”

Assessing the results

During the critical transition period, the buyer informed the seller whenever a client started talking about leaving, and the seller was given the opportunity to change the client’s mind. Ultimately, about 11% of the seller’s clients left within the first 30 months — which was within the 9% to 11% range Gemmell expected. But 89% of the book of business remained with the buyer — making it “absolutely” worth the cost in time and money.

Gemmell points out that there was an additional challenge the buyer had to overcome in this particular case: the sale went through at a tough time for the markets.

“We happened to purchase this just when we came off our first negative aspect in the market in over 10 years,” he explains. “We had a mini bear market there — a big correction in the market that fixed itself in a matter of two or three months, but returns all of a sudden started to look a little bleak under the new guy’s signature.”

That meant some extra hand-holding, including frequent communication to keep market volatility — and client account statements — in perspective. And, of course, this work had to be done for the buyer’s pre-purchase clients too, because there’s not much point buying a book of new clients if you lose an equivalent number of older, more established relationships. At the end of the day, it probably meant that a few clients who might have transferred successfully when markets were booming were lost along the way.

Nevertheless, Gemmell is convinced of the value of buying books of business when it is done right — especially for advisors who are more comfortable providing exceptional service to clients than picking up the phone to cold-call new prospects. But he stresses that each advisor is unique and must make the decision to buy based on his or her business goals and career ambitions — and then structure the transaction with appropriate terms and prices.

Read part 1 of this article, How to buy a book, step by step, by clicking here.

Read part 2 of this article, Buyers and sellers: Finding the perfect match, by clicking here.

(12/09/08)