How to buy a book, step by step

(September 2008) Peter Gemmell, branch manager at Assante Wealth Management in Abbotsford, B.C., has purchased several books of business for the advisors who work in his branch, handling everything from cultivating relationships with likely sellers to negotiating the terms of the sale and the final price. The largest transaction he was involved with is a good example of the complexities and potential rewards of buying a book from an advisor outside your own practice.

Starting this month, we’ll follow the progress of that deal from identifying the seller through the negotiation process to the all-important strategies that help advisors retain clients after a sale.

Why take the plunge?

Some years ago, Gemmell realized the path toward success as a financial advisor was being remapped. Increasing regulatory requirements were making it more expensive to manage accounts, making it essential to consider the economies of scale that come from working with more clients.

At the same time, his office was shifting toward front-end-load sales. Instead of the typical deferred sales charge structure of a 5% commission for advice and a 0.5% trailer, advisors were no longer making a commission upfront but were being paid 1% in trailers for the ongoing management of client relationships.

“It’s a pretty fundamental change to how we’re compensated within the business, and it’s very significant in terms of needing to have a larger volume of business,” says Gemmell. “I would say 10 years ago, a person with a $20 million book of business made a very good living. Today, a $20 million book of business would not compensate you very well at all. For my branch, I set a minimum threshold starting at $40 million and striving to be in the $50 to $100 million range.”

There are, of course, many different ways to grow a business — from traditional cold-calling sales strategies to cultivating referrals and consolidating existing clients’ assets. But one of the most efficient ways to build a practice quickly, Gemmell has found, is to buy a book of business from another advisor. The key is to find the right match and to structure the sale so the seller has strong incentive to make sure the buyer retains the clients.

Laying the groundwork

As with any major business decision, the first step was for the buyer to establish his objectives. In this case, he didn’t put together a formal business plan to prepare for the purchase, but he did have very clear primary and secondary goals. He wanted to double the size of his book with the purchase. Beyond that, he saw the potential of leveraging his relationships with newly acquired clients by taking advantage of opportunities to meet with their friends and acquaintances and further increase his book size.

With his goals defined, the buyer had to start considering how he would pay for another advisor’s book of business.

“It’s difficult to get financing from outside sources,” says Gemmell. “The banks don’t recognize the asset base as something that is liquid or saleable in the same way as we in the business feel that it is.”

Assante advisors have access to dealer loans that may cover up to the full purchase price of books over $10 million in size that, when integrated, create an aggregate book of at least $20 million — but in this case, the buyer relied exclusively on the seller to extend financing terms. Gemmell says that, apart from convenience, there’s another reason to get the seller involved in financing: it gives him or her a financial stake in the successful transition of his or her clients to the buyer.

Finding the seller

Gemmell began the scouting process. In broad strokes, he was looking for an advisor who was preparing to retire and who demonstrated a strong ethical commitment to clients. Of course, he also wanted to find an advisor whose clients were geographically in the same region as his office.

Identifying advisors on the verge of retirement is relatively easy, says Gemmell. “The first thing you look at is the colour of their hair, of course!” He laughs. “But it’s interesting — when guys are starting to make noise like that, it’s not a secret. You get to know very quickly who is content in the business and who is not happy. If you put the right proposal together at the right time, some bite.”

Gemmell is quick to acknowledge that most advisors who are retiring don’t advertise that fact openly because they don’t want clients getting nervous and moving on before they’re ready to leave the business. But he says that if you spend the time and effort to pay attention to what industry colleagues are saying, you can pick up promising signs.

Often, it’s a matter of watching people closely at meetings and following up with them if you have the sense they’re getting restless. Three or four times, he says, sellers have actually approached him now that he has developed something of a reputation for buying books — and having the means to buy them.

Gemmell says he hasn’t needed to use the services of a consultant to track down new potential sellers because he runs into a steady stream of them within Assante and outside the firm. The art is in developing a personal rapport with sellers who share a similar investment and practice management philosophy. To break the ice, he invites them to his branch and introduces them to the advisors there in an effort to demonstrate the professionalism of the operation and to reassure them that their clients will be well taken care of.

“The seller is often selling not just clients but friends,” he explains. “They truly, honestly are as concerned about the continuity of good advice for their client and/or friend as they are about what they get paid for [the book]. In fact, I would say in many cases what they get paid for it stands second, that they want to make sure they’ve got the right party carrying on where they left off.”

His informal screening process involved checking the potential seller’s reputation among colleagues at industry gatherings and making sure the practice wasn’t facing any regulatory problems. He points out that a lot of historical information is available online — from records of fines levied by securities commissions to a buyer’s track record of moving from firm to firm to specific licensing details. He also emphasizes the importance of getting to know the seller as well as possible and ensuring his or her approach preconditions clients to think about the relationship as a journey toward a long-term objective, instead of focusing on day-to-day returns.

“Understand the kind of business that [the seller has] offered and how it compares to your own value proposition for your clients,” he advises. “You don’t want to end up with a client base with one expectation and you delivering another, because you’ll be fighting an uphill battle all the way.”

Gathering information

As soon as discussions move beyond the abstract to the specific, the seller usually requires the potential buyer to sign a confidentiality agreement. After all, the buyer is about to start asking a lot of in-depth questions, and the seller needs to know proprietary information will remain closely guarded. A confidentiality agreement does not mean the seller won’t entertain offers from other buyers, but it is an indicator that the prospective deal is being taken seriously.

In this case, after signing the confidentiality agreement, Gemmell wanted to know a range of details. How many clients were in the book? Where did these clients live? What was the demographic split of the book by age and gender? What was the product breakdown? Were there any glaring product gaps, such as insurance, that could represent growth opportunities? How many of the assets were sold with a front-end load (and therefore higher ongoing commission)? What was the total recurring income? On a family basis, how many clients had more than $500,000, between $250,000 and $500,000, between $100,000 and $250,000 and less than $100,000 in assets? And what was the average asset value per client?

“The higher the average asset value, the more valuable the book,” Gemmell explains. “The fewer the relationships, the more the dollars, the more valuable the book.”

He was looking for a book with many clients in the “sweet spot” range of $300,000 to $400,000 in investible assets. He says this segment is generally middle-aged people who have worked hard, done well, want advice and are relatively hands-off when it comes to investing.

He also wanted to see a few “home runs” — clients with millions of dollars who can be extremely profitable but who also require a great deal of time and attention.

Gemmell was watching for red flags, too. He didn’t want to see a heavy involvement in specialty products, such as limited partnerships, that were structured to pay the advisor at the beginning with no ongoing incentive to maintain the client relationship. He was also cautious of advisors with a large proportion of assets in registered accounts — money that will likely transition into RRIFs and begin to shrink.

When it was clear that the book met the buyer’s needs and Gemmell’s requirements, he moved on to the next phase — nailing down the terms of the deal.