Younger advisors will trade income prospects for stability

Whether you’re growing a financial planning practice, a branch office you own, a corporate- owned branch or a financial planning firm, the ability to recruit high-quality associates is a key component of success.

A model of recruiting and business building that’s not frequently discussed is the salaried run financial planning practice. With the average age of independent advisors moving from their 50s into their 60s, it makes sense to offer a program to buy up these businesses over time and run them with younger, fully designated and well educated advisors.Over the past few years, colleges and universities have started taking the financial planning career seriously and are beginning to validate the financial planning business as a profession. Young people, and those changing careers at an early stage in life, are enrolling in programs that fast track their designations and licensing.

At one time, the career companies paid for this. Now we have full-scale educational institutions developing the industry’s future talent pool. Industry organizations, of course, continue to do an excellent job, but the validation of Canada’s formal educational system brings higher quality new recruits to our industry.

Once they’re minted, these salaried, designated, younger advisors need to be mentored by experienced advisors who wish to exit the business in a strategic way. Doing this provides a perfect method for passing the baton. The retiring advisor who deserves a good pay day is rewarded for his or her accomplishments, and clients are transferred to the team of salaried designated professionals.

Unlike other business models, the salaried model doesn’t come with high payouts. Once the overhead is in place, annual salary reviews, promotions and bonuses based on profitability and performance are built into the financial statements. This model, if run efficiently can bring significant margin back to the dealer (financial planning firm).

It’s important for hiring managers to remember this new wave of advisors is not coming from an era where working day and night for high compensation and no lifestyle are part of their psyche.

The baby boom generation in many cases has told generations X and Y that work/life balance is vital. Many boomers took a long time to learn this, and some never will. Therefore a good solid compensation program in a profession that caters to helping a majority of the population with financial and lifestyle planning isn’t a bad way to earn a living. Plus, significant margin moves in favour of the dealer (financial planning firm) and the dealer retains full ownership of the business for validation purposes (i.e. the value of the dealer plus the value of the book that the dealer owns).

So what target recruit do you want to go after? How fast do you want to grow? Is the marginal revenue from bringing on a specific type of recruit worth the risk to the firm and you?

Whether you run a company or a branch, you need to take a few days away from the business with your senior team and analyze all the factors before you initiate your plan of attack. Carefully look over all of the financial ramifications, strategic benefits and risk factors and determine if a salary model is the right one for your firm.

Critical Assessments

Weigh the margins and risks associated with different business models.

Financial planning firms generally have a few sources of revenue, which tend to be low, medium and high margin. Further, there are risk levels associated with each source.

It’s important to understand the margins and risk involved before building a firm or branch around a target recruiting strategy, because some of the recruiting you’ll do is strategic as it can be leveraged to benefit a higher-margin corporate entity within a larger conglomerate.

These revenue sources include, but aren’t limited to:

• Existing Independent Advisors – Assuming the average payout is between 75% and 85% and your expenses in normalized times run 10% to 15%, this would be considered a low-margin business, especially once you factor in the higher risk aspects and costs from liability and the enforcing compliance and regulatory rules.
• Corporate Commission Compensated Advisors – Assuming an average payout of 40% to 60% – with 90% of the branch expenses and 100% of the back office expenses paid by the dealer – these types of operations are low- to-medium-margin and medium- to-high-risk. Keep in mind that during difficult times the dealer’s costs of running the branch operation are in addition to the normal back-office costs.
• MGA or AGA Life Insurance Business – This is a low-margin business until you gain significant critical mass. Independent advisors can easily get high bonus levels from small MGAs that see their value proposition as paying the best bonus. This forces fully integrated firms to pay higher bonuses than is financially responsible. On the corporate side, the bonuses are lower but the dealer or planning firm still assumes the risk of branch overhead. This results in a low- to-medium-margin business with medium-to-high risk, because there isn’t enough cooperation between the regulating bodies to ensure a quality risk-management system.
• Group Insurance (Benefits) – An excellent high-margin business once it’s matured, with heavy concentration on retention of clients and growing new business. Dependency on a small number of large clients is a significant risk so diversification is important. Once again, you need advisors to sell new business and they must be paid fairly, so it’s a medium- to high-margin business once it matures, with low risk.
• Self-directed Plans – If the dealer runs its own self-directed plan division, it can make significant money once the critical mass is in place. This is similar to the group insurance business where you must gain the volumes to get the margin to move in a positive direction. This is a high-margin business once the business matures, with medium risk due to competitive threats on pricing.
• Miscellaneous Revenue Sources – These include mortgages, tax services, fee-based financial planning, and service charge backs to advisors. In fully integrated firms the revenue produced from these sources is generally small relative to the core service areas.

In some cases, distribution is merged with manufacturing mainly for the purpose of selling manufactured product. Those companies generally run their distribution at losses or break even as there is one overall balance sheet for both manufacturing and distribution. In such operations, the product shelf is significantly reduced but the client and the advisor know this going into the relationship.

Other firms run the dealer and manufacturer as separate entities, but the dealer serves as a loss leader that sells a certain percentage of its business in sister company product provided it’s in the client’s best interest and with proper regulatory disclosure.

Strong risk management and regulatory compliance, sophisticated back-office systems, building a brand that gives clients more comfort and assurance that they are part of a larger firm are absolute requirements in today’s world. This takes capital and critical mass attached to higher margin.

One other key component of recruiting quality independent advisors is the signing bonus. Generally, high-producing advisors require some form of signing or transition allowance to help them move from one dealer to another. The larger the advisor’s book, the larger the bonus.

This runs counter to the financial needs of dealers and MGAs that are increasingly challenged to do “cash flow positive” deals. Most dealers can’t lose money in the early years due to paying out significant signing bonuses to advisors. The market meltdown and a 20% to 30% cut in trailer fee revenue; not to mention new sales revenue, took care of that.

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David Velanoff is the president and CEO of MGI Financial in Waterloo, Ont.

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