Transitions in Today’s Market

“Light precedes every transition whether at the end of a tunnel, through a crack in the door or the flash of an idea, it is always there heralding a new beginning” — Teresa Tsalaky, author of The Transition Witness

Point Reference – Succession Planning Transition

1) Employee Model (aka – the banks)

Regardless of relationship factors, the firm owns the assets and they have essentially taken control of the process. Ownership is the key factor in this equation and fits hand-in-glove with the fact that a small percentage of advisors have planned well enough ahead while the majority keeps putting off the decision. Even worse is that very few understand the intricacies of the terms of transition.

Under an employee model the I.A. may well have some input, but invariably it will be the company that will make the critical decisions, i.e. pricing, valuation, term, etc. The royal ‘they’ will be the buyer and the seller and they will ensure that the pricing to the seller (retiree) will be sufficient enough to dissuade the broker from contemplating leaving the firm for a double-dip (paid twice). The distribution of clients is also under control of the firm and under whose management they end up will likely depend upon asset and revenue size, fee-based or P.M. managed and how they fit into the company’s product mold and reciprocal policies.

2) Principal/Agent Model (aka Independent)

It is under this model where the intricacies of transition come into play and the control factor is in the hands of the I.A. In no particular order, here is a list of items the broker will be faced with when contemplating succession.

• The client/broker fit which amongst a myriad of considerations would include the age factors of both the client and the buyer. The average age of retirement of IA’s is approaching 60 and is likely aligned with their clients’ ages; ergo the “younger” buyer will have to consider the issue of generational wealth transfer as a retention factor in the purchase.

• Other risk factors for the buyer would include the ability to audit the not-so-obvious flaws in the make-up of the clientele and the style of business. Perhaps not usual, but the concentration of wealth amongst a precious few clients (often large families) can be a large consideration in the retention column. Likewise, the audit should include the revenue risks of transactional business versus business under a fee-based system or a P.M. platform.

• The valuation process (i.e. cash flow) is critically important and should be in the hands of someone who understands the pricing mechanism for the longer term and not merely be reflective of the here and now. The seller would be well advised to hire the services of a Chartered Business Valuation (CBV).

• Account losses over the short term may be explainable (relative in the business, etc.), but it is essential that the seller remain on board well through the initial transition to ensure maximum retention. Longer term, account losses are not necessarily explainable and should be figured into the terms of payment. End adjustments are not unusual and should be accounted for as a legitimate retention factor.

• Lastly, under a P/A model it would seem that higher payouts and control factors would be a beneficial draw to a potential buyer in an employee model. The buyer however will be faced with some issues:

– Moving his/her practice to a lesser known name.

– Being prepared to ‘RUN’ a business in all of its machinations.

– Moving to a firm with less client and IA services.

Point Reference – Career Planning Transition

Probably fair to say that a majority of I.A.’s (and Planners) will make a move in their careers. They will do so for a variety of reasons:

– Their firm lacks vision

– Their firm lacks up-to-date services and support

– They find that the firm’s compliance and administration an overwhelming burden to the daily running of their business

– They face a personality conflict with those in charge

– They want to earn more money

— or maybe just the money

Those are some of the old, traditional push factors that can be in play when a broker decides to leave his/her firm. Today’s world incorporates some others:

– Production standards continue upward as the larger institutions clearly move towards the wealthy and super-wealthy amongst us.

– Asset standards on a per client basis are rising rapidly and will have a direct effect on an I.A.’s income if the client’s assets are below the standard (ie $250,000). This could also have an effect on client retention.

– The style of business is invariably moving away from predominantly transaction in nature to fee-based and then portfolio managed platforms. By not making these transitions will eventually move you and your business out the door.

– In the case where the larger institutions hand out clients to favoured IA’s the resulting benefits (if any) will come with a price, ie the selling of the firm’s products.

Here is an example of how those measurements can work in the larger employee firms:

– IA has $35 million in A.U.M. and is producing $350K in commission or fees.

– That is below the $500K bar set by the firm and their payout will drop to 20%

– After a period of time (if minimums are not being met) the IA will probably be offered a variety of options:

– drop their license and become an Associate to a larger broker (team member)

– retire and sell their book to the firm

– get the next down elevator

– NOW ARRIVING – becoming a salaried I.A.

OR

Explore other options. If you are forced out the door, not prepared to go through another cycle, looking at retirement, looking for increased earnings or looking for more freedom in business style and control of the terms of your career – consider the following:

– Principal/Agent Model

– ICPM Model

– Incubator Model

Note: For further insight into the subject of Transitions please refer to the Curry Henry Group website under ARTICLES – “Forms of Transitions”, 2014.