The average age of a financial advisor in Canada is around 56. Yet most advisors don’t have a succession plan.

“It’s the old story of the barefoot shoemaker,” says 65-year-old Merlin Chouinard, owner of Sentinel Financial Group in Saskatoon.

With 42 years of experience in the profession, Chouinard is a veteran. He launched his own managing general agency in 1981 under the name Sentinel Life Management Corporation.

Thirteen years ago, he grew his enterprise under the umbrella of Sentinel Financial Group, which now includes a mutual fund dealership and a retail mortgage company with 13 salaried employees and a number of associates.

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Despite his long career, Chouinard has no intention of retiring anytime soon. At last check, his doctor said he was in good health, and he anticipates working well into the next decade. Chouinard takes 3.5 months vacation each year, and is grooming his son-in-law in the hopes that he may one day take over the company.

But Chouinard knows business continuity takes precedence over family loyalties.

“If I die or find myself disabled, the assets of the company would go into a testamentary trust,” he says. “It would continue as a business enterprise under the management of three trustees of that trust, which include a lawyer, an accountant and a senior vice-president within my company.”

The trustees would be responsible for liquidating the assets of the company at the best opportunity for the beneficiaries of the trust.

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“We’ve had people kicking our tires for ten years,” he adds. “They want to buy us, but I’ve yet to see the right scenario. Many companies just want to buy the assets and amalgamate them into their own operation and destroy Sentinel Financial Group’s structure. But I want to make sure my employees and representatives are looked after. I don’t want someone running roughshod over them just to maintain profits.”

While the testamentary trust arrangement works well for this enterprise, it’s not necessarily the best solution for everyone. More typically, individual agents create a continuity plan—in the case of retirement, disability or death—which will see their books of business sold at a fair price to another agent or company.

“I’ve been involved directly with a dozen of these agreements between my own representatives and other representatives,” explains Chouinard. “Sentinel underwrites these agreements, so neither side, once the deal has been reached, can walk without Sentinel protecting the agreement in place.”

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Most often the agreement is drawn up by a lawyer and based on the parties’ mutual consent. Chouinard says often it can be done in the form of a letter of understanding, but it’s not something he recommends.

“There are many intricacies in these deals which could be argued under the law,” he says. “For example, it may be an arguable point whether an agent ever ‘owned’ a block of business. If someone gets nasty, these things can and do end up in courts for a number of years. Meanwhile, who’s looking after your clients?”

While there are no guidelines or laws forcing agents to create a succession plan, Chouinard says everyone should have a continuity plan in place for the very simple reason that they have an ethical responsibility to protect their clients.

“People put off making a will; it’s the same thing,” he says. “And the big question when something happens is how do we manage the welfare of the consumer when there’s no continuity plan in place?”

Read: Advisors ignore own succession plans

Steps to succession planning

  1. Understand what your business is worth. Chouinard recommends buyers and sellers within the succession agreement sit down with a third-party to get a valuation of the business.

    A typical formula for a dealership or a block of an investment business is 1% of the amount of the block of business in force. Using this formula, an agent with $25 million under management would value the business at around $250,000.

    “Sometimes that will go as high as 1.2 to 1.4% if income will be paid out to the seller over a number of years. While this is 100% taxable to the seller, it’s tax deductible to the buyer, so this formula accounts for management and taxation.”

  2. Make sure the agreement is done in good faith. “No matter how much detail you put into a legal agreement, if there’s not basic good faith between all parties, then the wording in the agreement is just rubbish,” says Chouinard. He recommends having a third party underwrite a deal.
  3. Include a clause that the sale agreement will be measured 24 months following the sale. The value of a business can erode if clients decide to move on. A succession plan should account for adjustments to any future payments.
  4. Include a non-competition clause to ensure retired agents can’t return in a few years to woo previous clients away for themselves, family members or other colleagues.