Ontario’s courts have determined that an investment advisor’s book of business is considered property for the purposes of the Family Law Act.
What’s less clear is how an advisor’s book of business should be valued if he gets divorced.
There have been numerous approaches used by business valuators and accountants in Ontario. Three of those include the current approach, the deferred approach and the marketing opportunity approach.
Under the marketing opportunity approach, the valuation is based on the estimated amount the advisor might receive if she moved to another firm. This approach is not widely used.
The current and deferred approaches are more common. In most situations, these approaches rely on a firm’s proprietary formula for calculating the price retiring advisors receive when they transition their books to other advisors.
For instance, assume Susan and Gordon separated in Ontario on June 30, 2015. Susan is a 45-year-old investment advisor at a major financial institution; Gordon is a teacher.
Based on Susan’s revenue and AUM, her firm’s formula indicates that, had she retired on or about June 30, 2015, she would’ve received 36 monthly payments of $25,000 each, or a total of $900,000.
Using the current approach suggests that in valuing Susan’s book of business (before taxes), it may be prudent to consider discounting her value somewhat, since it would take 36 months to receive her entitlement (had she retired on the separation date).
Assume that the calculation under this approach suggests a small discount of 5%. Thus, Susan’s pre-tax entitlement is $855,000 ($900,000 x .95).
Users of the current approach have differed when it comes to determining the tax liability in relation to the $855,000 pre-tax value noted in the example. Some suggest that a current tax rate (say, 40%) should be applied to the $855,000 pre-tax value, to reflect the fact that the tax would be paid over 36 months. So, the calculation of the after-tax value would be $513,000 ($855,000 x 0.6). This is the value that would form part of Susan’s net property for equalization purposes.
Others suggest that you should calculate tax on the current value based upon a normal retirement date. So if Susan expects to retire the day she turns 66, she could expect to receive equal monthly payments from age 66 through age 68 inclusive. If Susan pays a tax rate of 30% on the payments received upon retirement, the present value of that tax rate would be much lower (say, 15%). This suggests the after-tax value of Susan’s book is $727,000 ($855,000 x 0.85), and that amount instead would form part of Susan’s net family property.
Using the deferred approach, Susan is expected to work another 20 years after separation. Assuming Susan’s tax rate on the payments upon retirement is 30%, the after-tax amount (before discount) Susan would receive starting at age 66 is $630,000 ($900,000 x 0.7).
A discount would then be taken to reflect the fact that Susan’s receipt of her entitlement is scheduled to start about 20 years after Susan and her husband separate. The discount rate to use is a matter of professional judgment, as each case brings its own risks.
Assume that the effective discount is 40%. Then, the net value of Susan’s book is calculated at $378,000 ($630,000 x 0.6), and that amount would form part of Susan’s net family property.
As a result, the range of values for an advisor’s book of business under the various approaches can differ significantly.
Deferred approach: $378,000
It should be noted that if an advisor is near retirement at the date of separation, the current and deferred approach will not be significantly different.