Get more with less

By Steven Lamb | February 7, 2011 | Last updated on February 7, 2011
5 min read

Reader Alert: This is Part 2 of a three-part series. For Part 1, go here.

In September 2010, members of the Institute of Advanced Financial Planners met in Banff, Alberta to consider the organization’s annual case study. This year’s case involved a client that everyone could identify with.

This is the story of Russell, a financial planner in his mid-fifties who wants to retire.

He and his wife Diane have been married for 25 years, with one son together (Terry), and a child each from a previous marriage. Diane’s daughter Melanie joined Russell’s planning practice six years ago, while Russell’s daughter Kathy operates her own health and wellness store.

In November we dealt with Russell’s soft issues: what are his actual plans for retirement; does his wife share his vision; and how can he ensure that his children are treated fairly. With this counselling out of the way, he can now set about harvesting the value he has built up in his largest asset: his financial planning practice.

At 56 years of age, he is only now considering how to transition his practice and planning for his retirement. And he’s left himself a relatively short timeframe for planning this all out; he hopes to retire from his practice completely in five years.

Russell initially started his planning practice as a sole proprietor, but incorporated the business 10 years ago as RKM Planners & Wealth Advisors Inc. The firm provides both fee-for-service planning and charges asset-based fees for wealth management services.

Total assets under management are $85M for 350 families. Russell wonders how a business valuator might assess the value of his business for an outright sale or for succession purposes by Melanie.

Aside from Russell and Melanie, RKM employs four employees: an associate financial planner; a plan writer and researcher; a personal assistant; and a processing assistant. Russell is planning to hire another financial planner to work with RKM.

With his planned retirement just five years off, Russell has not yet decided how he will exit his business. He is considering either selling the whole enterprise to a third party, or he may transition it into Melanie`s hands. He is leaning toward the latter option, but recognizes that this may present a unique set of challenges.

Russell’s practice forms the largest portion of his net worth, and therefore his eventual estate, and his other children could be getting short-changed.

“The practice should have formed part of the estate and its part of Kathy and Terry’s inheritance,” says Kathy McMillan, RFP, director, wealth management, investment advisor, Gustafson McMillan Wealth Solutions in Calgary. “If he’s selling the business a little bit below value or giving Melanie long payment terms, you have a dollar issue there.”

Regardless of whether he sells to Melanie or to a third party buyer, Russell needs to know the true value of his practice, and should maximize its value as well.

“The big issue on the table is what’s the business value and what are some ways to finance its sale. It can be a lump sum, can it be a lump sum plus some periodic payments,” says McMillan.

RKM’s insurance-based revenues are not spelled out, so for the sake of gross over-simplification, we’ll assume that RKM’s $85 million in assets under management consists of mutual fund assets. From a 1% trailer, Russell’s dealer takes 40 basis points, leaving RKM with 60 basis points.

It may sound counterintuitive, but to maximize the value of his practice, Russell will need to prune it back.

MacMillan says she uses PriceMetrics to keep tabs on the value of her own practice, and recommends Russell use a similar software package.

“I took my book apart manually at one point in time and categorized my clients,” MacMillan says. “The few times I’ve done a deep analysis of my clients, I’ve found I can give away 30 to 40 percent of my client base and have hardly any difference in my income.”


“He needs to assess what he’s doing in his business. He has a lot of clients for the value, the assets under management, so he needs to clean up some of those lower level clients, perhaps give them to a junior, like clean up the book somehow.”

“The first thing would be to take a good hard look at a business, and ask `who do I have revenue coming from?’” she warns that it can be an emotional experience cutting loose a client. “This is very tough on a person.”

But maintaining a bloated client list can be even tougher on the practice’s value, resulting in excessive wear and tear on the whole team. The best option might be to move these clients out the door altogether to a younger advisor looking to grow their book.

Russell will need to be careful, however, and ensure that those smaller clients that tied to larger accounts – say, those that are children of a wealthy client – are maintained.

“If you have your clients categorized and you clean it up, then I’d say traditionally you can sell your book for one to three times trailers,” she says. “If he doesn’t clean it up he’s looking at a low ball of one times revenue. Cleaned up, he could maybe get three — three would be high, but it depends on the atmosphere out there.”

Without cleaning up his book, Russell’s practice generating an estimated $510,000 per annum, and the practice might be valued at that amount. With a cleaner book, RKM’s revenues might fall to $408,000 per annum, but the practice could command a higher multiple and be valued around $1.3 million.

RKM Financial, present book RKM Financial, clean book
AUM = $85 million Assumption: RKM generates 80% of its revenue from the top clients it keeps.
1% annual trailer = $850,000 X .80 = $680,000
Dealer takes 40 bps = $340,000 X .80 = $272,000
RKM receives 60 bps = $510,000 X .80 = $408,000
RKM valued at 1x trailer = $510,000 RKM valued at 3x trailer = $1,224,000

The lower value clients that Russell is selling off generate about $170,000 in total trailer, bringing in $102,000 for the servicing advisor. By segmenting his book this way, and selling off the low value clients at 1x trailer, Russell could generate upwards of $1.3 million from the sale of RKM.

Given that he is selling to his step-daughter, they might each feel a little generous toward each other, and settle on a valuation multiple of 2, pricing RKM at $816,000, after the book is cleaned up. Add in the $170,000 from the sale of the low-value clients and Russell could have $986,000 in additional investment capital from which to generate his retirement income.

Steven Lamb