Valenti: Protecting your client book

By Vince Valenti | March 5, 2010 | Last updated on March 5, 2010
4 min read

It happens all too often. A financial advisor becomes seriously ill, disabled or even passes away unexpectedly. When this happens, one of the most valuable assets that an advisor owns – his or her client book – is left unattended. The beneficiaries and/or executors are left scrambling to sell the book with little or no understanding of its value. With very little up-front planning, advisors can easily avoid such awkward situations as these.

Financial advisors are so busy educating and helping clients with their estate planning needs, they sometimes neglect to organize our own affairs. In some cases, advisors believe that their dealer or MGA will take care of everything in the event of a disaster but this is an irresponsible assumption to make for many reasons.

Upon the death of an advisor, the dealer must immediately assign the clients of the deceased advisor to another advisor to ensure clients continue to be serviced. In most situations, the deceased spouse or beneficiaries will not be licensed and therefore commissions must be put in abeyance until a new owner is found. If the deceased was the main bread winner of the family, this could result in serious income problems for the living family members. To further compound problems for the estate, an executor that is not familiar with the industry’s valuations and practices will be at a significant disadvantage when trying to find a buyer and negotiate a fair price for the book of business.

The continuity agreement

Simply stated, a Continuity Agreement is an agreement that you should set up with another financial advisor and it would provide authority for the other party to step in to service clients and to buy the client book in the event of a sudden illness or death.

A properly drafted Continuity Agreement should be stored with your will. This will allow your executor immediate access to the important details, such as; the contact information of the person and the pre-defined price. The agreement would also list other important contact information such as a dealer or MGA name. Your dealer, MGA and other product providers should also have a copy of the agreement in their files.

Your dealer and MGA can help

It is imperative that your dealer/MGA is aware of your desire to protect your estate and in some cases, should be a party to the agreement.

Set up temporary income payments

A Continuity Agreement should provide direction to your dealer/MGA on terms to pay your family members or beneficiaries an income while your commissions are in abeyance and pending a new owner taking over the book. You should be prepared to pay your dealer/MGA a fee to offer this benefit.

Finding an advisor to take over your book

If you do not already have a business partner or colleague in mind and cannot easily find an individual who would be suitable to take over your book, you should speak to your dealer/MGA to see if they can help you find a suitable candidate. A dealer/MGA would have a general knowledge of the advisors associated with the firm and may be able to suggest individuals that would match your objectives for a suitable replacement.

Structuring the deal

There are many ways and options to structure the purchase of an advisor’s book. The purchaser may request the purchase price be subject to a revenue or asset retention test for the first year of ownership. Clients of the deceased advisor may decide to move their business to a different advisor and this will result in lower revenue levels for the purchaser. This is a common concern among purchasers and can be easily managed if you properly communicate your Continuity Agreement to your clients, particularly your best clients. Your clients will be reassured knowing that you’ve structured your practice with a succession plan.

Payment structure and valuations

Consider basing your calculations on actual revenue generated by the client book rather than assets or other methods. Furthermore, the agreement should give direction to your dealer/MGA to release your gross annual revenue figures for the past three years to the purchaser. The purchaser can use the average of your last three years to calculate the final purchase price.

There are many ways to structure the purchase of a client book. One example is:

1. 1.25 to 1.75 times annual gross revenue

2. 0 to 50% of the purchase price as a down payment

3. balance paid in equal installments over a 3 to 7 year period

a. No interest and payments made quarterly

Retention clause

Let’s assume for this example that a client book has typically generated $100,000 in gross annual revenue and that the purchaser has paid $150,000 with 50% down. The purchaser has also negotiated to pay the remaining $75,000 over a 5 year period with quarterly payments ($3,750) with no interest. After the first year, if the book generates less income than $100,000, here’s how a retention clause could work;

Annual Revenue : $75,000, $80,000, $90,000

Selling price (1.5 x): $112,500, $120,000, $135,000

Less down payment: $75,000, $75,000, $75,000

Less 1st year payments: $15,000, $15,000, $15,000

Balance: $22,500, $30,000, $45,000

New quarterly payments for remaining 4 years: $1,406, $1,875, $2,812

Under this example, the purchaser’s quarterly payment would change to reflect the new quarterly payment calculation for the balance of the four remaining years.

Any plan is better than no plan. Do not procrastinate. The first step in any succession plan is to investigate your options. You should develop of a Continuity Agreement, which is relatively easy to do. Protect your loved ones from financial loss and help plan for the unexpected.

  • Vince Valenti, MBA, is the president of Independent Planning Group Inc.. He has extensive senior management experience in the Canadian financial services industry. He is the president of both Independent Planning Group Inc. (IPG) and Brigata Capital Management Inc., the exclusive distributor of the Brigata mutual funds.

    Mr. Valenti founded IPG, now a Level 4 mutual fund dealer with the Mutual Fund Dealers Association of Canada in 1990. In 2006, Mr. Valenti was recognized and honoured by the Greater Nepean Chamber of Commerce as the Businessman of the Year.

    Vince Valenti