Succession planning: Securing your future

The first successful succession plan involves a 59-year-old advisor who owns a block of mutual fund business generating gross commissions of $200,000 per year. He has found the perfect junior advisor to take over for him and his asking price is 2.5 times the commission currently being generated which means an asking price of $500,000. He would like half up front with the balance due over 5 years with no interest. The junior advisor cannot finance this transaction so they agree to a 60/40 split of commission over 8 years.

The junior advisor will earn $120k (60% of 200k) and the advisor selling will earn $80k (40%) for 8 years which actually gives him $640,000 for the business. The formal agreement (completed by a lawyer which includes a non-solicit clause) states that the established advisor will work part time for 2 years during the transition. The agreement also states it can be terminated with thirty days notice during the first 2 years by either advisor.

The second plan involves a 57-year-old advisor who owns a block of life insurance business and mutual fund business generating gross commissions of $150,000. He has found the perfect junior advisor but wants to stay active in the business and mentor the new advisor while spending more time with his family. He agrees to pay him a base salary of $500 per week for three years and assigns him his C & D clients while he focuses on his A & B clients.

All new commissions generated by the new advisor, from the existing block of C & D clients, get split 50/50 and the established advisor maintains ownership of the client during the three years. Any new clients that the junior advisor finds on her/his own are 100% owned by the new advisor. The salary stops after 3 years and the junior advisor has the option to buy the total block of business as per the conditions in the formal agreement. (This agreement can be terminated by either party with thirty days notice at any time during the 3-year period). Although the established advisor earns less commission in the first year ($150,000 minus $24k salary) the new advisor should generate 24K of commission through sales to the C & D clients. With a 50/50 split this means the established advisor is only out of pocket 12k in the first year. If $36k of commissions is generated by the new advisor in the second year, the established advisor is only out of pocket $6000 (24k salary minus 50/50 split on 36K (18k) = $6000). If the amount of commissions generated by the new advisor is $48k in the third year, the established advisor is not out of pocket (24k salary minus 50/50 split on 48K=0).

The third plan involves a 54-year-old advisor who owns a block of mutual fund business generating gross commissions of $300,000 (approximately 30 million under management). Her succession plan includes offering life, critical illness and long term care insurance to her clients. She has found the perfect junior advisor who will focus on educating her existing clients about the benefits of these products. The formal agreement states that a salary of $40,000 will be paid to the new advisor and all commissions generated from sales within the block of business will be split 50/50. The established advisor maintains ownership of the clients for 5 years at which time the option to buy the block of business will be made available to the junior advisor. The formal agreement includes a termination of agreement with thirty days notice by either advisor at any time during the 5 year period and includes a non-solicit clause. The price will be based on market value at the point of sale.

All three advisors mentioned above agreed that the reason their succession plans are successful is due to the fact that:

• they all took the time to find to find the right person to work with;
• they all had a detailed written business plan outlining expectations and time frames;
• they all completed a formal legal agreement with a lawyer experienced in this area;

• Mentoring plays a huge part in the success of any partnership and the best way to learn the ropes of any business is through hands on experience especially in this field where there is so much to learn. Working side by side, answering questions, introducing clients, sitting in on appointments, and reviewing client files is the best training an established advisor can give to a junior advisor.

  Many new advisors that I have met hold licenses, business degrees, CFPs and possess strong business, marketing, technical and entrepreneurial skills. What they may lack in experience and clientele they make up for in knowledge, energy and fresh ideas that can compliment an existing practice. They have been educated on the opportunities and options of working with independent financial advisors and the business potential this career offers. These individuals would welcome an opportunity to work with an established advisor.

  Just like advisors who focus on building relationships, an established advisor who focuses on finding the right person to work with, rather than focusing on how to pay them, increases her/his chances of a successful partnership.

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• Julia Chapman, business development manager, Independent Planning Group. Julia joined IPG in May of 2008 after working in the financial service industry for nearly 20 years. Her experience includes administration, client service, advisor assistant, marketing, training, recruiting, financial seminars, business development and working as a financial advisor. Julia is a member of the Ottawa Chapter of Advocis, the Women’s Business Network of Ottawa, and serves as an affiliate with the Algonquin College Finance Program. She is a frequent guest at the Ottawa U Telfer School of Business, the Carleton Sprott School of Business and Algonquin College where she educates students about the opportunities that exist in a career as a financial advisor.

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