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The Rising Importance of Transition Planning
Tuesday, May 12, 2020
We remain mired in the Covid-19 pandemic.
Amidst one of the worst public health crises and economic downturns in recent memory, financial advisor's have continued to help ensure the financial well-being of their clients. As the crisis continues, however, a growing number of advisor's are starting to turn attention to their own situation and the longer-term impact of Covid-19 on their business. They are beginning to ask the following questions:
What is my plan if I am no longer able to service my clients?
How might this crisis affect my own retirement?
I was planning to sell my business in the next 3-5 years. Does that timing still make sense?
How has this crisis affected the value of my business? What can I do to increase its value?
Do I have the motivation and desire to continue working as an advisor post Covid-19?
One of the most significant strategic challenges facing our industry prior to Covid-19 was the lack of advisor preparedness concerning Succession, Continuity and Exit Planning. We all know the stats. Only a small percentage (approx. 10%) of advisor's have a written plan for their succession, and the vast majority of advisor's were not even ‘thinking about’ the eventual transition of their business. In the era of Covid-19, however, this appears to be changing. A growing number of financial advisor's are realizing the importance of having a robust and well-documented Succession or Transition Plan in place.
This is a positive development. After all, the reality is that every advisor will one day transition out of their business and eventually exit the industry. The only question being on what terms and conditions. It seems obvious that not having a plan in place for an event that is certain to take place makes no sense whatsoever. A robust and well-documented plan is in the best interest of not only advisor's but also their clients, family members and staff.
What can we do to help financial advisor's take effective action and ensure their readiness?
In a series of articles over the next several months, we intend to explore the subject of Succession, Continuity and Exit Planning and the related trends and challenges facing advisor's in 2020 and beyond. Our objective is to offer insights and practical tips and suggestions on concepts and strategies, including case studies from The Personal Coach, to help advisor's take action and effectively shape the future of their firms.
Getting Started - Take a Different Approach to Transition Planning
One of the most frequently asked questions I get from advisor's who are keen to develop a Transition Plan is - ‘Where do I start?’
What I often suggest is that they start by adopting a different way of thinking about the concept of Transition Planning. And that starts with a clear understanding of the terms Succession Planning, Continuity Planning and Exit Planning and how these concepts ought to work together to create a robust Transition Plan. By doing so, advisor's will create for themselves a sense of direction, an understanding of the options available to them, and a clearer path forward.
Just about every advisor I know uses these terms interchangeably. In fact, they mean very different things.
Succession Planning – refers to the plan that ensures the seamless and gradual transfer of ownership, leadership and management of an advisor’s business internally to a new generation of advisor's.
The key point is that the founding advisor's business will endure beyond the life and career of the advisor….and no longer has to rely primarily upon that advisor.
Exit Planning – refers to the plan that ensures the transfer of ownership, leadership and management of an advisor's business to an external third party.This transfer is typically a 100% transfer of ownership and means that the founding advisor's business does not endure beyond his or her own career.
Contingency Planning – refers to the plan that ensures the seamless transfer of ownership, leadership or management of the advisor's business in the event of a random and unplanned event –death or disability being the most common, but pandemic as well.
One plan is neither better nor worse than the other. They are just different.
A Succession Plan at its core is about growing an advisor's business by including another generation of advisor's and leveraging their skills, talent and energy;
An Exit Plan, on the other hand, is about monetizing an advisor's business and bringing their practice to a close and career to an end;
A Contingency Plan is about insuring an advisor's business and preserving its value in the event of a major unplanned and negative event.
Conventional wisdom would suggest that an advisor must choose at some point in their career between an internal Succession Plan and an external sale to a third party. This kind of thinking is misguided. A smarter and more effective approach is for an advisor to develop a more comprehensive plan that incorporates all three of the plans described above. Ideally, it should always start with an internal Succession Plan and include a Contingency Plan. In this way, if the internal Succession Plan does not work to the advisor’s satisfaction, an external sale to a third party becomes their fallback strategy.
The term Transition Plan, therefore, refers to the advisor’s plan or strategy that incorporates their respective Succession, Contingency and Exit Plans and outlines the process of changing the advisor’s role as owner, leader and manager of his or her business over time to ‘something else’. That ‘something else’ can be whatever the advisor wants it to be aligned with their long-term goals, objective and vision for their life and business.
The Bottom Line - what are the key insights advisor's should take from this?
Every advisor will one day leave their business and exit the industry. Not having a plan in place makes no sense and is a breach of your duty to clients, family members and staff;
Start by adopting a different mindset and approach to Transition Planning. Understand the differences between Succession, Exit and Continuity Planning and how they work together;
Every advisor, irrespective of age and stage of career, needs to have a Continuity Plan;
It is never too early to begin Transition Planning. Every advisor between the ages of 35-50 ought to be developing a Succession Plan;
Every advisor over the age of 60 ought to be developing their Exit Plan.
Suggested Next Steps – what can advisor's do to get going and enhance their preparedness?
Get Educated – read up on this topic and talk to one of our coaches to learn more;
Get Started – email The Personal Coach to receive a preliminary Self-Assessment;
Get Help – connect with Afsar to schedule a Complimentary Consultation.
Afsar Shah, Business & Regulatory Coach at 3:30 PM
Mergers & Acquisitions: A Roadmap to Maximizing Value
Thursday, November 21, 2019
The most frequently asked questions I get asked by advisors who are thinking about acquiring a book of business are – ‘Where do I start? And what steps should I take to ensure that I’ll be successful?’ Advisors are right to be concerned because most acquisitions involving professional services firms (anywhere from 70-90%) fail to achieve their pre-acquisition objectives. Whether it is a lack of strategic planning, poor integration planning, failure to pay attention to risk management, culture clashes, or spending too much, the truth is, acquisitions are hard to get right.
Set out below are 6 “must-do” best practices that will help you create value and increase the likelihood of your success when acquiring a book of business.
1. Understand Your ‘Why’
It is imperative that you start by clearly understanding what is driving your desire to make an acquisition. What are the outcomes and benefits that you hope to achieve? Whether it is to reposition your client base, enter into a new market, or simply to acquire additional assets for greater scale and increased revenue, understanding your ‘why’ will bring clarity and focus to your M&A strategy. It will ensure that your M&A strategy aligns with your vision and the strategic direction that you have set for your firm. It will also create a set of criteria for you to evaluate the merits of a particular opportunity and enable you to identify the profile and characteristics of your ideal target firm. Given the cost, time, resources and personal commitment required, you cannot afford to start your M&A journey by heading in the wrong direction.
2. Assess the State of Your Business
Prior to going to market, every advisor should first ask themselves a fundamental question: ‘Is my business truly ready to take on another book?’ Buyers who go to market before their business is ready are more likely to destroy value than create it. So take a hard look at your business and make sure that your workflows, processes and procedures are efficient, scalable and align with regulatory requirements. Make sure that you have a team in place that can help you to integrate and service a new book and continue to maintain your existing clients. Integrating a new book onto a business platform that is less than rock-solid is asking for trouble. In today’s market, sellers have choices, and they are looking for buyers who can offer their clients the most value. So lay the foundation for a successful acquisition by ensuring the strength of your business model and service platform.
3. Valuation – Don’t Rely On “Rules of Thumb”
Too many advisors rely on industry ‘rules of thumb’ (ie, a multiple of revenues or percentage of assets) when attempting to value a target firm. Do not fall into this trap. The actual value of a firm is not merely a multiple of revenues or a percentage of assets. Several key factors tend to drive value in every advisory business, including strategic and cultural fit, quality of the client base, recurring vs. non-recurring revenues, transition risk, goodwill (or enterprise value), and regulatory risk. Make sure you do your due diligence and assess these factors if you want to determine the true value of a target firm and prior to putting together your offer.
4. Pay Attention To Deal Structure
Every advisor spends much time focused on valuation and purchase price but relatively little on deal structure and how that purchase price is to be paid. While the purchase price is critical, it is very often the deal structure that determines whether a deal gets done. Most deal structures are comprised of three components: an initial (non-refundable) down payment, a financing repayment stream, and an adjustment to the purchase price if a minimum amount of assets fail to transition to the buyer. How these three elements are negotiated and structured will impact each parties’ perception as to the value of the deal, the buyer’s ability to pay for the deal and, therefore, whether a deal is made. It is also a key way for the parties to allocate risk in the transaction.
5. Create a Joint Transition Plan
Every acquisition will ultimately be judged by the amount of client assets that transition from seller to buyer. The key to every successful acquisition is a well-designed and robust transition plan that maps out the roles and responsibilities of both parties, a precise client segmentation and communication strategy, the role of staff members, and key integration milestones and timelines. The more detail, the better. Do not underestimate the value of a well thought out transition plan. It may be the most important thing that determines the overall success of an acquisition. Start discussing transition planning shortly after you have completed your due diligence and agreed on the price. Make sure you finalize your transition plan before entering into a purchase agreement. You want to ensure that you hit the ground running as soon as possible.
6. Consider Non-traditional Strategies
There are different acquisition strategies you can employ to achieve your goals and objectives. Too many advisors lock themselves into a particular way of thinking about how acquisitions are done. They tend to believe every acquisition results from knocking on the door of a 65 year-old advisor waiting to sell his or her business. This is not usually the case. Broaden your thinking to include non-traditional strategies that can create opportunities where none might have existed. If you have a strong business model and service platform in place, you are in a position to offer a potential seller something more than just a down payment and a promissory note. You can offer them continuity, a safe haven for themselves and a viable option for their clients, all of which are very much in demand in today’s market. Having an open mind can lead you down a different path but towards the same objective.
If you are considering acquiring a book of business and want to increase the likelihood of your success, make sure you incorporate these ideas as part of your acquisition process. They will be foundational to your success.
Afsar Shah, Business & Regulatory Coach at 10:53 AM
Here are 5 key business areas that every advisor must review as part of their acquisition due diligence process.
It is not an overstatement to say that due diligence, or the lack thereof, can ultimately define the success or failure of any business acquisition. Simply stated, due diligence is the process of investigating certain key aspects of a target firm’s business, including its finances, client base, operations, regulatory risk profile, technology and culture. Its primary purpose is to help the acquiring advisor answer 3 fundamental questions:
1. Should I buy?
2. If so, how much should I pay?
3. How should I structure the payment price?
One of the most frequently asked questions we hear from advisors is, “What areas of a target firm should I review and what questions should I ask?” Since most advisors are looking to acquire firms that are well managed, compliant and positioned for growth, here are 5 key business areas that every advisor must review as part of their acquisition due diligence process.
1. Strategic (or Cultural) Fit with Seller
One of the most overlooked aspects of any acquisition is the degree to which the acquiring advisor aligns with the seller’s values, business and investment philosophy, and commitment to client service. Generally speaking, the closer the fit, the greater the likelihood of a seamless transition of the business. Imagine the likelihood of success where two advisors have diametrically opposite views on issues such as the value of financial planning, investment philosophy, fee transparency, client service standards, etc. How easy do you think it will be for the buyer to retain clients used to and comfortable dealing with an advisor who has fundamentally different way of looking at these issues? We typically recommend to clients who are buyers that they first satisfy themselves as to the strategic fit and “chemistry” with the seller prior to moving forward in the transaction process.
2. The Target Firm’s Client Base
Buyers should then undertake a detailed review of the target firm’s client base to ensure alignment with their own “ideal client profile,” to understand potential growth opportunities, and to identify potential underlying risks to the business. Specific areas of inquiry should include:
The number of clients that have assets greater than $500K, between $250K and $500K, between $100 and $250K and less than $100K
The average asset value per client
Demographic split by age and gender
The percentage of assets in registered vs. non-registered accounts
Whether there are any product gaps that present growth opportunities
The number of clients that have a financial plan
The number of high-risk clients as well as high-risk product offerings
The target firm’s client base is the lifeblood of its business. Take the time to deeply understand its composition and the quality of the relationships with the seller.
3. The Target Firm’s Regulatory Risk Profile
Buyers should take a hard look at the target firm’s regulatory risk profile by asking, “Does the firm’s workflows, processes and procedures align with regulatory rules and expectations?” We recommend to clients that they select a random sample of the seller’s files and assess the following as part of their regulatory review:
The suitability of each client’s investment holdings
Any improper use of embedded commissions (i.e. instances of churning or use of DSC with elderly clients)
Instances of KYC uniformity across accounts
Sufficiency of notes in the file and instances of signed blank or altered forms
Any client complaints or regulatory sanctions
Whether the advisor has dealt appropriately with elderly clients
Instances of high-risk product offerings
Clearly, the greater the regulatory risk, the less valuable the target firm will be to a buyer. Reviewing the seller’s files from this perspective also gives the buyer a good sense of the seller’s approach and commitment to client care and service.
4. Operational Effectiveness
Buyers should examine the target firm’s operational effectiveness and efficiencies with respect to processing trades, client service, financial management and human resources. Consider the following:
Does the firm rely on one or more key individuals to get things done or is there a set of systems and clearly defined processes and procedures in place that are effective, reliable and scalable?
Has the firm invested in technology such as a CRM system that will make it easier for the buyer to seamlessly connect with and service clients?
Do team members have clearly defined roles, responsibilities and competitive compensation structure in place and a desire to continue to work with the buyer?
Firms that operate based on a system of best practices and procedures are much more valuable than those that do not.
5. Financial Health of the Firm
Buyers need to determine that a target firm is financially well managed and able to deliver stable, predictable cash flow. The higher the percentage of revenue that will continue after a deal closes, the better. Key areas to review include:
Revenue analysis over preceding 3 year period
Expense ratios including expenditures on team members, benefits, technology, rent, etc.
Annual budgets and monthly P&L statements
Whether there are any outstanding debts, taxes or other obligations owed by the seller’s corporation
How a firm manages its finances and profit margins will directly affect its perceived value to a buyer.
Our advice to clients is simply this: do not underestimate the value of due diligence. Most advisors fail to pay enough attention to this part of the acquisition process, which is unfortunate because it is only through rigorous due diligence that an advisor can truly understand the practice they are about to acquire and its true value. If you would like to speak to a coach about business acquisition, please connect at email@example.com.
Afsar Shah, Business & Regulatory Coach at 9:48 AM
Thinking of acquiring a book or exiting the business? Our Coach, Afsar Shah explains five things you can do to bridge the gap and minimize risk.
Over the next 12 to 24 months, we are likely to bear witness to a significant spike in demand for books of business and a resulting boom in acquisition activity. One of the most frequently asked questions I get from advisors who are considering an acquisition or sale is:
What steps do I need to take to ensure that I maximize value, minimize risk, and ensure the safety of clients and staff?
Where do I even start?
Advisor anxiety about this issue is legitimate; buying or selling a business is a complex initiative and is just as likely to fail as succeed. Moreover, the consequences of failure are considerable. You risk significantly diminishing not only the value of your business, but also your name, reputation, and life’s work. How can you avoid such a fate?
Click here for the five things you should do to achieve success in either a buy or a sale scenario. This article is published in the latest Forum Magazine.
Referral Arrangement Rules (Part 1): What You Need to Know
Earlier this year, when the Canadian Securities Administrators (CSA) delivered their long-awaited proposals regarding embedded commissions, they also published a proposed set of rule changes aimed at enhancing advisor and dealer obligations toward their clients (Client Focused Reforms).These Client Focused Reforms will no doubt significantly impact the economics of advisors’ business models and how they address key issues such as KYC, KYP, suitability and conflicts of interest, all of which we discussed in a previous article.
An area of particular interest and concern to many of our clients, however, were the proposed rule changes dealing with referral arrangements. Many advisors have arrangements with third parties either as a means of client acquisition or to provide their clients with services that they are not authorized to perform. For example, it’s very common for an MFDA advisor to have an arrangement with another professional services firm (i.e. an accounting firm) for purposes of client acquisition. They may also have arrangements with either an investment counsel or brokerage firm for certain high net worth clients who want either products or services that the MFDA advisor is not licensed to provide. The Client Focused Reforms will impact each of these relationships.
The Big Picture: Regulators are proposing major changes to rules governing how financial advisors and dealers deal with referral arrangements. Referral arrangements will be permitted but only if advisors comply with specific requirements.
Here are five key takeaways from the CSA’s proposals:
1. A Referral Fee must not:
Continue for longer than 36 months;
Constitute a series of payments that together exceed 25% of the fees or commissions collected from the client;
Increase the amount of fees or commissions that a client would otherwise pay for the same product or service.
2. Advisors cannot pay a Referral Fee unless:
The recipient of the fee is a registered individual or firm;
The terms of the referral arrangement have been set out in writing between the registered firm (i.e. dealer) and the other party. The advisor may (but need not) be a party to the agreement.
The dealer keeps a record of all referral fees; and
The client receives in writing and understands the terms of the referral agreement.
3. The definition of what constitutes a referral arrangement goes beyond that of providing financial products and services. It also includes client names and information.
4. The regulators view all referral arrangements as a conflict of interest that must be resolved in favor of the client.
5. The rules governing referral relationships will come into effect immediately once the Client Focused Reforms come into force. Advisors will have 3 years to bring pre-existing arrangements into conformity.
Why This Matters: The proposed new requirements will significantly increase the risk, cost and administrative complexity of referral arrangements for both advisors and dealers. They will certainly alter how advisors process, administer, and evaluate any current and future referral relationship.
Check out Part 2 of our article to learn more about what you can do to get ahead of these changes to ensure that your referral arrangements comply with regulatory requirements.
Referral Arrangement Rules (Part 2): Take Action Now
In part one of our Referral Arrangement article, we discussed what advisors need to know about the regulatory changes regarding their referral arrangements. In this article, we will discuss what to do about these upcoming changes.
Why This Matters: The proposed new requirements will significantly increase the risk, cost and administrative complexity of referral arrangements for both advisors and dealers. They will certainly alter how advisors process, administer, and evaluate any current and future referral relationship given that:
Advisors will need to obtain dealer consent prior to entering into any referral arrangement;
Advisors will need to demonstrate in writing that a referral arrangement is in the client’s best interest;
The economic benefits to an advisor of a referral arrangement may no longer justify the additional administrative costs, requirements and risk;
Certain book acquisitions may be deemed a ‘referral relationship’ unless properly structured and documented;
Any violation of the proposed new rules can result in serious financial penalties.
The Bottom Line: All advisors should review their current (and future) referral relationships to make sure they align with the proposed new requirements and still make economic sense. Here are the impacts of the CSA’s proposals as they relate to referral relationships:
There will be increased and on-going regulatory scrutiny around referral relationships, particularly with respect to fees, duration, the client interest and disclosure;
Referral arrangements will still be permitted but only if certain requirements are met;
The fees associated with a referral arrangement will be capped and the duration limited;
All permitted referral arrangements will have to be documented in writing, approved of by your dealer, and disclosed in writing to your client;
The proposed changes will likely reduce the economic value of all referral arrangements.
Take Action: Advisors have a window of opportunity to get ahead of these changes and ensure that their referral arrangements comply with regulatory requirements. Here are a few suggestions as to what your action plan should include:
1. Education & Training – learn more about the proposed rules and how they might affect your business model. Understanding the new requirements is key if you wish to continue to enter into these kinds of relationships and keep regulators and compliance at bay.
2. Identify Your Existing Referral Arrangements – create an inventory of all the referral arrangements that you currently have in place.
3. Conduct an Assessment – do your existing referral arrangements comply with the proposed new requirements? Do the fees fit the new criteria? Did you document the terms of each referral arrangement in writing? Do you have a written record of all fees paid or collected? Did you document that your client understood the terms of the referral arrangement and that it was in their best interest?
4. Re-evaluateTheir Economic Value – do each of your referral arrangements still make economic sense given the increased costs and risk?
5. Talk to Your Dealer – start working with your Dealer to bring your referral arrangements into conformity with the proposed new changes. What will they be looking for from you?
6. Review your Process for Future Referral Arrangements – make sure you have a playbook in place that ensures your future referral arrangements comply with the new requirements and make economic sense.
The Personal Coach Can Help: To learn more about the CSA proposed policy changes and to help you develop your readiness game plan, contact The Personal Coach. Our extraordinary team of coaches and consultants has extensive experience working with advisors to develop customized strategies and plans to help you drive results and reach your strategic and financial objectives. Happy planning!
Afsar Shah, BA, LLB.
Business & Regulatory Coach
Get in touch
Afsar Shah, Business & Regulatory Coach at 12:48 PM