Richard Fogg is President of Pacific Coast Financial Planning Group, an Ameriprise Advisor firm. In his 20 years of experience in the financial services industry, Richard has purchased four distinct financial advisor client books – and has even sold a portion of his own client book as well. In my interview with Fogg, I learned some of his best practices when purchasing a book of business from a retiring financial advisor.
Service Model Fit
To use his words, Fogg suggests prolonging the “dating process” with the selling advisor. Said another way, take your time to determine if the book of business being sold is a good fit for your business.
One important consideration is service model fit. Does the way the selling advisor serve clients the same way you serve your clients? For example, if the book for sale has clients who expect – and are accustomed to – quarterly investment performance reviews, will your service model of meeting with clients once a year work? And, if you focus on financial planning (with investment management taking a back seat) – then serious consideration may need to be made as to whether you can re-train these potential clients. If so, you will need to reset new your client’s expectations. Whatsmore, if your firm is excited about and is eager to do financial planning for clients (as we are at Define Financial) and the clients of the book to be acquired don’t even know what financial planning is, you may have a challenge ahead of you.
Service model fit requires serious consideration, says Fogg, because you simply do not want to adopt someone else’s client service model. And of course, this makes sense. Any well-run financial planning practice will have previously-established (and hopefully well-run) processes and procedures in place. Having a consistent way of doing things creates not just firm efficiency, but enterprise value (as at least that’s the case made my Dave Grau of FP Transitions) . Adding an entirely new and different service model for a whole group of clients can completely derail firm efficiency.
Client Book Transition Timeline
Fogg shared that a typical timeline for bringing on a new book of business can run between 18 and 24 months. The first three to six months serve as a time for the acquiring firm to get to know their new clients. During this time, assets begin to move over to the acquiring firm. Ideally, the exiting advisor (the advisor retiring and selling his/her book of business) completes all their responsibilities within these first three to six months. Typically, after a maximum of nine months, the exiting advisor is no longer involved in the client transition process, says Fogg. Fogg’s timeline of nine months if literally half of Ian Kutner’s timeline – as shared in another interview. Kutner shared that he was client-facing for as long as 18 months. However, Ian’s book was a massive 150 clients relative to Fogg’s book acquisitions. For the client books purchased by Fogg, the client count ran between 20 and 60 households per book acquired.
Depending upon where the new clients are custodianed will dictate just how long it can take for assets to get in the door. For scenarios like Fogg or that of Ian Kutner, having assets custodied at the same broker/dealer is an advantage. For Fogg, assets can be moved over the in first week if custodied at the same broker/dealer as Fogg. Re-papering accounts across custodians can take more time.
Transitioning Portfolios & Investment Philosophy Fit
The next six months in the client transition timeline is where Fogg evaluates the existing investment assets of his new clients. Fogg’s goal is to align existing investments with his firm’s model portfolios. To accomplish this, Fogg does not sell everything. If there are significant capital gains involved, Fogg’s approach is to execute portfolio changes over several years. Sometimes this transition can take as long as five years. In the end, Fogg won’t adopt a new investment strategy to onboard clients – but will take his time transitioning the legacy positions to his investment model. (Prolonging the dating process with the retiring advisor, as mentioned earlier, provides an ample opportunity to review investment portfolio holdings.)
The final six months of the client transition timeline serve as a time for setting client expectations.
Exiting Advisor Retirement Party
Perhaps the most interesting practice shared by Fogg is that of a retirement party. This happens at around the three-month mark. The task involves inviting the retiring advisor’s now-former clients and your own’s firm staff. The retirement party for the exiting advisor will give closure to all parties involved. It will also allow the retiring advisor and that retiring advisor’s former clients a chance to thank each other. The party will allow your newly-acquired clients another chance to get to know their new advisors (i.e. you and your team) better.
I can’t say enough how much I love this idea. There is something about the definitiveness of event that is simply appealing. In a single evening, the generational transfer occurs. Ah, closure!
Selling Parts of Your Client Book
Ian Kutner’s mostly-transactional book was composed of roughly five hundred clients. Only roughly 150 of those clients made for a good fit as new clients of the acquiring financial planning firm. (This is because many of Ian’s old clients did not generate sufficient revenue to support a financial planning service model.) Given an AUM billing model, it was only profitable to offer financial planning to highest revenue-producing clients. As such, most of the clients in Ian Kutner’s old book of business were sold again from the initial advisor buying Ian’s book to yet another advisor.
Richard Fogg has made the same move – selling unprofitable clients (for his firm) to another junior advisor. And while Fogg has done just this, he also offers an alternative: keep the less profitable clients on hand, assigning them to junior planners within your own firm. Fogg champions this idea because it gives his firm’s younger planners a chance to learn. Moreover, any mistakes made by junior planners may be less impactful. That’s because there are less dollars on the line given relatively smaller account sizes. Moreover, it’s easier for a junior planner to learn on simpler client scenarios, relative to a client with a more complex financial plan. Fogg emphasizes that he still oversees the process and has the employee stick to firm practices and procedures.
Sale Terms for Buying a Financial Advisor’s Book of Business
Given that Fogg has purchased four distinct books of business (including one book that was of 1/3 the size of his own financial planning firm), the terms for each book of business purchased have varied. However, there were some common themes among the payment terms, including a 70% or 80% down payment, and a five-year note for the balance owed. To finance these acquisitions, Fogg used Live Oak Bank.
The down payment figure of 70% was so striking that I must come back to it. This is especially the case when you consider that is more than twice Ian Kutner’s experience (30% down payment) and much higher than the average of 10% – 40% cited by David Grau of FP Transitions on his book on buying and selling financial planning practices. Moreover, Grau makes the case that smaller books – i.e. those where there isn’t even sufficient revenue for an administrator to support the advisor – command an even smaller down payment!
Given the down payment size, no payments on the noted owed are made during the first year. It is only after 365 days that the note payments begin. At that point, the book sold is evaluated for client retention (i.e what percent of transitions clients have dropped off) and the balance of the note is decreased, adjusting for any clients that didn’t transition to Fogg. A similar arrangement was constructed with Ian Kutner. Kutner received 30%, interest only for the year on the noted owed, and the interest and principal notes payments after the first year.
For Fogg, he finds an average 2.3 to 3.0 multiple on recurring revenue. Even though Fogg has purchased four books of business, he’s considered a total of eight. This means that’s Fogg walked away from four potential acquisitions. For him, the price wasn’t right. Fogg urges those advisors looking to buy a business to walk away from a book if the price is too high. He adds that emotions should be taken out of the picture. Look at the data of the business you are looking to acquire, says Fogg, and make a decision with that data.
Earlier, Fogg made the comment regarding prolonging the dating process. Doing enables the potential acquirer to double check the validity of revenue, etc., to preclude front loading of commissions, etc.
Biggest Takeaways from Richard Fogg on Buying a Financial Planning Practice
My favorite practice shared by Fogg was the exiting advisor retirement party. That will be a mandatory part of our process as we acquire client books for Define Financial. The other thing that truly stuck out was the size of the down payment used by Fogg. As I interview more advisors who have purchased entire books of businesses, I hope to learn how much an outlier Fogg’s large down payment is.
Lastly, I return to Fogg’s comment about taking emotion out of the picture when assessing potential acquisitions. For a younger advisor (such as yours truly) who is excited about further growing a business by purchasing an acquisition, removing the emotional factors can be hard. It is simply exciting to think about getting to grow a business, and generating more firm revenue, and getting to help more people.