If buying a book of business from retiring advisor interests you, know that there are many stages in the Exit planning process:
- Prospecting for your target acquisition (i.e. go find an advisor looking to retire!)
- Agreeing to the terms of the sale structure
- Executing the terms of the deal (i.e. bringing the new clients into your practice)
- Sailing off into the sunset, but not before preparing your own succession plan 30 years down the road
For today’s post, we’ll be discussing both the first and the third bullets above.
Bullet Point One: We’ve already heard from John Turner on what a buyer needs to do to become a viable candidate to purchase a business from a soon-to-be-retiring advisor. But how does a buyer screen for the best books to buy?
Bullet Point Three: You’ve found a soon-to-be-retiring advisor and the Exit plan terms have been agreed to. The deal is signed. How do you execute the Exit plan that you’ve worked so hard to create?
To answer these questions, I spoke with a junior financial planner (on the condition of anonymity) at a San Diego financial planning firm. This particular San Diego financial planning firm has already acquired multiples books of business from other retiring advisors. Here’s what this junior planner shared about his experience executing the Exit planning process.
Finding the Right Retiring Advisor
How do you find the right retiring advisor? In addition to the usual considerations (such as investment philosophy fit), consider that there are a few criteria that – if a match between the retiring advisor and your own firm occurs – will not only work well for you as the acquiring advisor, but for your supporting staff as well.
In a perfect world, you would find a retiring advisor who engages with their clients the same way you do. If you’re a fee-only advisor pledged as a fiduciary, dedicated to low-cost investing, you’ll want to find those same characteristics in a retiring advisor. However, finding such a match is likely difficult.
Commissioned vs. Fee-Based
When there are differences between the two firms, a (possibly rewarding) challenge presents itself. The junior planner interviewee shared a case study at their own firm. Recently, a retiring advisor sold his book to the junior planner’s firm. The retiring advisor did numerous one-time, commissioned business. This meant stock broking, UITs, and non-Traded REITs. Transitioning new client accounts from commissioned products to a fee-based model was a daunting task for the acquiring firm. But, it was also a big opportunity to convert those commissioned accounts into fee-only investment portfolios, generating much more valuable recurring revenue.
Purchasing a book of business where the assets held by the clients are not ideal may result in paying less for that particular book. Such a process – buying up books with clients holding commissioned products – can be very profitable for that reason. Said another way, you can buy a book of business at a severe discount if the assets within that book aren’t managed money. You can then turn that book into managed money!
Technology
Lastly, the issue of technology fit often presents a challenge. Ideally, both the retiring advisor and the acquiring firm will be utilizing the same software. However, with so many different technology options available, that is highly unlikely. For this particular case study, the retiring advisor was using a near-extinct technology platform: DBCams. (I hadn’t even heard of DBCams before this interview.) Transitioning data from DBCams to Redtail was a reported challenge. Data did not seamlessly transfer into the new CRM software, resulting in some manual data clean-up on the acquiring firm’s side.
The Client Transition Process
For this San Diego-based financial planning firm, the on-boarding process for the acquired clients was as follows. Over the first 18 months, a transitioning client and the acquiring advisor met several times. Those meetings each had distinct agendas.
Introduction Meeting
The first meeting occurred between two to six weeks after the book of business was sold. Preparation for each meeting began roughly two weeks ahead of time.
At the first meeting, both the retiring advisor and acquiring advisor attended. The goal of this meeting was to set expectations for the transitioning clients. To do this, the firm explained its new client onboarding process. (You’ll want a document that lays out what the process looks like, advises the junior planner interviewed for this story.) Additionally, the retiring advisor discussed why he was exiting the business and why the advisor chose the acquiring firm.
Investment Review Meeting
The acquiring firm reviewed transitioning client’s investment holdings to determine how existing investments could be modified to fit within the investment philosophy of the acquiring firm.
Recommendations Meeting
At this point in the process, the client may be on board and in agreement with being moved over to the acquiring firm as its new client. However, this may not always be the case, with some clients opting out of the transition. After all, humans being are often reluctant to change.
Managing the Exit Planning Process
Sometimes, clients resisting change may simply need more time. One solution, suggests the junior planner, is a slow transition of the portfolio over time. A three-year transition may be more appropriate if meetings are infrequent. Of course, three years is uncommon. (As mentioned, the process for this particular San Diego financial planning firm typically takes 18 months.)
In a succession plan, a few clients simply do not make the transition to the acquiring firm. The junior planner highly recommended having a solution for these non-transitional clients already lined up. A different advisor, for example, may prove to be a better fit.
From an operations standpoint, the client transition process brings with it a lot of work and a lot of risk with existing clients, shares our associate planner. Getting the transition process dialed in is a lot of work. As a natural consequence, existing clients may receive less service during this process, cautions the associate planner. However, take the above remark with a grain of a salt. This particular San Diego wealth management firm chooses to meet with existing clients three times a year! This meeting frequency is more akin to an investment management firm (where portfolios are looked at too frequently) rather than a financial planning firm (which may only review a client’s financial plan annually).
The challenge comes in attempting to execute these numerous meetings. Therefore, it’s important to make sure that you have the capacity to transition the new book and service the existing clients sufficiently, advises the junior planner.
Role of the Retiring Advisor
In this Exit planning case study, the retiring advisor committed to transitioning clients from his book of business to the acquiring firm over the course of 18 months. Our junior planner makes a point that the more involved the outgoing advisor is in this process, the better.
In this example, the retiring advisor participated in almost every meeting with the transitioning clients. The exception was if a client had a transactional-only relationship with the retiring advisor, with the retiring advisor acting more in the role of a broker than an advisor.
Organizing Your Firm for a Succesful Acquisition
The acquiring financial planning firm had a well-delineated system of delegating responsibilities to different parties. This structure is a modification of Angie Herbers’s diamond team philosophy. This team structure created success for the acquiring firm.
Two supporting associate advisors support the lead advisor. The lead advisor only meets with “A” level clients. All clients get to meet with an associate advisor.
An administrative assistant executes all data entry, even dabbling in some light paraplanner duties. Our associate advisor strongly stressed the value of having an administrative assistant:
“Getting an admin is the biggest thing you can do to take your business to your next level. Building a team is the only way you can take the business where you want to go.”
Given the small size of this San Diego financial planning firm, our associate advisor initially doubled as a Human Resources representative in the firm’s early days. He had a big part in putting the above team together, and shares some takeaways from his experience.
A big takeaway is that you need to look at your employee compensation plan. Like most things in life (except investing), when it comes to hiring individuals, you are going to get what you pay for. What you offer in terms of pay and benefits determines what skillset you are going to attract.
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I hope you learned something from this case study of a San Diego financial planning firm – and how they have succeeded in executing multiple exit plans. Stay tuned for future posts for shared best practices on Exit planning.
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