Rogers Group Financial Advisors Ltd Rogers Group Investment Advisors Ltd, Member CIPF

Succession Planning for the Financial Advisory

Practice (Everything you wanted to know but were afraid to ask)

Banff School 2006

Presented By:

David Chalmers, BA FLMI CLU CFP RFP ChFC

(The “Somewhat Old Guy”)

Dylan Reece, DiplT CFP CLU(The “Young Whippersnapper”)

AGENDA

• Why Succession Planning?

• RGF’s Succession Infrastructure

• Recent Succession Initiatives

• Elements of a Successful Succession Plan

Why Succession Planning? (We’ll try not to bore you with the stats, however…)

•Baby boomers retiring•A change in organized recruiting•Lack of succession infrastructure•The value of asset and fee based practices

•Clients need advice and care for life

RGF’s Succession Infrastructure

• Rogers Group Financial (RGF) Formed in 1973

• Similar to Accounting / Law Firm1. Articling Advisor (0)2. Associate Advisor (5)3. Financial Advisor (“Partner”) (14)

• Facilitate succession of retiring “external” advisors

Recent Industry Succession Initiatives

• Advocis Career Center (prev. “RAMS”)– Information / on-line tools– Liaison with educational institutions– Web based “dating service”

• Succession planning resources from insurance companies and MGA’s

• Seminars / Presentations

• Books on buying and selling an advisory practice

Recent Industry Succession Initiatives

Elements of a Successful Succession Plan

1. Selecting a Mentor / Successor

2. Principle Agreement3. Setting Timelines &

Training 4. Client Identification5. The Segue Process6. Compensation

During Segue

7. Valuation of the Client Base

8. Legal and Tax Considerations

9. Documentation10.Buy / Sell

Considerations11.Financing

Arrangements

Selecting a Mentor / Successor

• Mentor …possibly looking at retirement or semi-retirement.

• Ideally, mentor has capacity to refer/transfer clients)

• Mentor should have ability and patience to train a successor.

• Successor.. From your firm ? Industry contacts? Schools ?

• Selection tools / testing• Attributes: … Hardworking,

Trustworthy, Motivated, Personable.• Willing to learn.. Patient• Will your clients like and trust this

individual ?

Principle Agreement

• Is Successor a potential business owner?

• Agreement in principle …business valuation.

• Termination of relationship : Client Ownership… Non compete

• Death, Disability• Mentor / Advisor sourced clients

• How will Successor be compensated?• Who pays for infrastructure ?• Who pays for Successor expenses

such as education or entertainment ?• How much autonomy is given to

Successor?• Holidays / Work Hours

Setting Timelines & Training

• The Client Service / General Learning phase. Formal and “on the job” training

• Acting as a Quasi-Advisor• Advisory responsibility for a group

of clients…but no ownership.• Transfer of ownership

Client Identification

• Which clients will the Successor… provide service to … manage…buy ?

• Factors include : Age, Relationship, Complexity, Assets ( potential) Revenue ( potential)

• Probably…generally “smaller clients”• A fair distribution of quality

The Segue Process

• We use an XLS spreadsheet that identifies the 3 phases of segue process ( potential, in process, complete)… assets … revenue

• Introduce in client meeting… (choose words carefully…position as a positive change) … let Successor “carry the ball”

• Possible “pre-approach letter”

• Look for feedback from clients on segue progress ( formal or informal)

• Don’t expect 100% success…many clients don’t like change

• Successor must acknowledge and accept occasional resistance

• Be prepared to re-think strategy

Compensation During Segue

• Flat salary ? • Salary plus bonus?• Formula- Based ? ( minimum

guarantee?)• Recognition of “Successor sourced

clients”• Lump sum vs. asset based

compensation

Valuation of the Client Base

• There are various theories about the value of a client or a practice

• We favour a valuation factor based on sustainable revenue

• The “Owner’s Premium” / ( fairly high) return on investment approach

• Mentor and Successor must agree in principle

• Recognition of Successor sourced clients

• Price Adjustment if the adopted approach is unfair ( to either party) in hindsight

Legal and Tax Considerations

• Purchase of Clients vs. Shares• Who assumes liability ?• Independent Tax and Accounting

advice• What constraints does dealer, MGA

or other intermediary place on transfer of clients ?

Documentation

• Who will draw up documentation ?• Are sample agreements available ?

(suppliers… Advocis)• Arbitration• Recourse in the event of dispute

Buy / Sell Considerations

• Death / Disability and Retirement (we should practice what we preach)

• On “sale date”… determination of “The Number”

Financing Arrangements

• “ Earn Out” or “Buy Out” ?• Earn Out …. Percentage of revenue? How

much? How Long?• Buy Out …. A price needs to be set

(“The Number”)• Does Successor have the cash ?

(not likely)• Vendor Financing or 3rd Party Financing

• If 3rd Party Financing…does Vendor co-sign or guarantee loan ?

• If Vendor is “on the hook” is transaction a “Sale” or “Agreement for Sale”?

• Default / recovery provisions• Editorial Comment : The Presenter’s

two previous sales have gone very smoothly

Summary

The process of finding a Mentor or Successor

(training, client selection and segue , transfer of responsibilities, sale and documentation)

is a complex one. The end results can be beneficial for

the Mentor, the Successor and…. most important of all :

Our Clients

Thank you!

Questions?