Young advisors seeking to acquire a book of business are usually told it’s a sellers’ market, but Peter Bailey of Worldsource Financial Management disagrees. With two deals in quick succession, and a third soon to close, Bailey increased his assets under management from $30 million to $100 million in just a few years. Can you do the same?
Coming from a dot-com background, Peter Bailey had the time and the money to develop a business-growth strategy before entering the industry at the age of 38. Surveying the landscape, he noticed that most Ontario advisors were nearing retirement. While proficient at helping others plan their retirements, it seemed to Bailey that many advisors were less prepared for their owng golden years than most skilled tradesmen.
"I was working part-time in construction, and noticed that carpenters and bricklayers and electricians all had apprentices and spent time teaching young guys how to do what they did," says Bailey. "I saw that these outgoing advisors would have to transfer their business to someone, and that they would need to transfer the goodwill to someone. So it may well be me."
From day one, Bailey believed that an apprenticeship that led eventually to him becoming a junior partner in a succession plan was the best route to success – and he eventually would serve in a five-year apprenticeship before taking over the book. To find a partner, he started by going to industry events and approaching advisors with a somewhat blunt elevator pitch.
“I started by speaking to the grey hairs and asking these 64-year-old advisors what they planned to do for an exit. Most of them said ‘I don’t really have one yet’ and my response was ‘well you’d better because your clients are planning one for you,’” says Bailey. “They would ask ‘what do you mean?’ and I would tell them: ‘No offense Mr. Advisor but your clients know that you are turning 65 and that you are not going to work forever, so they are looking for a new advisor who is my age right now.’”
Bailey also notes that a sale can have advantages from a tax planning perspective. “Whatever money they are earning they’re still paying 46 per cent tax on, but if they did a sale with the capital-gains exemption they would pay no tax.”
Nevertheless, Bailey notes that his blunt pitch is only the start of a longer process of relationship building.
“You can’t just walk up to them and say ‘hey, I’m Joe Smith and I want to buy your business.’ You have to get to know them and you have to play golf with them,” said Bailey. “The number one thing for these senior advisors is that they care about their clients and they want to make sure that they are passing a book along to someone who takes care of their clients as well as they have been taken care of by the senior advisor.”
Very early in the process, Bailey learned that buying a book from one of the big-six bank affiliated houses would be a near impossible task for an independent outsider.
The banks “own the business and they dictate from a branch manager standpoint, and there’s also a lot of politics involved over who ‘owns’ the relationship with the clients,” said Bailey. “I went down that path with a couple of people for a short period of time – and they had large, large books – but I figured out right away that it wasn’t going to work because they didn’t have the autonomy over their business that an independent advisor has.”
Although Bailey found himself essentially lockedout of the bank channels, for advisors within the bank networks looking to buy a book it is an area where they will have an advantage – although even an internally brokered in-house purchase would likely be highly competitive, with multiple bids.
“The big-five have a plan for advisors to sell their books internally,” says Bailey. “If they did try to sell to an independent the brokerage would have 25 (internal bidders) all over those accounts to keep them at TD or RBC, for example.”
By approaching independent brokers, Bailey was able to talk directly to advisors who control their own business and avoid the tight control banks have over transition processes.
One trick in entering a purchase agreement is getting the right price, as the formula for valuing a book can vary widely depending on the nature of the business.
“On the valuation side, basically the ‘street value’ is anywhere from two to three times trailer and/or recurring revenue, or it could be based on free cash flow, there are so many different ways to value a business,” says Bailey. “From an assets-undermanagement per-client standpoint, if someone has $10 million dollars but has 1,000 clients, that’s obviously not a good book to buy because that’s a lot of work; but if you have a $30 million book that has 50 clients, that’s an almost $450,000-per-client book. That’s obviously more lucrative.”
Valuation may also depends on whether the advisor works with 20 fund companies as opposed to five, he notes, whether they use 25 funds versus 125, whether they have an office with staff or work from home.
“A lot of the valuation depends on whether a person is incorporated or not,” Bailey says. “If you are buying from someone who has incorporated, there is a lot more risk to deal with, there is more costs due to the amalgamation of corporations and all of that. For an asset sale alone, you will pay more but it is an easier transition.”
MANAGING A TRANSITION
“You have to go slow and steady. The junior advisor has to have a relationship with the senior advisor, and they both have to have an understanding about what they are going to do and what is the purpose of the relationship. Once you get that down, it’s more about having the junior advisor around to meet clients with the senior advisor, the senior advisor sending out communication telling clients ‘I’ve brought a junior advisor in because I want to raise the level of service for your account as I’m may be working less because I’m getting older.’ Basically it’s coaching the clients and telling them that ‘as a senior advisor I’m doing this for you, so that you are not left high and dry when I eventually retire.’”
Bailey says the succession process should allow the senior advisor to ease into retirement at his or her own pace. “You have to be patient and respectful. I think that a mistake that many young advisors make when they buy a book is they try to get the senior advisor out of the way as quickly as possible. But these guys have an emotional attachment to their clients so you can’t do that, it won’t work that way and you won’t get the deal done.”
Nevertheless, the junior advisor will need to clearly lay out the process, and put his or her foot down if needed.
“A purchase-and-sale agreement needs to be drawn up and this is also a costly document – sometimes you can get it from a dealership but mine is really particular, and the purchase-and-sale lays what the process of exit is going to be, what the involvement of the outgoing advisor is going to be, how many meetings there will be per year per client, how much work the outgoing advisor will be required to do, how involved they’ll be, who’ll make decisions regarding the clients’ investments.
“As the incoming guy, you really need to keep the outgoing guy in check, because as soon as the transaction goes through you’re the owner. They are not the owner anymore, their job is to assist with the transition and pass on the goodwill from his clients to you. Sometimes the outgoing advisor will have trouble abandoning the driver’s seat, so you really need to have a legal agreement so when the time comes if you need to you can put your foot down and say: ‘It’s great that you sold me your book, and we’ve got a great relationship, but we have to do things my way as per the agreement or things are not going to work.’”
A COMING BUYERS’ MARKET?
Bailey has other deals in the works that could put him within his $250 million goal within a few years. And he sees even more acquisitions in the future as some events may make it a buyers’ market.
For starters, the average age of advisors in Canada is around 58, according to Advocis
, which means that the demographic clock is ticking for many advisors. The other big event is a significant regulatory change coming on July 15, 2016.
“We all know what’s happening that day. It’s a bill called 31-103 for the MFDA and for IRROC, and there is going to be full disclosure of fees to clients on that day,” says Bailey. “If you have a $500,000 client who you see once a year or talk to once on the phone, their statement is going to show in writing that the client paid you $5,000 that year for the one meeting or call. What that’s going to do for advisors who don’t disclose what they make, over the next three years, is that they will lose business hand over fist.
“Clients will say: ‘Wow, I don’t understand what you do for me for the money that I pay.’ When they see these large amounts of money on their statements, for guys like me who want to buy books it’s going to be like drinking water from a firehose.”
Bailey believes that this, along with demographics, will change the landscape into a buyers’ market. “The prices are going to come down, it’s not going to be two times trailers it’s going to be one times trailers and we’re going to show we’re a different type of advisor,” he said. “I can’t wait for that to happen. If you ask nine out of 10 guys, they are just dreading it, but I can’t wait.”
And here’s his tip for senior advisors who haven’t started succession planning: Start.
Peter Bailey Worldsource Financial Management Inc.