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 Firm 1.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 Agreement 3.Setting Timelines & Training 4.Client Identification 5.The Segue Process 6.Compensation During Segue 7.Valuation of the Client Base 8.Legal and Tax Considerations 9.Documentation 10.Buy / Sell Considerations 11.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 3 rd Party Financing

If 3 rd 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?