Executive summary

Every entrepreneur wants to grow his or her business. The financial services sector is no exception. Right now, we’re in a favorable economic climate. On the one hand, many advisors are approaching retirement age and want to sell off their block of business; on the other, financing is available for acquisitions.

But watch out for pitfalls!

Potential buyers run the risk of buying a block of business for the wrong reasons.

Before entering the acquisition process, you need to ask yourself four questions.

If you decide to go ahead, you need to engage in a rigorous acquisition process. Don’t be seduced without doing your homework.

You wouldn’t buy a house without the support of an expert. Then do it for the acquisition of a block of business, contact us to represent you:

www.queenston.net

204-889-1189

Growth and acquisitions

Every company, no matter how big or small, wants to grow in the short, medium or long term. The financial world is no exception.

The growth of a financial block

There are three ways to grow a financial block.

1- Internal growth: you rely solely on your existing customer base to ensure sales growth.

• New sales (insurance and/or investments)
• Growth in assets under management during periods of market growth.
• Referrals from current customers

This approach generally ensures steady but modest growth.

2- Active growth: in addition to relying on internal growth, some advisors actively seek  new customers.

• “Cold call”
• Participation in organizations such as chambers of commerce, charities, etc.
• Telemarketing outsourcing, etc…

3- Growth through acquisition: this type of growth aims to significantly and rapidly increase a company’s turnover. There are risks and benefits involved, which we’d like to discuss in this text.

Two phenomena are driving a wave of acquisitions in this sector. First, the aging of financial advisors who want to retire or semi-retire. Secondly, the concentration of mutual fund brokers, such as Investia, Assante and Raymond James, who are willing to facilitate the retention of blocks within their organization. In economic terms: the barriers to entry are low.

Three worst reasons to buy a block of business:

Buying a block of business in the financial sector is becoming disconcertingly easy, as supply and demand grow almost daily. But beware of the pitfalls that await you. Here are the three worst reasons to buy a block of business.

1 – Find a new niche in the market.

As if Coke began producing Palmolive soap! Above all, don’t laugh. As a financial advisor, you can’t effectively serve just any client. The proof: you don’t. Resist the temptation to spread yourself too thin. Instead, buy a clientele that complements the one you already have.

A:     “Listen, Martin Luc, I can buy a clientele of doctors, and the current consultant will help me’’.

Q.:    He’s been serving this clientele for 30 years. “He knows his stuff”, not you.

Instead, look for a clientele similar to your own! It’s a win-win situation!

2 – Buying customers to save your sinking ship

Has your block of business taken a beating because of the ups and downs of the markets? Acquiring a new block isn’t the way to rectify the situation. First, work on getting your practice back on track. Then you’ll think about acquiring. And don’t worry, there will always be good opportunities on the acquisition market.

3 – Looking for a shortcut to higher profits?

Don’t buy a new block of business. Work on your current one. Your company’s profits won’t magically increase by acquiring a new block. You’ll have to work hard, and probably for a few years, before seeing profits materialize.

The cost of acquisition is likely to eat into your profits in the first two or three years.

As you can probably realize, you don’t fall into any of these categories! Let’s continue our journey.

The four killer questions!

Increasing assets under management is not a sprint, it’s a marathon.

Remember that most advisors consider their customers to be family. You must first demonstrate that you will take care of them as they have done. Forget the rest, it doesn’t count at first.

Before you begin any acquisition process, ask yourself the following questions.

1 – Can you acquire a new clientele?

The acquisition will require you to set aside a large part of your existing clientele to concentrate on the new one. Will your support staff be able to handle them adequately?                     

Do the files of this new clientele rest in 22 filing cabinets or in the cloud? If the first case, will you need to move to larger offices?

“I can recruit some of the vendor’s support staff”. Where will you accommodate them?

The killer question: “Will your current situation cause you to lose some of these new customers while alienating your existing ones? The new office space, did you consider this cost addition in your financial projections?

2 – Who are my current customers?

How well do you know your core customers, representing your financial practice? Why do they do business with you? Your strengths that they appreciate. Will you be able to promote them to new customers? What kind of customers do you most enjoy working with?

The killer question: do you see yourself as a chameleon who can adapt to any type of customer?

3 – Who will finance your acquisition?

Have you analyzed the cash flow required for this acquisition? On what factors does the support of the financial institution that will lend you the money depend?

The killer question: have you done your homework?

4 – What is this block of business really worth?

Think outside the “x times revenues” paradigm. Is this an elderly clientele that is making substantial annual withdrawals? Will you be able to recover the assets when the majority of customers die?

The paradigm is that a clientele is worth between 3 and 5 times the revenues generated over the last 12 months. Remember, this is a paradigm, not a rule.

The killer question: are you able to establish the real price of the clientele you intend to acquire, and especially the future cash flows?