How To Get The Greatest Payout On Your Book Of Business While Leaving Clients In Good Hands

In this thought piece, I want to address a topic that I know is quite concerning to mature financial advisors. At some point, whether we want to or not, we will have to stop serving clients. A few financial advisors I’ve worked with over the years plan to die at their desk, as the saying goes. But most of us want to exit the industry and our practices in a way that serves our needs well and that also takes care of clients.

This is especially true for mature advisors who’ve spent decades taking care of clients and their families. In some instances, financial advisors have built relationships with two or more generations of the same family. They may have started serving a couple when they were young, watched their family grow, then began serving their children as young adults and now are watching those children have families too. In these situations, the clients feel like family. You really care about them. So how that family is served, once you’re no longer serving them, matters a lot.

But these advisors also have needs themselves. They often have a spouse, children, grandchildren, beloved extended family and even charities that they’d like to support. This means that getting the best possible payout on their book of business is really important to them too. But here’s the kicker. Many financial advisors suspect that organizations who specialize in buying books of business don’t really specialize in serving those clients after the transaction. This is a real conundrum. How do you get a payout on your book that will support your dreams while also ensuring clients are served well?

Here are six ideas I think can really help:

1. Define how much money you’d like to see from your book.
2. Get an independent, third-party appraisal of your book.
3. Balance client disposition with your economic imperatives.
4. Review your options: third-party, in-house, join a new company.
5. Get good advice from people you trust.
6. Build your plan and execute it.

Let’s examine these ideas in greater detail.

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Define How Much Money You’ll Need

As a financial planner, I like to start with the end in mind. I believe it’s advisable to establish a minimum threshold for a liquidity event of this nature. I also counsel people to create three scenarios:

1. Minimum – this is the minimum amount you would expect to receive from the transfer of clients.
2. Medium – this is the most likely scenario, given market conditions.
3. Maximum – this is the maximum amount you believe is reasonable that a transfer could produce.

Your minimum payout should be factored into your financial plan and should serve as a baseline expectation for you and your spouse. For example, let’s assume your annual cost-of-living is 100k and you expect to live for at least 20 years after you transfer your book. This means the minimum threshold for your practice transfer would be two million dollars.

Now I know what you’re thinking—that analysis does not factor in inflation, cost of living adjustments or the possibility of growing principal through astute investing—something you’re probably pretty good at. I recognize the inherent mathematical flaws in what I’m suggesting. But I suggest in anyhow and here’s why. It’s far more psychological than it is mathematical.

Here’s what I mean. After 30-40 years, say, of serving clients, if you don’t realize a sizable liquidity event that offers, cash-in-hand, a nest-egg equal to or greater than your known cost of living for the rest of your life, you’ll probably feel cheated. That is not how you want to enter the next phase of your life. That should not be the psychological reward for years of faithful service.

I also don’t believe it’s wise to expect that a payout to you, given any of the three scenarios above, would come via a lump sum. That may or may not happen. But I don’t advise you to count on it. I’ll explain more about why I say this when we look at exploring your options below.

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Get An Independent Appraisal Of Your Book Of Business

I cannot overstate the importance of this. As much as I believe it’s important to establish a minimum payout, it’s equally important that the payout is realistic. This is where a lot of financial advisors really struggle.

The problem, as I see it, is that we work so hard for so many years that it’s never a happy moment to realize that our practice, all of our blood, sweat and tears, is only worth X. I find that most financial advisors tend to over-value their book because they are so close to it. They know what it took to build that book and it was not easy. It probably took a lifetime of sustained effort.

This actually puts financial advisors at-risk. Here is why I say this. I have spoken with dozens of financial advisors who have gone through this process. Many have reported to me that certain organizations who specialize in practice transfer gave them very attractive valuations… at the start. But as they navigated the due diligence process, the valuation was lowered several times, resulting in projected payouts that they felt were well below market averages. In other words, what they expected their payout to be and what it actually ended up being were vastly different.?

This is why my counsel to you on this is simple: get more than one valuation. Make sure at least one of those valuations comes from a third-party who has no vested interest in what happens after the transfer of the book of business. You need a completely objective appraisal from a qualified expert.

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Balance Client Disposition With Your Economic Imperative

Most of the big decisions we make in life require tradeoffs. As the Rolling Stones so famously said: “you can’t always get what you want.” If you want to get the greatest payout on your book of business AND you want clients to be well served after you exit—which matters most to you? The reason that I bring this up is because you may very well have to sacrifice certain things to achieve your goals. That’s just the way these things seem to work.

In an ideal world, you would get maximum value for your book and the advisor taking over your client relationships would do a better job than you’ve done (I know, I know. That’s not possible—no one could do a better job than you. I feel the same way.)

But let me help you here with a short test. On a scale of 1 to 10, where 1 equals “not at all important” and 10 equals “the most important thing,” how would you score these:

• Getting the greatest payout on my book: 1, 2, 3, 4, 5, 6, 7, 8, 9 ,10
• Making sure clients are well served: 1, 2, 3, 4, 5, 6, 7, 8, 9 ,10

What numbers would you pick? Here is what I would advise. Identify your numbers today, but don’t be surprised if you change your mind as you proceed. It may take a lot of soul searching, consultations with a spouse and with advisors and, frankly, time to really figure all of this out. As you explore options, which I present below, you may find your priorities shifting a bit. I think that’s actually healthy.

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KEY TAKE AWAY

“Most Of The Big Decisions We Make In Life Require Tradeoffs. It’s Important To Get Clarity About What Matters Most To You.”

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Review Your Options

By my estimation, most financial advisors will transfer their book of business in one of three ways.

• Third party. In this approach, all clients and operations pass over to a third-party buyer of the book. The payout comes from the third-party and is often predicated on the exiting financial advisor achieving certain benchmarks and milestones.
• In-House. In this approach, a team or advisor that is already a part of the company where a financial advisor works takes over the client relationships. The payout may come from the company, from the team taking over clients or both.
• New company. In this approach, a financial advisor joins a new company with the express intent of transferring their clients to team members at the new firm within a given time period. The payout could be from the financial advisor team taking over the book, from the company or both.

It’s impossible for me to predict which of these options is best for you. But I will provide some pros and cons for all three approaches based on what I’ve witnessed.?

The third-party approach has several pros to recommend it. You can transfer the book of business and all of the headaches, usually in just a few steps. You can get a pretty good payout, depending on your situation. But the biggest con is that usually that you have no control over what happens with client relationships once the deal is done. For financial advisors with long-standing clients, this can be a major drawback.

The in-house approach also has a lot of pluses. You can likely get a pretty good payout, but it might require a longer-term commitment from you. This might mean that your earn out is extended over several years. That all depends on the terms you negotiate. Another plus has to do with client relationships. If you know who you are transferring your clients to and they serve clients in the same way you do, that gives you peace of mind. But the drawback, for many advisors I’ve spoken with, is that many smaller organizations simply don’t have teams who can take over a large book of business.

The new company approach also has a lot to recommend it. If you move to a new company with the express intent of transferring your book, you get to vet the company and the teams at that company before you make your move. This gives you both a solid negotiation position and a clear path to exit. I find that there’s little difference in the payout on your book between in-house and new company. But maybe the biggest reason to go this route is what it allows you to do. For advisors with long-term client relationships, this path is pretty attractive for a few reasons.

First, you get to start with a blank slate in training your replacement about how you want clients to be served. This helps ensure continuity of client experience, making sure people you really care about are served well long after you’re out of the picture.

Second, you probably get to structure your eventual exit based on terms you negotiated coming in to the company. Depending on where you work today, this may not be possible. Many larger organizations have defined practices for client transfer and they’re not likely to veer from them.?

Third, you can probably structure your exit on a timetable that works for you and your new company. This becomes incredibly impactful to the ongoing client experience after your exit. Here’s what I mean. Let’s assume that you have 100 affluent client families you’ve been serving for around 20 years. The question becomes, how can you transfer trust from each family to the new advisor? What does that process look like? How long will it take? How many conversations would be involved and how do you help your replacement build the same kind of chemistry and trust you’ve had with clients? If you get to define this, you greatly increase the likelihood that clients will be well served down the road.

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Get Good Advice From People You Trust

This may be the single biggest decision you’ll make in your life. So my advice is that you explore your options carefully, openly and thoroughly with people you love and trust. Who do I recommend?

• Spouse or significant other. It’s very likely that no one knows you better than your spouse or significant other. They’ve probably been on your journey with you, through the ups and downs, for many years. They know how you feel, how you think and what makes you happy and sad. Not everyone likes to talk about work with their spouse and I recognize this. But I do recommend that you at least explore options with the person who knows you best. Their perspective could really help you get clarity.
• Attorney. It’s very important to talk to an attorney. I recommend that you sign nothing until you’ve had your attorney review all of the documentation. I believe it would be a huge mistake to go through this life-changing process without the advice of an attorney.
• Valuators. Above I provided several reasons for why you want the input of more than one valuator.
• CPA. There are tax considerations that should be factored in to this decision. This becomes especially important for multi-year payouts where you have the opportunity to defer taxable events. A good CPA can help ensure you keep more of your hard earned money than paying it to the government.
• Industry contacts. It’s a good idea to speak with 5-10 people in your industry and tell them what you’re considering. Ask them what they would recommend if they were in your shoes. The people in your network could provide a key piece of information you need at just the right moment.

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Build Your Plan And Execute It

I’ve written a pretty extensive article describing how to do this. So I won’t go into a lot of details here. But let me say this for the record. I believe this is far more process than event. I encourage you not to rush this decision because once it’s made, there’s really no going back. In my experience, people who make a plan and then follow through on it end up the happiest.

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Next Steps

In this thought piece I’ve provided six of my best ideas for ensuring you get the greatest payout on your book of business while ensuring treasured clients are well looked after:

1. Define how much money you’d like to see from your book.
2. Get an independent, third-party appraisal of your book.
3. Balance client disposition with your economic imperatives.
4. Review your options: third-party, in-house, join a new company.
5. Get good advice from people you trust.
6. Build your plan and execute it.

Please know that my door is open if you’d like to discuss any of these ideas.