Advisor at Risk

Ellen Bessner

Ellen Bessner is a well known, leading litigator with commercial litigation firm Babin Bessner Spry LLP. Her more than 20 years of experience includes defending investment and insurance industry participants, including dealers and individuals at all levels of courts.

Advisors looking to buy a book of business have no shortage of options; however, they need to be aware of some key considerations

By Ellen Bessner |

Editor's note: This is the second in a two-part series on succession planning for advisors. This column explores the issues associated with buying a book of business; the first column focused on some of the issues associated with selling a book of business.

With a substantial number of advisors heading toward retirement, a younger advisor looking to find a book of business for sale does not have to look too far. But while the process of buying a book of business might seem to be straightforward, it can be fraught with difficulties. Here are some key considerations to keep in mind when going through the process:

1. What is actually for sale?
Like buying a house, it must first be determined if the vendor (selling advisor) actually owns what he or she is proposing to sell. Some dealers have an agreement — in writing — proving that the dealer, and not the advisor, owns the book of business. In that case, the selling advisor can't actually sell the book of business.

Under these circumstances, the dealer arranges for a transfer of the clients for a fee paid by the "buying" advisor to the "departing" advisor, but the dealer continues to own the book of business. The advisor who takes over the book of business pays based on an estimate of the anticipated cash flow. Note that effectively this is more akin to renting a business rather than purchasing one — because if the purchasing advisor leaves the dealer, he or she doesn't own the client base for which he or she has paid.

Furthermore, the purchase/rental agreement usually has a non-solicitation clause that precludes the purchasing advisor from soliciting the clients if he or she leaves the dealer. So, understand what is actually for sale and what you are buying before you engage in negotiations with the seller.

2. How hard will the transfer be?
Remember that clients are not obliged to transfer their business to the purchasing advisor; they can choose any advisor they want. Therefore, you need to know how likely it will be that the clients will choose to transfer to you and how much work it will take to get those clients on board?

Much of that might depend on how involved the selling advisor is in the introduction and promotion of the new advisor. If the selling advisor is in good health and motivated to make this transfer a success, those are usually better circumstances than if the seller is either unwell and thus unable or simply unwilling to be involved in the introductions. (Note: the advisor could have already passed away and the sale of the book of business is by the estate.)

You need to be mindful that the quality of the relationship between the selling advisor and his or her clients might not necessarily be strong; thus, a recommendation from the advisor might not be helpful.

3. What is the quality of the book?
Does the purchasing advisor agree with the strategies and approach that the selling advisor has applied to the client accounts? Is the purchasing advisor comfortable that the investments are suitable for each client, for the most part? Also, are the clients quite satisfied with their circumstances?

If the answer to any of these questions is no, the purchasing advisor might have to spend a lot of time educating clients and rebalancing clients' accounts; as well, those clients may figure out that they might even have a claim against the selling advisor and that's something that you, as the purchasing advisor, no doubt would prefer not to get embroiled in.

4. Can you do this without legal advice?
I am not a corporate lawyer, so understand that there's no benefit to me at all to strongly suggest that you should hire a corporate lawyer to ensure you're buying what you think you're buying — and that the agreement protects your interests.

If you do not hire a corporate lawyer, you might end up having to hire a litigation lawyer, which would be me. That's because if there's a disagreement over one, or some, of the important terms in the agreement, or you verbally agreed to something that didn't end up in the written agreement at all, you might need to sue.

So, don't be penny wise and pound-foolish. Hire a corporate lawyer at least to review the written agreement before you sign it.

If you're in the process of looking to buy a book of business, make sure to be smart and careful about the transaction. After all, you would never buy a house without a lawyer and without satisfying yourself that the seller had title to the property and that the quality of the house was up to par. Buyer beware.

See also: Advisors need to take their own advice on succession planning