A new succession program introduced by TD Wealth Private Investment Advice (TD Wealth PIA), a division of Toronto-based Toronto-Dominion Bank, aims to compensate retiring advisors for their loyalty and for promoting the loyalty of their clients.
“What we are trying to do is to reward our advisors who build incremental and sustainable value in their practices over time,” says Dave Kelly, president and national sales manager with TD Wealth PIA, “and then ensure they [transfer] their practices to a TD advisor of their choice when they retire.”
TD Wealth PIA’s Distinction Plan, launched in September, will provide the firm’s top 100 advisors with an opportunity to build deferred equity in their practice over time, over and above the firm’s regular deferred-equity plan.
Upon retirement, a participating advisor will receive a cash payout that has accrued over the years. The payout from the Distinction Plan, and other deferred-equity plans, could be as much as 33% of 12 months’ revenue in the first 10 years of the program, and up to 60% of a year’s revenue by Year 20.
The plan consists of four segments – book affluence, fee and managed revenue in the book, client retention, and client alignment throughout the organization – that are equally weighted in determining what level of cash payout an advisor would receive upon retirement.
“When you think of how advisors [purchasing a book of business] would value a practice,” Kelly says, “one of the things they want to know is how long a client has been on the books. And for an incoming advisor, the more a client has needs being met throughout the entire organization, the more inherently valuable that practice becomes.”
Qualitative metrics also has been introduced by CIBC Wood Gundy, a division of Canadian Imperial Bank of Commerce of Toronto. Wood Gundy made changes to its succession legacy plan this past year and, while the firm won’t release any details regarding its qualitative metrics, Gary Mayzes, managing director with Wood Gundy in Toronto, says the new program does look at factors outside of the traditional business metrics of a book.
“It’s about the quality of the business that is going to drive the highest valuation for the advisor,” Mayzes says. “And that includes both quantitative and qualitative factors. We want to retain the relationship with the client, but we also want to evolve the relationship with the client.”
George Hartman, CEO and co-founder of Elite Advisors Canada Inc. in Toronto, specializes in book valuation and succession planning. He agrees that qualitative measures such as client retention and tenure should be key variables in identifying the value of a practice: “For the first time, it appears as if there is some qualitative aspect that is going into valuing a book of business. Up until this point, most people use a financial rule of thumb, such as a percentage of assets or a multiple of trailers over the past 12 months, without considering the qualitative aspect of the client space, which includes client loyalty and propensity to refer.”
By including factors such as client tenure and loyalty, Hartman adds, retiring advisors’ books can warrant either a premium price or, in cases in which those features are absent, a discount for the buyer.
Client loyalty also can help the firms in retaining top talent, as the financial services sector has seen an increase in advisors “double-dipping” – receiving substantial bonus cheques for switching firms near the end of their careers, then receiving another windfall when they retire.
“I’m not surprised to see this type of offering being introduced,” Hartman says. “We see a number of the big firms doing ‘chequebook recruiting’ and offering big bonuses to attract talent. But, at some point, there has to be some sensibility brought back into the numbers because it is disruptive to the normal course of the business.”
Mayzes and Kelly both hope to combat “double-dipping” by providing their advisors with a long-term strategy.
“We are giving our advisors a lot of clarity around the valuations of their business,” Mayzes says. “And we hope we are taking that [double-dipping] option off the table by putting these long-term plans in place. Our advisors are very client-focused, and I have a hard time arguing that [double-dipping] is a client-focused strategy.”
Kelly believes that the combination of TD Wealth PIA’s legacy plan (which helps advisors to sell their book of business to an incoming advisor), the firm’s restricted share unit offering and the Distinction Plan will help to keep the firm’s advisors in-house.
“The combination of these three things will not necessarily get you all the way to mitigate a highly valued double-dip,” Kelly says. “But I think, in their heart of hearts, most of our long-tenure top performers would rather [transfer] their clients [within] TD in a way that makes sense than to take the risk of the double-dip.”
For advisors who are nearing retirement, the Distinction Plan may not hold the shimmering appeal it does for the younger generation; the appeal of double-dipping still resonates. And Kelly knows he has to introduce something competitive to help to keep advisors’ books in-house while rewarding the loyalty of established advisors.
“We want to make sure we do the right thing for those [advisors] who don’t have as much time for the equity component [of the distinction plan] to build,” Kelly says. “We will be making sure we do something for them as part of this program.”
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