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5 Spot Checks to Conduct before Buying a Book

An image of a checklist of things to do when buying a book of business

By Afsar Shah

Due diligence, or the lack thereof, will ultimately determine the success or failure of any business acquisition. Before you agree to buy a book, review these five business areas of the seller (and firm’s) practice.

1. Strategic (or cultural) fit

Imagine the likelihood of success where two advisors have diametrically opposite views on such issues as the value of financial planning, investment philosophy, fee transparency, and client service standards. How easy do you think it will be for the buyer to retain clients used to and comfortable dealing with an advisor who has a fundamentally different way of looking at these issues?

2. The seller’s client base

Do these clients align with your own ideal client profile? With these clients, you need to understand potential growth opportunities, and identify potential underlying risks to the business. Specific areas of inquiry should include:

  • The number of clients that have assets greater than $500,000, between $250,000 and $500,000, between $100,000 and $250,000, and less than $100,000
  • The average asset value per client
  • Demographic split by age and gender
  • The percentage of assets in registered versus non-registered accounts
  • Whether there are any product gaps that present growth opportunities
  • The number of clients with a comprehensive financial plan
  • The number of high-risk clients, as well as high-risk product offerings

3. The seller’s regulatory risk profile

Do the seller’s workflows, processes, and procedures align with regulatory rules and expectations? I recommend selecting a random sample of the seller’s files and assessing the following as part of the regulatory review:

  • The suitability of each client’s investment holdings
  • Any improper use of embedded commissions — e.g., instances of churning or use of deferred sales charges with elderly clients
  • Instances of know-your-client uniformity across accounts
  • Sufficient notes in the file and instances of signed blank or altered forms
  • Any client complaints or regulatory sanctions
  • Whether the advisor has dealt appropriately with elderly clients
  • Instances of high-risk product offerings

Clearly, the greater the regulatory risk, the less valuable the target firm will be to you as the buyer. Reviewing the seller’s files from this perspective also gives you a good sense of the seller’s approach and commitment to client care and service.

4. Operational effectiveness

Examine the seller firm’s operational effectiveness and efficiencies with respect to processing trades, client service, financial management, and human resources. Consider the following:

  • Does the seller rely on one or more key individuals to get things done, or is there a set of systems and clearly defined processes and procedures in place that are effective, reliable, and scalable?
  • Has the seller or firm invested in technology such as a CRM system that will make it easier for the buyer to seamlessly connect with and service clients?
  • Do staff have clearly defined roles, responsibilities, and a competitive compensation structure in place, and a desire to continue to work with the buyer?

5. Financial health of the seller’s firm

You need to determine that a target firm is financially well managed and able to deliver stable, predictable cash flow. The higher the percentage of revenue that will continue after a deal closes, the better. Key areas to review include:

  • Revenue analysis over preceding three-year period
  • Expense ratios, including expenditures on staff, benefits, technology, rent, etc.
  • Annual budgets and monthly profit-and-loss statements
  • Whether there are any outstanding debts, taxes, or other obligations owed by the seller’s corporation

Afsar Shah, BA, LLB, is a business and regulatory coach at The Personal Coach based in Waterloo, Ont. To comment on this article or receive Afsar’s article that appeared in the February issue of FORUM, email dgage@advocis.ca.

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