Tips & Traps When Changing Financial Planning Licensees

Through our practice broking and valuation services, we have for many years now observed the interactions between Dealer Groups/Licensees and their representatives within multidisciplinary and standalone financial planning firms. Prior to many of the more recent industry changes, there was this underlying view by the licensees that they owned the clients serviced by the planners, with such terms and conditions generally included in more historic contracts and agreements. We witnessed this earlier this year when completing a valuation of a multidisciplinary firm who remained governed by a licence agreement that claimed the clients were that of the licensee. Whilst this was and is perhaps fine for standalone financial planning firms who remain part of the few large groups or licensees, this had and still does have more significant issues for multidisciplinary firms when it comes to selling their broader firms, or changing licensees, and having to transfer their FP clients to a new home.

Remember back in the good ole days, when BOLRs were common, various Dealer Groups would purchase a book of clients off a selling or retiring planner, for say 3.5 times recurring revenue, and then on-sell these clients to another planner within their group for say 2.5 times recurring revenue, taking the 1 times hit on the transaction to ensure the clients remained part of the group. Licensees could and would make it extremely difficult for vendors to sell or pass on these clients to anyone outside their group. Most of the big players took such approaches, and for some, they still do.

As a side bar, whilst the thought, effort and cost of applying for your own AFSL when this regime was introduced seemed overwhelming, it could perhaps be worth it in the long run, pending your more long term succession plans. This would lead to less restrictions or difficulties around the transfer of clients.

So let’s think about a couple of keys issues that transferring licensees could pose for a multidisciplinary firm. The first is who owns the clients. In reality, this question relates to all professional service firms as well as many other types of businesses. The answer in reality is no-one. No-one owns a client or customer. It’s all going to depend on loyalty, which is generally related to the quality of service, clients’ satisfaction and the like. For professional firms, what is really being sold is the opportunity to continue an income stream associated with the transfer of a group of clients. Essentially, it is the transfer of relationships. Nothing worse could be said than telling a client you have sold them. However, when it comes back to an accounting or financial planning client, the closest person who ‘owns’ them is their adviser. This is the person with whom they have the trusted relationship, this is person or group of people who they trust to provide the best advice and guidance. Thus, for a licensee to think they own the client, is from a practical standpoint, wrong. The client would probably have little to no idea about the licensee or the people who work for it.

However, where this does start to get difficult is where the licensee has the ability to write to the clients of the adviser, informing them of the proposed change in licensee and offering them to opportunity to stay with the current group. Their matters can be passed onto another adviser within the group. Authority needs to be sought from the client for any transfer and the difficulty with this is that the licensee can provide such information prior to the adviser even informing its own clients. Just imagine the response from long standing clients if they were told by a third party, rather than you, that you were no longer going to be servicing them, that you were retiring. In many instances, these are clients who the firm may been servicing for years; some of the clients could almost be like family. It would be bad enough in terms of the financial planning side of the firm, however such advice could also cost the firm the loss of accounting clients as well – a double whammy. So, as a vendor trying to manage the timing of such announcements, the lack of control over when the clients are advised is risky. Thus, finding a tendency for the vendor to want to settle the financial planning side of the firm after the transition of the accounting clients has already begun.

Then the next issue to be concerned about is the communication piece itself. What is the message that the clients will actually be receiving? What is being said about what their current firm or adviser is doing? Do you, as representative, have any input into the communication piece? What happens if you are dissatisfied with the messaging, do you have any come back? No doubt the licensee will invite your clients to simply transfer to another adviser within the group to avoid all the hassle and paperwork.

And lastly, of course the licensee will encourage, or want, you to sell your financial planning clients to another adviser in the group. Many historically have the reputation of nothing other than this. They want to retain funds under advice. However, this can be very dangerous to the short and long term success of the overall proposed transaction or transfer. Selling your financial planning clients, who are also accounting clients, which is typically the case in multidisciplinary firms, means you can also lose potential control of those clients and the associated accounting revenue. If those clients are sold onto another firm that offers both financial planning and accounting services, or onto a financial adviser who has connections with an accountant, great efforts could be made to try and coax these clients away from the purchaser, costing you part of any retention sum.

Thus, we would encourage multidisciplinary firms to consider their options when entering into their first or subsequent arrangement with a financial planning licensee. Review agreements extensively to understand your commitments. All too often, when speaking with advisers that have entered into agreements with a licensee which clearly states the clients remain theirs, think they can simply overlook such terms. Don’t be so sure. Likewise, if planning to retire or change licensee, do a bit of planning initiating the move to understand the processes that are going to take place.