Buying a Book


With the introduction of new legislation and the tightening of fees, having a $20 million book of business doesn’t quite cut it the way it did a few years ago. One of the quickest ways to grow your practice is to buy an existing book of business from another advisor. However, while it sounds easy enough, buying a book can be a complicated process, and there are many factors you must consider.

First Considerations

Before you start the process of actually purchasing a book from a selling advisor, you must understand the exiting advisor’s business and make sure the book is a good fit for you. Below are just a few scenarios that should be considered:

Can You Handle the New Workload?

One of the most obvious reasons advisors buy a book of business is to grow their businesses, and there is no denying that buying a book of business achieves this goal quite quickly. In adopting this approach, your book can easily double in size, and you could have hundreds of new prospects. But before you take this step, ask yourself whether you have the time to invest in these new leads without compromising the service you are offering your current client base.

It is Hard to Know What You Are Getting

It cannot be emphasized enough that a prospective buyer should learn every little detail of the book they are considering. It is not uncommon for advisors to buy books that initially seemed large and lucrative, but ended up being just a lot of service work. Therefore, understanding the potential profitability of a business is extremely important.

A Well Constructed Book Can Provide a Reliable Stream of Income

If you are lucky enough to acquire a well put together book of business, you are likely to start reaping the benefits immediately. However, be wary of books that are heavy in specialty products that may have only paid out at the time of sale and don’t offer any trailing commissions. These books can look very appealing at first if they have large accounts, but that doesn’t mean they will pay you since the book would effectively be only leads and not an active business.

Client Retention is Never Guaranteed

In a perfect world, a selling advisor is looking to slowly transition out of the business and is willing to introduce and recommend you to all of their clients. Unfortunately, this isn’t always the case, and clients may simply not want to work with you, or they may be put off by the thought of working with someone just because they bought their business. As a result, it’s always a possibility that clients may walk away from you, and this is something the buying advisor needs to be cognizant of and prepared for.

Is the Book Compliant?

Compliance is a big part of an advisor’s practice, and therefore, if the book isn’t compliant, someone else’s laziness might cause you a lot of headaches and may also expose you to possible disciplinary action from regulators.

Was the Advisor a Good Advisor?

It may seem almost silly to inquire, but find out if the selling advisor was, in fact, a good financial advisor since their reputation will be your new reputation until the clients get to know you. If the advisor didn’t know what they were doing and was giving out faulty advice, ask yourself if you want to align yourself with someone like that. A bad advisor could also mean a messy, uncompliant book of business.

What are the Seller’s Circumstances?

Is the seller dealing with declining health, and therefore, has to get rid of the book fast? Or are they simply looking to transition out of the business? How and why the seller is departing should be of great concern to buying advisors. The more time that the advisor can spend introducing you to their clients and helping you understand their business, the more successful the transition is likely to be. On the other hand, If the seller has to get out of the business fast, you risk a messy transition, and therefore, lower client retention.

One aspect that is often overlooked, but always important, is to respect the fact that the advisor is handing over their life’s work to you. The advisor probably has long standing, positive relationships with a lot of his/her clients and will want to ensure that the transition is smooth for them. Therefore, expecting the selling advisor to back off immediately after the sale has been completed is not usually the best choice for your book in the long term. In order to manage the transition better, you and the seller should take the time early on to set out a clear timeline for a permanent departure that makes sense for both of you.

Action Plan

Once you’ve decided that the book of business may be a good fit for you, its time to start ironing out the specifics.
Below are some details you will need to focus on as you move into the buying phase:

Develop your specific objectives and focal points.

  • What type of practice will fit my current business framework or will allow me to expand into a framework that I currently don’t have?
  • What type of firm should I seek: Commission based, fee-based or fee-only?
  • What type of client base will best fit my focus areas and the products I can offer?
  • How many additional clients can I provide service to without sacrificing customer service for my current base?
  • What can I afford and what payment option should I use? Should it be an earn-out, promissory note, installments, etc.?
  • Do I want to stay within my geographical area, or am I prepared to grow beyond that?
  • Will I need additional support staff?
  • What are all the costs associated (outside of the book purchase) that I need to consider?

Have the funding available or at least the ability to get funding in place before approaching a seller. The following are four ways in which you can do this:

  • Bank financing: Banks won’t consider your new client base as collateral or an asset because clients can always walk away. As a result, many buyers need to rely on personal loans, equity in their homes or lines of credit. While you can do this, be sure not to over extend yourself.
  • Cash Buyout: Offering a cash buyout can work best if the seller is in dire need of cash. However, if this is not the case, you need the seller to be willing to work with you over a period of time in order to transition his/her clients effectively. Therefore, if using this method, offer a down payment and agree to pay the rest after a period of time or when a certain percentage of the new book of clients is successfully transitioned.
  • Installment Note: Having an agreement in place to make payments over a period of time reduces the risk to the buyer and gives the seller fewer tax consequences than a full buyout.
  • Earn-out method: This method utilizes a contractual provision stating that the seller of a business is to obtain additional future compensation based on achieving certain future financial goals. This arrangement can be on a fixed term or open term basis. It is best to have an experienced professional assist with this since an agreement will need to be written up.

When ready to buy, get a lawyer: There will be multiple agreements and other papers to review and sign at this time. Your attorney will provide these for you.

Have a post-transition plan ready: During the previous phase, your attorney should have you and the seller agree to a consulting agreement, which ensures the seller’s willingness to assist you in the transition and introductions to his/her clients. This would help secure a higher retention rate. In addition, have regularly scheduled meetings and also timeframes in place for you and the seller, so neither of you fall off the tracks and you’re both on the same page.

Bottom Line

Many firms have succession specialists who can help you evaluate a book and can also mediate the initial discussions between you and the selling advisor. Buying a book can be a long, arduous process, and therefore, it is important to know what you are getting into. Your due diligence should be thorough, so you avoid future pitfalls.