Young Advisor Reveals ‘Huge Opportunity’ to Grab Profitable Books of Business

“For the same book of business, whatever they put the recurring revenue at, if I just transfer it I’m going to make more money because I have a higher payout than [the retiring advisors] do,” he says.

Arnold gets a 75% payout from AXA, while the retiring advisors, with lower levels of production, might get a 65% payout. “So if they make $40,000—just by transferring I’m making $50,000,” he says.

“All four of these [acquisitions] have been in my eyes a no-risk transaction,” Arnold adds. “If I was able to buy the practice and not convert one client into an advisory capacity, I’d make my money back in one year, two years or three years,” since the price range of his acquisitions were from one to three times annual recurring revenue.

But the real upside comes from account conversions, which Arnold and his team aggressively pursue.

“I’ve made it a sticking point that each advisor go to [their] top 25 clients and I insist that that is a joint meeting,” he says. “For them to give me an endorsement in person goes a mile for those people [compared to just sending the clients a letter].”

For the rest of the book—the acquired practices have from 400 to 500 clients—Arnold and his six junior advisors call on them, arranging two performance reviews a year, one in person and one through a webinar (unless it’s an older client that prefers a phone call to a webinar).

“There’s a lot of service work on a lot of smaller, unprofitable accounts, but we want to give great service to everybody,” Arnold says.

Now working on his fourth acquisition in Tucson, Arnold says that “One to three times annual recurring revenue is kind of a starting point for negotiations.” Other factors include how much is paid up front versus paid out over time (he prefers the latter) and critically, how many personal meetings and endorsements can he expect. It’s the latter that drives the value of the acquisition and thus the ratio of price to revenue he’s willing to pay.

In transitioning the business, Arnold’s team double-checks that each contract from the seller’s book transfers—maybe there’s a state licensing issue that holds things up—and verifies that his revenue projections were met. The baseline for this analysis is the data AXA provides at the beginning of the acquisition process on the seller’s book of business and what the book’s contracts produce on a recurring basis.

Arnold points out that a buyer needs to acquire a book of business from one of his own broker-dealer’s retiring advisors in order to maximize the financial opportunity.

“The books I’m buying are proprietary products. You need to have a career contract with AXA in order to take advantage,” he says.

And the proprietary nature of the product makes these acquisitions highly desirable for the broker-dealer, which is why they typically assist the transactions by providing trustworthy data, for example.

“If a practice is not acquired, it goes into an orphan program,” Arnold says. “That’s bad for the advisor, bad for the clients.” Whereas buying practices is good for the broker-dealer, both buying and selling advisors and the clients, he says.

Arnold says buying advisory practices has been a compelling business strategy, yet he has had a surprising absence of competition.

“There’s nobody else that has talked to these older advisors about the transition of these practices,” he says.

“Every transition I’ve had has been respectful,” Arnold adds. “The No. 1 thing I keep in mind is the blood, sweat and tears” the retiring advisor applied in building his practice.