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

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Interested in a risk-free way to increase revenue, profits and assets under management—albeit with lots of hard work? John Arnold of AXA Advisors has found this can be done—repeatedly—through acquiring the advisory practices of retiring advisors affiliated with his broker-dealer.

Indeed, the 36-year-old advisor based in Scottsdale, Ariz., is now negotiating his fourth deal in Tucson, having already acquired two practices in Albuquerque, N.M., and another in Scottsdale.

The opportunity came to Arnold’s attention when he learned from his broker-dealer that it had six advisors in Albuquerque and not one of them was under age 65.

John ArnoldThe problem of aging advisors has been made more acute by a shortage of advisors entering the business, Arnold (left) said in an interview with AdvisorOne. He says that as a response to the Madoff scandal, the Financial Industry Regulatory Authority (FINRA) has made it much harder for advisors to pass the Series 66 exam by increasing the number of questions an advisor must correctly answer and by making those questions more difficult.

“So fewer people are entering the business while more people are exiting due to age and retirement,” Arnold says. “That creates a huge business opportunity for people like me.”

The next step was developing a personal connection with some of those retiring advisors, whom he met at AXA’s annual meetings.

“Personal confidence and chemistry is key to the success of this,” Arnold says. “The retiring advisor wants to know who’s taking over, and they want to have confidence in that person.”

Arnold has found that the key consideration for retiring advisors—above even monetizing their books of business—is to know their clients are in good hands. That’s what makes acquiring a book of business a win-win for both seller and buyer.

“Retiring advisors’ main goal is to make sure the clients are taken care of. Driving a hard bargain is not their priority. They’re done. They’ve got [money]. That gives me the leverage. But in a respectful way. I have to add staff; service time is required; there are incremental costs I’ll have to take on my books,” he says.

Having learned that Albuquerque—an hour’s plane ride from Scottsdale—was an underserved market, Arnold made his first acquisition there in 2010, and the move was an immediate success.

“I paid for that within three months. I was able to dig up a really big 401(k) rollover that the previous advisor didn’t know about.

“They [were] in the swan song of their career, so maybe they weren’t as hungry as I and my crew.”

While a rollover is nice bonus, the biggest payoff and the key to Arnold’s acquisition strategy is to try to convert a transactional book of business into fee-based advisory relationships.

“If I can transition these relationships into my advisory practice, that’s all new recurring revenue that I didn’t have to pay for”—since his acquisition price, usually between one and three times annual recurring revenue, is based on stock and A-share mutual fund transactions and the like.

Encouraged by his first success in Albuquerque, Arnold bought his second book of business last year in Scottsdale, then another this year in Albuquerque, which he is still transitioning. He is already realizing economies of scale through merger of the same-city offices.

Despite all the long hours, additional travel and difficulties of hiring and training new staff members, Arnold considers the acquisitions risk-free.

“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.


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