Buying or selling a financial advisor’s “book of business” may sound straightforward: determine revenue, apply a valuation method, negotiate a price and complete the transfer.
In practice, these transactions can be considerably more
complicated.
An advisory book is built around client relationships. Those
relationships may be affected by employment agreements, restrictive covenants,
confidentiality obligations, regulatory requirements, transition arrangements
and, most importantly, decisions made by the clients themselves.
Before negotiating price, the parties should ask: What
exactly is being bought?
Purchasing an established advisory practice is different
from paying another firm to release or modify contractual restrictions so an
advisor can compete, communicate with clients or serve clients who
independently choose to follow the advisor. That distinction can affect nearly
every aspect of the transaction.
What Does It Mean to Buy a Financial Advisor’s Book of Business?
Financial advisory practices are commonly valued by
reference to assets under management (“AUM”), recurring revenue, earnings or
related multiples. Those measurements are useful, but they can create the
impression that a book is a fixed asset that transfers intact from seller to
buyer. Usually, it is not.
The economic value of an advisory practice depends on
clients continuing relationships they generally have the ability to change. A
purchaser should therefore look beyond headline AUM and revenue figures.
Important considerations include recurring revenue quality, profitability,
client concentration, demographics, expected retention, the strength of
advisor-client relationships, services provided, anticipated withdrawals and
the seller’s ability to assist with the transition.
Are You Buying a Business—or Buying Contractual Freedom?
A conventional practice acquisition may transfer goodwill,
contractual rights, intellectual property, infrastructure, personnel, business
systems and transition assistance.
Other transactions arise when an advisor wants to leave an
existing firm while remaining subject to a noncompetition agreement,
non-solicitation provision or other restriction. In that setting, a negotiated
payment may principally purchase certainty and contractual freedom, rather than
an operating business.
Those rights can have substantial value, but they are not
necessarily equivalent to the enterprise value of an entire book. A business
generating recurring revenue indefinitely and a restriction expiring after a
limited period are fundamentally different economic assets.
Can Clients Be “Sold” With a Financial Advisor’s Book?
Not in the same way as inventory or equipment. Clients
participate in the transition. A client may remain with the existing firm,
follow the departing advisor, move to the acquiring firm or choose someone
else.
The agreement should distinguish between an advisor
affirmatively soliciting a client and a client independently deciding to
continue working with that advisor. That distinction can be especially
important when restrictive covenants apply.
Financial Advisor Non-competes and Non-solicitation Agreements Are Not the Same Thing
A noncompetition provision may prohibit an advisor from
engaging in specified competitive activities after leaving a firm. A
non-solicitation provision may permit competition generally while restricting
solicitation of particular clients or employees. A confidentiality provision
may restrict the use or disclosure of protected information regardless of
whether the advisor competes or solicits anyone.
Each provision should be analyzed separately. Enforceability
may depend on governing state law, the language, duration, geographic scope,
clients covered, the advisor’s relationships with those clients and the
legitimate interests the restriction protects.
Missouri Law and Financial Advisor Restrictive Covenants
Missouri Revised Statutes § 431.202 addresses certain
covenants involving employees and recognizes customer contacts, relationships,
goodwill and loyalty as potentially protectable interests. For certain covered
employee non-solicitation agreements, a post-employment duration of one year or
less receives a conclusive presumption of reasonableness as to duration. The
statute does not, however, establish that every customer restriction is
enforceable.
The statute also states that it does not create or determine
the validity or enforceability of ordinary employer-employee covenants not to
compete.
In Whelan Security Co. v. Kennebrew, 379 S.W.3d 835 (Mo.
banc 2012), the Missouri Supreme Court recognized legitimate interests in
customer contacts and goodwill while rejecting restrictions extending beyond
what was reasonably necessary.
A one-year non-solicitation provision and a one-year
noncompetition provision are not automatically equivalent. The actual agreement
must be reviewed.
Geographic and Activity Restrictions Matter
Duration is only one component of a restrictive covenant. A
one-year restriction limited to a reasonably defined territory may differ
substantially from a restriction with no meaningful geographic limitation that
bars nearly any client-facing, sales, managerial or advisory work for a
competing business.
Scope affects both enforceability and negotiating leverage.
What Happens to Confidential Client Information When an Advisor Leaves?
An advisor may have strong arguments against a noncompete
while still owing duties to protect legitimate confidential information. Client
lists, internal records, proprietary systems, pricing information, business
plans and other protected materials should not be removed, copied, used or
disclosed simply because the advisor believes another restriction is
unenforceable.
A transition should establish how information needed for a
new advisory relationship will be obtained lawfully, subject to applicable
privacy, regulatory and recordkeeping requirements.
Is Announcing an Advisor’s Move the Same as Soliciting Clients?
Not necessarily. Courts addressing financial-services
transitions have sometimes distinguished between a communication announcing a
new affiliation and one affirmatively requesting or encouraging a client to
transfer business.
The distinction depends on the communication, agreement,
governing law and surrounding facts. Its substance, audience, timing and method
matter.
FINRA Requirements When a Registered Representative Changes Firms
FINRA Rule 2273 applies in specified circumstances when a
registered representative is recruited by another FINRA member firm and former
customers are individually contacted about transferring assets to the new firm.
In those circumstances, the rule generally requires a FINRA-created educational
communication.
A private transition agreement does not eliminate regulatory
obligations. Compliance should be built into the transition before the
commercial agreement is signed.
Valuing the Transaction
There is no universal formula. Recurring-revenue multiples
and earnings-based approaches can provide useful benchmarks in a genuine
acquisition, but the analysis should also consider profitability, client
concentration, expected retention, transition assistance and durability of
revenue.
A restrictive-covenant buyout presents a different question.
The parties may need to consider remaining duration, likely enforceability,
litigation and injunction risk, rights being released and the value of
immediate certainty.
The value of a transferable advisory practice and the value
of a release from a disputed, time-limited restriction are not necessarily the
same thing.
Contingent Consideration
Where future client retention is uncertain, the parties may
allocate some risk through contingent consideration based on revenue actually
received from identified transitioning clients during an agreed period.
Any earn-out should define qualifying clients, revenue, the
measurement period, treatment of new assets and withdrawals, deductions,
reporting rights, payment dates, terminated relationships and any payment cap.
What Should a Financial Advisor Buyout or Transition Agreement Cover?
Depending on the transaction, the agreement should address
restrictive covenants being released or modified; clients who may be contacted;
unsolicited client communications; the advisor’s ability to accept and service
transferring clients; confidentiality and return of records; transition
communications; transfer procedures; regulatory disclosures; post-departure
fees; compensation; bonuses and clawbacks; promissory notes; expenses; employee
non-solicitation; mutual releases; pending claims; injunctive remedies; tolling;
non-disparagement; and procedures for future disputes.
If substantial money is being paid for contractual peace,
the agreement should provide meaningful contractual peace.
Why Injunction Risk Matters
A departing advisor may have strong arguments that a
restriction is overbroad or unenforceable, but that does not eliminate
short-term litigation risk. A former firm may seek temporary or preliminary
injunctive relief soon after departure.
Settlement economics therefore involve more than predicting
the ultimate winner. Avoiding months of uncertainty, legal fees and disruption
can itself have significant value.
Negotiating Without Conceding Enforceability
A party does not have to choose between challenging a
restrictive covenant and negotiating a resolution. Settlement discussions can
preserve positions concerning enforceability, breach, damages and defenses
while the parties explore a commercial solution.
The useful question is often: What is certainty worth to
each side?
Damages Should Not Automatically Equal the Gross Value of Lost Accounts
If a firm claims that prohibited solicitation caused clients
to leave, the loss is not necessarily equal to the assets those clients held or
to gross advisory revenue.
The measure of damages depends on governing law, the claim
asserted, the contract and the facts. A central factual question is whether the
client would have remained with the former firm absent the alleged violation.
The claimant generally must establish causation and a non-speculative basis for
the amount sought.
Due Diligence Before Buying a Financial Advisor’s Book
Financial due diligence should address historical revenue,
margins, fee schedules, concentration, AUM and anticipated withdrawals.
Client due diligence should examine demographics, retention
history, service expectations, relationship duration and dependence on the
selling advisor.
Legal due diligence should include client agreements,
employment agreements, restrictive covenants, confidentiality provisions,
ownership rights, disputes and regulatory obligations.
Operational due diligence should address custody,
technology, staffing, recordkeeping, compliance systems and account-transition
mechanics.
Selling a Financial Advisory Practice Requires Preparation Too
A seller should understand what is transferable before
promising what the purchaser will receive. The seller should identify
contractual obligations affecting the transition, permissible communications,
available assistance and responsible representations concerning client
retention.
The Best Agreement Plans for the First Day After Closing
The parties should know who will contact clients, when
communications will occur, what may be said, how documentation will be handled,
how regulatory disclosures will be provided, how client information will be
obtained and what happens when a client makes an unexpected decision.
A good transition agreement does not merely resolve
yesterday’s dispute. It provides instructions for tomorrow morning.
Frequently Asked Questions About Financial Advisor Books of Business
Can a financial advisor take clients when leaving a firm?
There is no universal answer. The analysis depends on agreements, state law,
regulatory obligations, conduct and whether the client independently elects to
follow the advisor.
Is a one-year financial advisor noncompete enforceable in Missouri?
Duration alone does not answer the question. Missouri distinguishes between
ordinary noncompetition agreements and certain non-solicitation agreements.
Scope, protected interests and contractual language matter.
Can a former client contact a financial advisor after the advisor changes
firms?
Independent client contact may present different issues from affirmative
solicitation, but confidentiality, privacy, regulatory and onboarding
requirements still matter.
How much is a financial advisor’s book of business worth?
There is no universal multiple. Recurring revenue, earnings, client
concentration, demographics, retention expectations, profitability and
transition arrangements can all affect value.
Is buying out a noncompete the same as buying the advisor’s book?
Not necessarily. Purchasing an operating practice may involve assets, goodwill
and continuing revenue. Paying for release from a time-limited restriction may
principally purchase contractual freedom and certainty.
Can the purchase price depend upon clients actually transferring?
Yes. Some transactions use contingent consideration tied to post-closing
revenue or client retention. The measurement provisions should be precise.
Can a financial advisor announce that he or she has joined a new firm?
An announcement may differ legally from solicitation, but content, method,
agreement, state law and securities regulations matter.
What is the biggest mistake in buying a financial advisor’s book?
A major mistake is assuming historical revenue guarantees future revenue.
Client retention, contractual restrictions, transition mechanics and regulatory
obligations can materially affect what the buyer receives.
The Central Question
What are you actually paying for?
Are you buying an operating business, goodwill, recurring
revenue, transition assistance, contractual rights, a release from a
noncompete, permission concerning particular clients or certainty that neither
side will spend the next year litigating?
Often, the answer is a combination. Each component may have
a different economic value and legal significance.
Conclusion
Buying or selling a financial advisor’s book of business is
not merely a valuation exercise. It is a transaction involving contracts,
regulation, confidential information, professional relationships and client
choice.
The parties should understand what is actually being
transferred, what remains subject to restriction, what obligations survive the
transaction and how clients will be treated during the transition. Where
restrictive covenants are involved, the parties should separately evaluate
noncompetition, non-solicitation and confidentiality provisions rather than
treating them as a single restriction.
Most importantly, the agreement should reflect the
transaction the parties are actually making.
Purchasing an advisory business is not necessarily the same
transaction as purchasing freedom from a restrictive covenant.
A carefully structured agreement can define that difference,
allocate client-retention risk, protect legitimate confidential information,
address regulatory requirements, resolve existing disputes and establish a
workable transition before clients are ever contacted.
The best transactions therefore do more than establish a
price. They establish who may do what, with whom, when, and under what
conditions after the agreement is signed. That clarity can be as important as
the economics themselves.
About the Author
David B. Cosgrove is an attorney with experience advising
businesses, professionals and financial-services participants on contracts,
restrictive covenants, business transitions, disputes and related legal
matters. His work includes analyzing non-competition, non-solicitation and
confidentiality provisions; negotiating transition and separation agreements;
and helping clients evaluate the legal and practical risks associated with
buying, selling or transitioning an advisory practice.
Disclaimer
This article is provided for general informational and
educational purposes only and does not constitute legal, tax, investment or
regulatory advice. It does not create an attorney-client relationship. Laws and
regulatory requirements vary by jurisdiction and depend on the particular facts
and agreements involved. Readers should consult qualified legal and other
professional advisers concerning their specific circumstances.
