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Measure and grow

Kathryn Furtaw Keuneke, CAE

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Tracking three areas of business value eases business continuation planning.

First published in the November/December 2014 issue of Round the Table

There’s an ugly industry rumor that says if you run a risk-based business, it doesn’t build value. This belief causes insurance producers to hold onto the notion that they, themselves, are the only value in their practice, and they must ride it out until there’s nothing left.

As business continuation expert Don McLaughlin, CLU, ChFC, explains, that’s a giant misunderstanding, as long as you plan ahead.

A consultant with Succession Resource Group, McLaughlin has a decade of experience providing business continuation advice to financial services professionals. He explained that a practice built on risk-based products, such as life and disability insurance, can absolutely build value — separate from just the renewals. Just like other businesses, advisors need to know and understand three key elements of value in a risk-based business: cash flow, client service and productivity. “You need to begin paying attention to certain aspects of your business that maybe weren’t that important before,” McLaughlin said.

Succession Resource Group founder David Grau Jr., explained that any business can increase its value by focusing on these key elements of value. Borrowing a line from management expert Peter Drucker, he said, “What’s measured improves.”

Following are the three business focus points for the individual who wants to know where to start building value.

CASH FLOW: Where is your value coming from?

“In any business, the more predictable and faster-growing the revenue stream, the more valuable it’s going to be to a buyer,” Grau said. He acknowledged that generating predictable revenue is easier for some businesses than others.

“For a financial advisory practice, it might be through recurring revenue, fees and renewals on insurance protection products,” he said. “It’s going to be different for each business, but the predictability in the growth of the revenue stream is a huge value driver.”

Grau said the durability of the revenue stream for a financial services business is largely dependent on the age of the clients. He explained that when producers start out in the profession, their natural market is prospects within a few years of their own age. So, their clients often age along with them, and they likely aren’t bringing in many new clients who are significantly younger. The older the clients are, the less likely they need to purchase insurance — so the less valuable they are to the future of the advisory practice.

Diversifying your clients will add value to your practice, Grau said, and a good way to do this is by working with a younger producer who brings younger clients with them, or who can help your business attract a wider array of clients. “You can’t make your clients younger,” he explained, “but, by building teams, succession planning and bringing in more diverse clients, you have the ability to diversify and build sustainable value.” 

CLIENT SERVICE: Relationships are critical to value

McLaughlin explained that many baby boomer producers tend to have difficulty bringing in another advisor because they are used to doing everything on their own. “Sometimes, the lone wolf has a problem with succession planning because they have done everything by themselves all along,” he said. “The reality is they have to value the relationships they have with clients and, at the same time, find a way to let go.”

These relationships they’ve worked so hard to build bring a lot of value to the practice, but the key to building value is to create a process around transferring those relationships. The client service model must be defined by client level to provide value to the practice, Grau explained. Many practices don’t define this, he said, and the result is off-balance service, which is inefficient. “If you don’t have a client service model for A, B and C clients, your A and C clients are likely getting your B-client service model, or everyone gets the A-client service, and you’ll be far less profitable. 

“Build a client service model that is not solely dependent on you, and this institutionalized relationship can provide tremendous flexibility when it’s time to sell.”

PRODUCTIVITY: What are you doing to maximize your business productivity?

In general, the more you run your practice like a business, the greater value it will have. Being able to show hard data on your profitability is another way to demonstrate value, Grau said. “The cleaner your book of business is and the more profitability you can show in your P&L statement, the more attractive you’re going to be to the next generation of talent,” he said.

“A lot of it comes down to being aware that there is value in the business, even if they don’t have a number to put on it,” Grau said. “If they don’t think they have value in the business, then doing succession planning is a moot point.”

There is a mindset shift, McLaughlin said, that requires producers to work on their business and not just in it. “We bring very unique people into this industry,” he said. “They’re extraordinary people who want the entrepreneurial opportunity. They can build a successful practice, essentially, from their own personal drive and desire and caring about other people. That power that helps them build their practice is the same thing that holds them back from a succession standpoint. They have to take the steps to practice letting go and finding the right successor to be successful.”


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