Merger Mania – The End of Independence?
Over the past year we have seen an unbelievable level of mergers and acquisitions in the employee benefits industry. Large global advisors like Hub International Ltd., Arthur J. Gallagher & Co. and People Corporation have been purchasing numerous small and mid-sized brokers across Canada. Hub alone has purchased thirteen advisors in Canada, with six advisors in British Columbia alone, over the past year.
So this begs the question as to what is going on here. Is this focus on acquisitions by the multi-national advisors in the best interests of clients or in the best interests of their global shareholders? In particular, why would advisor firms that previously promoted themselves as an “independent, advisor-owned company” now choose to sell out to these large multi-national companies? And what does this now mean for employee benefits plan sponsors? We suggest the following issues for consideration:
- CLIENT FOCUS – Based on my own personal experience working for multi-national companies, there is a major difference between servicing clients as an “employee” versus servicing them as an “owner”. Too often at the large consulting firms, advisors simply inherit clients and have no personal connection with them and when they lose a client relationship they are just allocated another. Incentives at these firms focus heavily on technical expertise and “billable hours” rather than on client satisfaction. As well, how will former entrepreneurial “owner advisors” feel now being just another “employee advisor”, one of the many, in their new firms and how long will they last (beyond any negotiated retention periods).
- TRANSPARENCY – While all this goes on, the employee benefits industry is also undergoing major changes around transparency of compensation. The national “G19 initiative” proposes to require disclosure of all compensation paid by insurers to advisors on behalf of clients, starting in 2019 for retirement plans and 2020 for employee benefits plan. These commissions are currently built into employee benefits premiums paid by plan sponsors but they may not be aware of the amount being paid. History in other jurisdictions has shown that disclosure has caused many smaller advisors to opt to sell their businesses rather than undergoing the rigour of these new disclosure requirements, so perhaps this is a contributing factor in Canada.
- SUCCESSION – Like in many other industries, the employee benefits industry is dominated by advisors who are approaching typical retirement ages. Many of them have unfortunately failed to develop adequate succession plans and have failed to hire new advisors to continue their business. As such, the emergence of multi-national firms looking to purchase these firms provides a convenient “exit strategy” to many of these advisors and they simply sell their business given the convenience.
- MULTIPLES – Some “owner advisors” are considering purchase offers as part of their succession plans while other advisors are considering them because they just can not resist the size of the offers. As a Chartered Professional Accountant, I have historically seen sale prices for professional service firms ranging from one-and-a-half to two times annual revenues but we understand that these more recent sales in the employee benefits industry are being made at much higher multiples. While it is typical for the exact terms of sale to not be disclosed, we have heard that some of these sales have been made at three to four times annual revenues. Often these large multi-national firms feel pressured to grow by way of acquisition since they have failed to grow organically through innovation and personal entrepreneurial drive. Regardless of how these sales are being financed, paying such high “multiples” undoubtedly results in pressure on the business in the long term.
- COST PRESSURES – When you put all these factors together, there is undoubtedly going to be cost pressures on these large multi-national advisors for them to ultimately generate a return on their investment (purchase price). They are purchasing other advisors at extremely high multiples and will therefore either need to increase revenues or decrease costs. The pressure to increase revenues will come at a time when new standards will require transparency in disclosing those higher commissions to clients. Alternatively, the pressures to decrease operational costs may result in lower client service standards from advisors who are no longer personally connected to their clients. Clients may see their historical advisor teams disappear as acquired firms are consolidated and operational structures are rationalized.
At ZLC Financial, we are proud to continue to be an independent advisor. We have been one of the fast growing advisors in the local market, growing our client base primarily through direct referrals from our valued clients rather than relying on acquisitions. As well, we continue to find experienced advisor team members to join ZLC Financial and now we have one of the most experienced employee benefits teams in the market – almost 300 years of experience within our team of fifteen employee benefits specialists.
As a result, we are large enough to be a force in the local employee benefits industry but still small enough to be flexible and affordable. At ZLC Financial we:
- remain personally vested in ensuring our clients achieve the best solutions and that we meet and exceed their expectations. If you are not satisfied, we feel it personally. You are not just “another client” of the firm and our focus continues to be on you, our valued clients.
- proactively started to adopt the new compensation disclosure standards starting in 2019 rather than waiting for the formal launch to ensure transparency in compensation for our clients.
- recruit new advisors into our employee benefits business to proactively address succession risks. Three of our five advisors have joined since 2016 and none of our advisors is even within ten years of a typical retirement age.
- grow our business organically (10% to 15% annually over the past four years) and therefore our growth strategy does not put pressure on our operational structure and our service standards.
- stay focused on keeping our existing clients happy and continue to hire new team members to support our clients at our high client service standards.
ZLC Financial is one of the fastest growing advisors for employee benefits in Vancouver and we are fortunate to have the best people, resources and clients. We provide value to you by leveraging one of the most skilled benefits teams – collectively almost 300 years of experience within our team of 15 employee benefits specialists. We have been working with businesses ranging from 3 to over 65,000 plan members for over 30 years.
We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits and retirement programs. Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.
By Dan Eisner
This information is designed to educate and inform you of strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a qualified advisor.