GCI launches succession plan for independent brokers
Alex Cook, CEO of GCI Wealth.
Independent insurance brokers, particularly in the short-term insurance space, find it hard to capitalise the value of their companies in order to fund retirement. This lack of proper succession planning disadvantages the broker as well as his or her clients, says Alex Cook, CEO of GCI Wealth.
“The broker has built up a small team and a loyal client base, creating a profitable business that generates a good income. But when it comes to selling the business in order to fund the desired retirement lifestyle, most brokers come unstuck,” Cook points out. “We have successfully pioneered a similar process for independent financial advisors, who face the same challenge, so we are essentially adapting a proven approach to the short-term insurance industry.”
Cook explains that when an independent brokerage is sold, the norm would be for a purchaser to pay between 1.5 and two times the annual turnover. The resulting capital sum would certainly not provide enough capital to fund anything like an equivalent income stream.”
For example, a broker drawing an annual income of R1 million could expect to sell his or her business for around R1.75 million. With a prudent drawdown of around 5 percent, that would only produce R87 500 per annum, thus compromising the broker’s ability to fund his or her retirement.
The better alternative, Cook argues, is to create an income stream that will continue into retirement and beyond to create a financial legacy. This can be achieved by helping the independent broker to roll his or her business into GCI itself, providing a formal process through which the seller can transfer his or her embedded knowledge and experience to younger brokers. The process could be phased in line with commercial realities or the seller’s plans. In this way, for example, the seller could retain key clients for as long as desired while helping to transfer other clients to younger brokers.
By following this approach, clients are much more likely to be retained. In addition, because brokers are now associated with a large company like GCI, they will be positioned to earn additional income by taking on certain functions for insurers, such as policy issue or claims. This would increase the revenue from clients. The fact that GCI Risk Services is a joint venture with leading provider of back-office services to the insurance industry, Inscon, makes this very easy to achieve.
“We have found that the most effective successions are those that are phased,” Cook says. “By phasing the succession, we can help the broker to remain as busy as he or she would like, retain the existing client base and tap into additional sources of income. Returning to the example I used above, instead of realising the relatively paltry lump sum of R1.75 million for a business that generates around R1 million per year, a broker could earn R6.7 million during the phased handover approach.
“Independent brokers, like independent financial advisors, often build strong businesses with good income streams, they just need a way to capitalise those strengths when they exit the business,” Cook concludes. “We have developed the model to this successfully.”
