By Danniel Wexler and Phil Calhoun
How do I keep and protect what I have built? How do I create value that someone would purchase? How do I sell or transfer my business when I am ready? Brokers who build a book of business need to think like any business owner and consider these questions. We found the answer: “Find your successor, please!”
We came to this conclusion when a few years back we set out to listen to broker’s questions and concerns about protecting their commissions. From the results of ongoing California Broker Magazine surveys, from our continuing education programs on succession planning, and from numerous discussions with carrier and general agency representatives, the clear and consistent planning message we hear is: brokers want control of their commissions while they are active in the business. The unfortunate fact is most brokers fall short when planning how to protect their commissions in all life events, namely death, disability and retirement.
In this article, we outline best practices to protect commissions and explain why a successor is required. We also cover how adding a purchase agreement with a commission protection plan is the ideal model for a comprehensive plan.
“We outline best practices to protect commissions and explain why a successor is required. We also cover how adding a purchase agreement with a commission protection plan is the ideal model for a comprehensive plan.”
What brokers told us
From our research we found 90% of brokers want to keep control of their commissions when doing any planning.
In order to develop and implement a commission protection or succession plan, commissions need to stay with the broker as usual during the time a broker is active. However, brokers also report they perceive the cost is high to complete a commission protection plan. Further they see the time needed to find an acceptable successor and complete a written agreement as a burden.
Surveys show the majority of brokers surveyed have not completed a written plan to protect their commissions. This is a prime example that failing to plan leads to a plan to fail. These results are not surprising especially when brokers share how common it is to feel paralyzed about doing planning work. Complicating the planning process is the fact that even when a broker begins to work on their plan they seldom complete the process. Mostly this failure to finish is due to starting and stopping the process over and over.
Business owners particularly fall short when it comes to planning business succession. Health brokers and other business owners procrastinate about exit planning and instead tend to rely on hope: hope that a relative will join them; hope they stay healthy and active until they choose to stop working; and hope that carriers will step in and pay their loved ones. Hope is not a plan to count on—it is actually a plan to fail.
The best practice is to work with trusted advisors who can help with the planning process. Brokers who work with a professional are able to get started in the right direction and keep progressing so they can complete and then update their plan annually.
Your plan should focus on:
- Controlling commission
- Protecting commission in all life events
- Making the book of business as valuable as possible to a future buyer
Still not motivated? These facts should persuade you
Fact: To keep commissions coming in, brokers at the least need to stay alive and healthy, renew their license, and recertify annually with carriers and America’s Health Insurance Plans (AHIP).
Reality: Brokers who wait too long can lose it all, leaving loved ones with the double grief of dealing with their feelings of losing YOU and the fact that no income will be transferred from your book of business to their bank account. All of this can be avoided.
Solution: Find Your Successor: Brokers, especially solo brokers, need to understand the role a successor plays in commission protection. A successor is an individual or agency who agrees to help the broker continue to receive their commission payments when the broker experiences a life event that threatens the loss or lapse of commissions.
Our research shows the most common concern is how to find a successor agent or agency.
FACT: The chief concern of brokers is loss of control of their commissions. The truth is, failure to complete a commission protection plan can result in losing most if not all commissions by acting too late.
For many brokers the only plan they have is to keep working as long as possible. Some think they will get around to commission protection planning someday. Failing to have a plan to protect commissions is to plan to fail. Failure to plan is 100% guaranteed to lose 100% of your commissions. (Mike – This is another pull quote indicated by author)
Action Plan: To complete a commission protection plan, you need a successor broker or agency that you or your loved ones can transfer commissions to upon your death or in the case of a disability. A successor is someone who is licensed, can be trusted, matches your financial and client service style, is contracted with the carriers you received commissions from and if necessary is certified with AHIP and the carriers. You and your successor will need to complete a written agreement that you update annually.
Succession Plan Best Practices
Given all our research, a best practice plan would include the following:
- Retain your commissions. Brokers should retain their commission while active. Moving commission to another agency is a non-starter and should only be triggered after a life event like a disability or death. Build a solid client retention program that will push retention to the highest level possible.
- Chose commission protection that suits you. Your plan should be based on your independent nature and give you control over when you change from Active to Inactive. Define whether you want to choose to sell all or any of your book of business and detail needed protection in an unexpected life event. Define clearly what is a mandatory event and what that event triggers. Avoid a “one plan fits all” approach.
- Establish terms of payment. A commission protection plan has details and terms outlined in a legal agreement that includes a provision to continue commissions paid to the broker when a life event occurs, while they are alive, as well as providing a consistent payment stream to loved ones after death.
- Include a buyout option. See below for details on why this is critical.
- Find a legal and affordable way to execute your plan. A complete commission protection agreement will include commission protection as well as a buyout option where you or a designated person control the timing along with clear terms on how much is paid, for how long and to whom. The agreement needs to be legal, affordable, and brief and include a list of your clients and carriers along with commission transfer instructions.
- Find trusted advisors. Look for flexibility and affordability in your planning options. Find someone with experience who can tailor a plan for your needs. Brokers need a plan that addresses their number one concern—control.
- Stay in control. You need a written agreement with your successor that clearly spells out how your commissions will be paid in all life events. Since a life event is more than the death of a broker, the agreement needs to address disability or any reason the broker is no longer able to stay licensed and certified. The agreement needs to include a buyout, with specific terms defined such as how the price will be set and the payout period in years.
- Determine if you need Limited Liability Company (LLC). While LLCs or S-Corps are popular they are more expensive and complicated than a sole proprietorship and in many cases cannot substitute as a successor since many carriers require a licensed person receive commission transfers. Also many Medicare Advantage carriers require a certified and licensed person as a must for commissions transfer so a successor can only be a human.
David Ethington of Lambda Insurance Services developed a Successor TIP Sheet to follow when selecting a successor, which you can obtain by emailing firstname.lastname@example.org.
Think twice about forming an LLC
If you are thinking about an LLC and have identified a trusted broker partner, you may decide to wait or not start an LLC.
Many brokers find an LLC:
- Difficult and costly to start
- Fail to actually define the planning role of a successor agency
- Time consuming and costly to manage annually
- Complex and very expensive when you decide to exit or just you want out.
Why a buyout option is critical
From our discussions and research we have found most brokers know their commissions have value and can be sold or transferred but only while they are alive.
Why is a buyout agreement a key piece to add to your commission protection? Unfortunately it is common to hear that a broker has passed away with no buyout plan. This is a sad but preventable story. The impact of lost commissions on grieving loved ones is too hard to describe. This tragedy is compounded for those of us who know how much work and time is spent building a book of business, adding clients and commissions only lose it all when a commission protection plan falls short.
Solution—Add a buyout plan as part of planning with your successor. All buyout terms need to state how your successor will pay you and your loved ones an agreed amount for an agreed period of time. Once in place, the decision to start the buyout process should be on your terms only.
“Our goal is to educate brokers on the importance of having a plan to protect their commissions. Let’s make commission protection part of the discussion. Ask your local health benefits colleagues about their commission protection planning, attend CE courses, look for articles and other information, and find speakers who have experience with this topic who can give you unbiased information,” suggests Ethington.
We authored “The Health Broker’s Commission Protection and Purchase Guide” to address key commission protection points and how to build the value of a book of business. We include key points of our 3-page commission succession and purchase agreement as well. The guide is available by calling (800)-500-9799.
The Tip Sheet: “How to Pick a Successor Broker” is also available via email to email@example.com.
Phil Calhoun, MBA, a Cal Broker editorial advisory board member, has built, sold and acquired insurance agencies and books of business. He is the managing member of Lambda Insurance Services an elite broker education and planning agency, author of The Health Broker’s Commission Protection and Purchase Guide and Phil enjoys educating brokers on how to protect their commissions in all life events. Find him on LinkedIn here: https://www.linkedin.com/in/phil-calhoun-7a59491a/
Danniel Wexler, JD, is with the law firm of Strazzeri, Mancini LLP. Wexler is a nationally recognized estate and succession planning attorney. He has worked with insurance brokers for over 20 years and appreciates the effort it takes to build a book of business and the importance of protecting commissions. Find him on LinkedIn here: https://www.linkedin.com/in/danniel-wexler-9280072/