Financial planning practice due diligence

A financial planning practice has almost nothing physical to inspect, so diligence is really about testing three things: whether the AUM is as durable as reported, whether the client files would survive a compliance audit today, and whether the income the seller is reporting will actually keep flowing once the registration changes hands. A buyer who works through each of these systematically is in a very different position at closing than one relying on the seller’s own summary.

Verify the AUM schedule client by client

Ask for a client-by-client breakdown of assets under management or advisement, showing fee type, account tenure and how each relationship has been serviced, and cross-check the largest accounts specifically rather than accepting a single blended total. Concentration in a handful of large accounts, or a heavy skew toward one product type, is exactly the kind of risk a blended figure hides and a client-level schedule reveals.

Pressure-test the know-your-client and suitability files

Pull a representative sample of client files and check that know-your-client information is current, that the recorded investment objectives and risk tolerance genuinely match the holdings in the account, and that plan reviews have actually happened on the cadence the practice claims. Gaps here are not just an administrative nuisance — they are exactly what a dealer’s own compliance audit would flag, and a buyer inheriting undocumented suitability risk is inheriting a problem that predates their ownership but becomes theirs to answer for.

Confirm registration and complaint history directly

Confirm directly with the dealer or MGA, and with the relevant provincial securities and insurance regulators, that the practice and its principals are in good standing and that no open or past complaint or disciplinary matter is attached to the book. This is not a step to take on the seller’s word — regulators and self-regulatory bodies keep their own records, and a complaint that surfaces after closing rather than before becomes the buyer’s to manage with none of the leverage they had during negotiation.

Test whether trailer and commission income actually transfers

Where part of the practice’s revenue comes from trailer or commission arrangements tied to specific insurance or investment products, ask the dealer or MGA directly, in writing, whether that income continues at the same rate once the registered representative changes, or whether it needs to be renegotiated or requalified for. A margin that looks stable in the historical financials can shrink the moment the registration changes if the underlying arrangement does not survive the transition — and finding that out during diligence is far cheaper than finding it out in month two.

Reading a clean file for what it does not show

A practice with tidy records and no obvious red flags is a good sign, but diligence should still confirm the negative — that no undisclosed complaint, no lapsed errors-and-omissions coverage and no pending compliance inquiry exists — rather than treat the absence of a problem the seller happened to raise as proof none exists. Get independent confirmation wherever the regulator or dealer allows it, and use advisors who do this kind of diligence routinely rather than relying solely on the seller’s own representations.

Staff and successor dependency, tested rather than assumed

Where the practice includes associate advisors, paraplanners or client-service staff, find out how much of the client relationship actually runs through them rather than exclusively through the retiring advisor, and whether any of them are bound by non-solicitation terms that would survive a change of ownership. A practice where staff already hold meaningful client trust is a materially safer purchase than an equally sized practice where every relationship funnels through one person who is about to leave — talk to key staff directly, where the seller permits it, rather than assuming their continued involvement.

What a finding actually means

Not every finding is a reason to walk away. A know-your-client gap on a handful of smaller accounts, or a trailer arrangement that needs to be renegotiated with the dealer, is common and can often be addressed through a price adjustment, an extended transition period or a holdback rather than treated as disqualifying. What matters is that each finding is identified and dealt with explicitly in the purchase agreement, rather than discovered for the first time after closing — when the buyer has already taken on the registration and has far less leverage to do anything about it.

• Client-by-client AUM schedule: fee type, tenure, product mix, historical service relationship
• Representative sample of know-your-client and suitability files, checked for currency and accuracy
• Direct confirmation from the dealer or MGA and relevant regulators of standing and complaint history
• Written confirmation of whether trailer or commission income survives a change of registered representative
• Realistic client consent-rate assumptions, tested against any early outreach already done
• Non-solicitation coverage and actual client-relationship depth for any associate advisor or support staff