Financial advice firm Templeton Advice Group, based in Wangaratta in Victoria, experienced three existential crises in the space of just seven years, any one of which on its own could have destroyed the business but for its partners’ foresight in setting up smart protection strategies.
Templeton founder and director Jürgen Schonafinger says advisers are often more focused on continuity of service to clients in the event of something happening to their adviser.
But his own experience shows it’s at least equally important to protect business partners from each other.
Buy-sell arrangements have been pivotal to Templeton’s resilience, but they’re often overlooked when advisers set up a business.
“There’s a much bigger story here – the client is such a small piece of it,” he tells Professional Planner.
“You can have the clients looked after, but if the [partner’s] surviving spouse wants his/her money, you’re there trying to run the business with that pressure of having to give him/her what it’s worth, because you don’t have a buy-sell or the insurance in place can make things very ugly and in some cases be the demise of the business.”
Insurance is essentially in Templeton’s DNA – it evolved from a National Mutual Life Association divisional sales office – so the value of having a buy-sell arrangement was a relatively easy sell when Schonafinger attended a presentation by MLC that set out some blunt facts of life.
“They said to us as business owners, if you have three partners, one of you is going to suffer a major trauma event,” Schonafinger says.
“If you have four partners, it’ll be two of you. And if you have five it’s likely to be three of you. And I thought, this is unreal… this is a big risk to our business.”
And as it transpired, MLC’s claim was neither far-fetched nor exaggerated. In a period of just seven years, Templeton has triggered its buy-sell agreements no fewer than three times, in a perfect hat-trick of trauma, own-occupation total and permanent disability (TPD) and life insurance claims.
“It does actually happen,” Schonafinger says. “There were only four partners, and three of them went down.”
Valuable lessons
Templeton’s experience is a salutary lesson in both the value of buy-sell arrangements and in managing relationships between business partners decisively but with sensitivity.
The insurance isn’t cheap – it was costing $30,000 per year just for Schonafinger own buy/sell insurance and he was starting to question the cost to the business in dollars.
At a six-monthly review he suggested to his then-partners that “we just cut the insurance back a bit, and then if something happened to me, you guys would just source the remaining funds via a bank loan”.
“And they said no way; we do not want to deal with the bank if we don’t need to; he says. As it happened a mere six months later, in 2016, “it was me that had the trauma”, when he was diagnosed with stage 4 melanoma.
“It was eating my bones, and I had 17 months off work,” he says.
“I seriously didn’t know if I was going to live or die. I won’t go into that story, but clearly, I lived. At that stage I had 65 per cent of the shares in the business. I received the insured amount for my cancer as per the buy/sell agreement and the other three partners got the shares.”
The insurance played its mechanistic role in saving the business, but Schonafinger’s personal experience illustrated a less talked about aspect of the benefits.
“It’s bigger than you know, and I’ll tell you another reason why it’s huge, because during my career I probably had somewhere between 30 and 40 trauma claims for clients that I sold trauma insurance to,” he says.
Most survived and “without exception, every one of them… said to me, the reason I got over my illness and I’m well now, is because as soon as that trauma payment went into the bank account, that was the last time I worried about money and I could then just concentrate fully on my health”.
“It makes such a significant difference. And I am living proof,” Schonafinger says.
“I was up and down to Peter Mac [the Peter MacCallum Cancer Centre] in Melbourne, and sometimes you’d get an appointment when it was really busy in the city, and you’d have to pay $400 or $500 for a motel room. Well, it didn’t matter, because you know the money was there and the money was just so irrelevant.”
When it happens again
Templeton’s buy-sell arrangement was triggered a second time just a few years after Schonfinger’s cancer when in 2022 another of the firm’s partners was forced to make a claim, in this instance for a mental health issue. He exited the business under an own-occupation total and permanent disability claim.
“It was an unsettling time for the business due to the nature of the partner’s condition. Schonafinger says.
“We had to protect everyone’s interest – the partner, the clients and the business and it was difficult, but we got there in the end.”
This episode demonstrated the importance of dealing with an emerging issue as proactively as possible rather than letting it fester; and it reinforced the need to have the proper cover in place.
“The other thing to note is in our buy-sell agreement, we always had trauma, own-occupation TPD, and life insurance.
“That’s critical because trauma becomes very expensive as you get older. A lot of the buy-sell agreements I’ve seen, post having constructed ours, don’t have the trauma cover in place.
“It’s a cost-cutting measure, and it’s something that’s quite difficult to deal with in the buy-sell agreement if you don’t have the cover in place. You do have to make a provision for it, because sometimes if you have a trauma, you’re not going back to work. [After] some traumas you can’t get back to work.”
Third time unlucky
It was less than three months later when the firm made a third claim on its buy-sell insurance. This one came completely out of the blue, when Brendan Phillips then aged just 35 years old and in Schonafinger’s words “was as fit as a trout” suffered a fatal heart attack. Schonafinger says Philips was one of the best advisers he’d seen in his 35 years in the industry.
“In our industry he is what we called a clean skin, meaning on his insurance application he had absolutely nothing wrong with him.” Schonafinger says.
“So, again, the buy-sell agreement kicked in. It was tragic and sad but from an insurance and buy/sell point of view, relatively straight forward. The death insurance paid out to his wife and his shares transferred to the remaining partners.”
Robust buy-sell arrangements make sense for any advice firm with more than one owner or partner, but especially when the firm is self-licensed. Templeton acquired its own licence in 2022, having previously been part of the RI Advice network.
“The dealer groups definitely do ask all their businesses whether they have it,” Schonafinger says.
“RI Advice was great in that regard. They’re big on it because they know what a disaster it can be, and then as the dealer they’ve got to step in and help clean up the mess.
“It’s more important if you’re self-licensed because you’ve got no one there to help you. If you’re a big business in one of those licensees they’re going to want to make sure they keep that business going so they’re probably going to step in and help due to them being the responsible licensee whereas at a self-licensed level you are on your own.”
