If I asked you to define partnership, what would you say? It’s a challenging question because partnerships mean different things to different people. For many advisors I speak with, a partnership is a structure that provides certain benefits. Specifically, it allows them to expand scale and capacity, maximize operational efficiency, create economies of scale, foster redundancy of skill sets, and establish a firm identity rather than one based solely on the personality of the founder.
But is forming a business partnership right for your firm? If this is a strategic move that you’re considering, it may help to first identify what stage of partnership your firm is in—and where you would like to take it.
Stages of Partnership
Generally speaking, the various stages of partnership can be described as follows.
Solo. The solo advisor has a single DBA name, likely owns the office space, and may have staff members who fill generalist and hybrid roles.
No shared business and no shared staff. Here, the advisor is the firm. This is the form taken by many traditional “lifestyle” practices.
Silo/multiple-advisor office. In this case, individual advisors have a shared DBA name. They also share space, expenses for resources (e.g., equipment, common areas), staff who fill generalist roles, and some marketing expenses. But they have individual books of business and separate processes. Again, the advisor is the firm.
Ensemble. In ensemble practices, the firm begins to establish an identity of its own. Advisors share many things, including a business plan and vision, space, expenses, staff, DBA name and marketing plan, and technology. They may have some shared business, financial management of the firm, and similar processes. It’s likely to see increased specialization among staff, reciprocal continuity plans with buy-sell agreements, and some shared equity.
Enterprise. In an enterprise firm, there is a shared business plan, vision, and values. The firm also has a shared space (often with multiple locations), expenses, staff, DBA name and marketing plan, ideal client profile, processes, service and fee matrices, and technology.
In a nutshell, the enterprise firm has an identity of its own, which means an integrated book of business, a team approach to client acquisition and service, and buy-sell agreements for succession and continuity. The leadership roles are clearly defined, there are integrated business management competencies, and there is cohesive and disciplined financial management of the firm.
Avoid the Partnership Pitfalls
Once you identify what stage your firm is in, you’ll want to think about what’s next. Considering the following questions will help you avoid the pitfalls that can affect the success of a partnership. Ultimately, all partners need to be candid about their expectations so decisions are not made based on assumptions or a handshake.
- What is your level of commitment? Partnerships are not necessarily easier structures to work within than the solo model. The relationships between the partners require constant attention and nurturing to be successful in the long term. Often, there is a high level of interest, but the level of commitment may be lacking.
- What will forming a partnership allow you to do that you cannot do today? Here, you’ll want to think about the objectives you hold for your business and which stage of the partnership spectrum might help you achieve those goals.
- Are you ready to give up complete autonomy and control? If the answer is no, perhaps sticking with a solo practice or a lifestyle practice is the right option for you.
- How will decisions be made in the partnership? How will impasses be cleared? When thinking about these questions, consider how comfortable (or uncomfortable) you are with sharing decision-making with others, as well as your ability to make compromises.
- What roles are you best suited to play within the partnership? For more on the various roles to consider, read on!
The Written Operating Agreement
When forming a business partnership, executing a written operating agreement will help you gain clarity. It will also help ensure that you and your partner(s) have discussed critical issues that will likely affect the partnership in the future.
The operating agreement may include the following topics:
- Shared requirements (space, resources, expenses, staff, etc.)
- Communications (confidentiality, shared drives, etc.)
- Decision-making (voting methodology, tie-breaks, impasses, etc.)
- Meetings (frequency, agendas, minutes, follow-up, etc.)
- Personal courtesies
- Ownership structure
- Profit-sharing structure
- Buy-out agreements (continuity and succession)
- How to separate if the partnership is unsuccessful
Documenting the agreement that you and your partners have on these issues will give you an objective standard to turn to if you ever find yourselves in a difficult situation. Plus, it will allow you to focus on the bigger picture and reflect on the intentions you had when putting the partnership structure in place.
What’s Your Role?
Economies of scale and expanded capacity are gained when partners share the responsibilities of running the firm. But as partnerships evolve, the roles assumed by advisors become more distinct and more critical to the success of the firm. Regardless of the stage of the partnership, the roles that you may want to consider include, but are not limited to, the following:
CEO. The CEO is the most senior dedicated management position within the firm. This individual possesses broad executive authority and has responsibility for providing strategic vision and leadership for the firm. The position also manages other senior roles. When partnerships form, it can be difficult for advisors to relinquish their CEO responsibilities.
CFO. This position is responsible for overseeing and directing the organization's financial goals, objectives, and budgets. The CFO collaborates with the firm’s executives to develop these financial goals and budgets.
COO. This position often oversees all aspects of the office, including the management of operational tasks and the supervision of other employees. The COO designs and implements systems to streamline operations and maximize revenue interests.
CIO. The CIO is responsible for a wide variety of financial functions. This individual designs the investment process for the company and, above all, performs the critical function of asset management. The CIO also helps develop the asset allocation levels aimed at creating a portfolio of investments and helps conduct investment research, as well as technical analysis research to help the firm make trading decisions.
Director of human resources. This position is directly responsible for the overall administration, coordination, and evaluation of the human resources function. The director of human resources hires for open positions, oversees the training of new staff, guides the supervisory team in developing staff members, ensures that compensation and benefits are comparable with the market, and keeps a pulse on the culture within the firm and the expression of the firm’s values through the policies adopted.
These roles may seem daunting, but though they are vital to the overall success of the firm, they often are not full-time positions. In most firms, the majority of the advisor’s time is focused on working with clients.
Is a Partnership Right for You?
While forming a partnership isn’t limited to assessing commitment, creating an operating agreement, or defining roles, considerations of these aspects can be among the most challenging to work through. Be clear about what you want and are willing to do. Of course, partnerships aren’t for everyone. But using the information above, you can better assess whether it’s something that can work for you.
What partnership stage is your firm in? Do you have a written operating agreement in place? Please share your thoughts with us below!