Succession conversations typically focus on two strategies: cultivating a successor from within or aligning with another advisor/owner outside of the firm. An alternative approach—and one that’s worth considering—is merging your firm with another.
Through a partnership, experienced advisors with dynamic, vibrant businesses join their practices, providing for their eventual retirement as well as unexpected events like death or disability. Plus, the new entity presents an opportunity to create:
Economies of scale in operations, technology, and marketing, allowing advisors to balance workloads and assign support staff to specialize in areas where they are strong
Capacity—both advisory and administrative—to meet the demands of an ever-growing business and ensure seamless delivery of service if an advisor or key employee is unable to work
Greater operational efficiency, reducing overhead and increasing margins and net operating profit
Are you on the same page?
To make this strategy work, there are five things partnering advisors need to be crystal-clear about before moving forward.
1. Vision. Know exactly why you want to partner and what you’re willing to give up in doing so. Most advisors think only in terms of what they will gain by choosing this path, not about the things they will lose: complete autonomy, single-handed decision making, and so on. Also be clear about how you want the partnership to fulfill your retirement needs. For example, do you want to exit all at once, or sell tranches and transition over several years?
2. Complementary skills. Successful partnerships bring together advisors who have strengths in different areas of managing a practice. Both will have expertise working with clients—that’s assumed. For the practice to thrive, however, the partners need additional business management competencies like:
- Financial management (CFO role)
- Operations management (COO role)
- Investment management for client portfolios (CIO role)
- Marketing prowess (CMO role)
- Visioning and decision making (CEO role)
Consider, too, how the role you intend to fill will be handled once you retire. Which position does it make sense for you to take today, knowing that several years out you may no longer be with the firm?
3. Trust. The partnering advisors must trust each other implicitly, conduct themselves with integrity and honesty, and approach each day with a similar work ethic.
4. Commitment. It’s not enough to be interested in the partnership’s success; each partner must be fully committed to it. Ken Blanchard has said, “There is a difference between interest and commitment. When you’re interested in something, you do it only when it’s convenient. When you’re committed to something, you accept no excuses, only results.” If you enter into a partnership for succession reasons, planning to exit in a couple of years, you should still be committed to the success of the firm.
5. Preparation. A poorly structured partnership can result in a negative experience for the advisors, staff, and clients involved, with longstanding implications once it’s unwound. Be prepared to spend a lot of time and effort developing your partnership or operating agreements—which should define how you will work together, how decisions will be made, and the roles each partner will fill—as well as your succession plan. Be willing to enlist the help of legal and tax experts in documenting these agreements.
The partnership advantage
This may seem like a lot of work, and it is! From a succession standpoint, though, partnering with another advisor presents several advantages:
- Clients become comfortable working with a broader group of people, getting to know the names, if not the faces and personalities, of the other advisors in the firm. This familiarity will support client retention when you begin to implement your succession plan, providing a sense of continuity, consistency, and reliability.
- The partnership will likely increase the value of your book of business through better deployment of technology and staff, lower-cost management of accounts and portfolios, higher margins, and greater brand awareness. If an earnout is one of the terms of your compensation agreement, this could mean a significant increase in the payments you receive compared with what you might receive if you remained a solo advisor.
- Going through the partnership process can help you allay your concerns about the future. Knowing that your clients will be in good hands and that you can expect a strong return once you begin selling your interest in the firm, you’ll have the space to think about new challenges and projects that may lie ahead.
Partnerships aren’t for everyone, of course. This type of arrangement typically takes five years or more to put in place and stabilize, and the considerations outlined here are only the beginning. That said, partnering with another advisor is certainly a worthwhile option to consider as you envision how you will move on to the next chapter in your life.
Maria Considine King is vice president, practice management, at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.
