Marriage is a serious commitment between two people who enter into the union with all the best of intentions to stay together forever. Unfortunately, statistics show that almost half of marriages will end in divorce. In the same way, advisor partnerships are not immune to divorce.
Increasingly, brokerage firms push fledgling advisors into partnerships with senior ones to boost their productivity, stave off attrition, and reduce the failure rates among the rookie set. Nearly 60 percent of advisors are within five years of retiring, expecting to sell their businesses to an unidentified buyer, according to recent estimates by Cerulli Associates. The further benefit of these matches is the increased odds of penetrating the next generation client population.
While arranged marriages make good sense for the firms at which these advisors work and most often for the senior advisor, they’re not always in the best interest of the rookie advisor.
Take the case of Rich, who started as a trainee with Merrill Lynch in Southern California. He was slowly but surely building his business, but at year five, he found himself at a crossroads. He had a book with $40 million in assets under management, and due to his lack of gray hair and tenure in the industry, he was finding it harder to demonstrate the “street cred” needed to win larger clients.
As Rich was contemplating his next move, he was approached by Sam, a family friend who was the senior partner in a two-person team at a boutique wealth management firm in the same city. Sam said that he and his partner generated approximately $4 million in annual revenue and managed assets of nearly $500 million. They had more business than they could handle and no succession plan. On the face of it, Rich saw this as a golden opportunity to move to another quality firm, gain access to a built-in client base, and someday become the lead dog in a growing business. Giving up total control over his business and professional life seemed a small price to pay for the potential to gain so much, so Rich determined that he would make the move.
The Honeymoon’s Over
Sure, the first three years of his new partnership were great, and they met nearly all of his expectations: exposure to higher level clients, enhanced credibility, increased compensation, and the psychological benefit of gaining greater status. But now—two years later—Rich is 34 years old and feeling deflated. He is living what some told him could be the “cons” of his partnership choice:
• Spending his time building someone else’s business and not his own;
• Becoming an indentured servant to the team;
• Building a book of clients that would never be his; and
• Neglecting to formalize a succession plan. (In this case, Sam’s nephew had recently graduated from college with a finance degree and would soon be joining the team. Rich’s chance of being the heir apparent was much less definitive.)
Today, Rich has added five years to his time in the business, but not meaningfully to his personal productivity or the assets that he owns. If he looks to leave the team and his firm, what will he have to show for his efforts? (His personal productivity is an anemic $300,000 as the majority of what he produced in the past five years went under a joint number with his partners.)
What can we learn from Rich’s less-than-optimal situation?
• If you are changing firms in order to join an established partnership, you must be sure that you have fallen in love with the firm first; don’t make the opportunity the only reason for the move. Do as much due diligence on the firm as you do on the team you are joining.
• Be sure to get any promises for succession opportunities in writing and have all specifics spelled out.
• If you do choose to partner, maintain a separate production number and be as diligent about growing your own client base as you are about the group’s.
• Make sure the clients you bring to the partnership remain yours alone.
• “Date” for a while before you establish anything resembling a business marriage.
While the opportunity to join a more seasoned team might seem sexy on the surface, it isn’t always what it’s cracked up to be.