More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
The greatest prospecting opportunity in the history of this industry is right now.
No, it’s not cold calling, networking, referrals, introductions, seminars, direct mail or the “85 percent of high net worth investors who would consider changing advisors.”
It’s the legions of baby boomer brokers who, like their counterparts in society at large, are inevitably, if reluctantly, lumbering toward retirement. If you are 35 to 50 or so, you should seriously think about a partnership with a senior advisor, with the long-term objective of buying him or her out. I call this a buyout partnership.
The average age of a financial advisor today is about 58. In the next decade, billions if not trillions in assets will go in play as senior advisors retire or pass away. Younger advisors, now in the industry, have the most golden opportunity of any group, probably since the early baby boomers hit the markets in 1983, 1984, 1985.
Talk with several prospective partners. Please understand: you young advisors are in high demand. There are more of them than there are of you. Pick the best opportunity.
That’s not necessarily with the oldest and richest. Personality conflicts could intervene. The oldest and richest might have clients who will pass away even before the FA retires.
The best opportunity is with someone you like and trust. He or she has at least $50 million in AUM, and is willing to completely share knowledge and skill. Ideally, it is someone whose book contains a substantial percentage of people younger than the FA.
To find out if a particular partnership will work, go through the steps of my “Partnership Process,” found in my white paper and tools online.
Find a Suitable Partner
For the senior, this means find someone at least 15, preferably 20, years younger. For the junior, vice versa. This can be as simple as letting your complex manager know you are looking. You can, and probably should, join a local group, such as an FPA chapter. An even more radical approach, search Google and look at pictures of FAs.
Get To Know Each Other
The basis for a surviving partnership is enduring friendship and goodwill, and common ground on investment strategy. Perhaps like most surviving marriages, a long courtship is worthwhile.
Obviously, you need to agree on investment philosophy. A partnership MUST speak with one voice. At the time the relationship comes together, that voice is the senior partner’s. In most partnerships, the partners need a similar work ethic. However, in a buyout partnership, the agreement can be for the senior partner to work less and the junior partner more. It’s sort of a “your brawn, my brains” deal.
Get an Agreement
Here are key tasks you must perform to arrive at an agreement:
Gather data. Each prospective partner should be willing to share some data about clients. These data do not have to disclose client names, but they should include assets, revenue, dates of birth and known health issues. My website will help you calculcate average ages and life expectancy for clients and spouses.
Consider: Suppose the average age of a clientele is: husband 76 and wife 72. Very roughly, in 10 years, in some 20 percent of cases both spouses will have passed away. Unless you have drilled deep into the family relationship, a fifth or more of assets will have gone to the heirs to be spent or managed elsewhere.
If you have 300 clients now, in 10 years, you will have 240. Therefore, just to stay even, you need to add a minimum of six households per year. And this doesn’t even factor in losses due to withdrawal.
Decide to become a partnership. A partnership, by definition, is “a business entity in which the partners share with each other the profits or losses of the business.” I suppose you could say that a partnership could consist of “these are mine/those are yours/and these are ours.” But that does not make it so. I have seen the “mine/yours/ours” model tried countless times, but they blow up sooner rather than later.
There are at least two reasons for their demise: lack of trust and “ours” become orphans. My counsel: keep talking until you trust your partner enough to put all the clients in one bucket. Get married or break up. No living together!
Negotiate initial compensation. There is no hard and fast rule on this. Probably the most frequent initial comp formula is: add trailing 12 gross revenue for each partner to get a total. Each partner gets their percentage of the whole.
Negotiate compensation trend. Unless the senior partner’s departure is imminent, a partnership with long-term survival value must trend toward 50-50. Let’s say that the senior partner’s production is $500K and the junior’s is $250.
Initially, the senior partner draws compensation of two-thirds and the junior one-third. But if the junior partner starts finding new assets from existing clients and bringing in new clients, production will go up. So the junior partner should, over a several year period, step to a 50-50 split. Let’s say at $1 million, the percentages are 60-40. The senior is actually making more but has a lower percentage.
Work out a decision-making process. One of the biggest dangers of a partnership is: two partners disagree and forward motion stops. I suggest if a decision cannot be made, a person respected by both is brought in to break the tie.
Decide how to handle disability. I am familiar with one partnership where one of the partners was ill for a year. The other partners carried on, kept the business alive and kept sending the checks. But suppose it’s five years? Stuff happens.
Decide on a divorce clause. One of the big reasons partnerships break up is because the partners never looked at what could happen and planned for it. Suppose one partner wants to change firms and the other does not? Suppose one partner develops a different investment philosophy? The possibilities are endless.
A possible provision in your agreement could be something like: Each partner is entitled to take clients he or she brought to the partnership. A meeting will be held with a mutually agreed-on mediator to apportion the other clients on the basis of revenue and relationship with the understanding that the split on revenue shall be approximately the split on income as specified elsewhere in this agreement.
The better job you do deciding how to split the less likely you are to split.
Get it in Writing
You are two years down the road, and one of the partners tells the other, “But I thought you meant…!” You must avoid this by getting your agreement in writing.
I recommend the partners work out between them what they agree to, and then consult an attorney. The type of attorney you are looking for is probably someone in a small law firm. This partnership model is the same model as a small law firm.
I also urge you to get one attorney to act as counsel to the partnership. At the very end, you can each consult your own attorney, but please, if possible, don’t each hire a separate attorney. Legal bills will be many times what they would otherwise be.