Financial advisors love joint ventures. They are perceived as a low-cost, low-risk way to expand an advisory business, and some firms have “proved” this theory to be correct. But, as with all concepts in the financial services industry, I urge you to be careful about how you apply “rules of thumb” or “industry standards.” It is becoming increasingly clear that most current practices are neither optimal, nor even necessarily “best” practices: They are just frequently used, and oftentimes, they don’t make sense. The key to finding the right strategies lies in creating a clear and detailed plan before you start; time and again, success lies in the nuts and bolts.

Joint ventures are a perfect example. By definition, joint ventures are designed to be short-lived: either they work extraordinarily well and the bigger firm swallows the smaller firm whole; or they fail abysmally and both firms go their separate ways. That’s why it’s important that advisors not confuse joint ventures with building referral networks or developing informal alliances. In a joint venture, two parties formally combine their strengths to shore up each other’s weaknesses, usually with the goal of capturing more business.

For example, an accounting firm may form a joint venture with a financial planning firm to deliver advisory services to their clients; or a financial advisor may form a joint venture with a law firm in order to offer clients legal advice and document preparation. In an ideal joint venture, this exchange would go both ways (e.g., the CPA firm getting advisory services and the advisor getting tax work), but it rarely happens that way. Usually, one of the entities provides expert service to new business generated by the other.

The joint venture model works best when both parties in the venture share in the risk and the return, have an explicit commitment to each other to support the initiative, and have a clear vision of what they are trying to accomplish.

Joint ventures fail when the relationship becomes one-sided, when success is measured in short-term financial results, or when there is no clear strategic framework for how it can work.

To start the joint venture process, then, ask yourself whether it would be better for your firm to offer its existing services to new clients or to add additional services for the clients you already have. If it’s additional services, then finding a partner who offers what your clients need–a law firm doing trust work, or an accounting firm that does tax work–is relatively easy. More often, though, a planning firm is interested in generating new clients. If that’s the case in your firm, consider what kind of clients you’d like to have, and how many new ones you could service effectively. If your business plan calls for growing beyond your current capacity, carefully consider what increases will be required in staff and professionals, and how you will find, train, and manage them.

It’s Not a Sideline

To develop a successful joint venture, we recommend that you first clearly articulate your business strategy. Because advisory firms usually have limited resources, any joint venture should comprise a major part of that strategy, typically either to get more clients or offer more services to existing clients. If you view the joint venture as merely a sideline to your core business, it’s unlikely you’ll have the time, energy, or staff to make it work. Every time you dabble in sidelines, you distract yourself from your primary business and dilute your ability to propel that business forward.

One of the key goals in structuring this model is that there be measurable expectations and outcome. If your primary role is to create leads and new business, then there should be a systematic program for making that happen. For a joint venture to work, it cannot be dependent on “accidental business” that only captures clients when the referring party trips over opportunity. If, on the other hand, your primary role is to provide service, then the source of the clients for your service has a reasonable expectation that the service will be done accurately, completely, and on time, for a reasonable fee.

For example, you may be an advisor specializing in very-high-net-worth individuals who have complex needs, especially in tax and estate planning. To further extend your brand and build deeper relationships with those clients, you might consider aligning with an accounting or law firm that possesses this expertise and making their service part of your core offering.

But is this really a good idea? First, ask yourself if the joint venture is a compelling proposition for your target clients, or just your fantasy that you can project business through such affiliations in order to conquer the world by being all things to all people. Follow that reality check with a strategic question: How will adding these services make your firm different from every other advisor–including accounting or law firms–in your market? A good answer might be that you package the additional services in a way that makes them more cost effective, or more efficient, or more integrated than what is currently available in the market.

Get Specific

Once you’re clear on the type of client you are going to pursue and serve with the joint venture and how it will differentiate your firm from your competition, you need to define the processes of how the joint venture will work, and determine specific responsibilities. Start by being very clear about how clients will be handled–from intake, to document collection, to providing each service, to billing and collection of the fees. Then answer these questions:

o Who will be accountable for what?

o What will the final product or service look like?

o How will you ensure quality control?

o How will the other owners of the joint venture monitor what’s happening with specific clients?

o How will you resolve conflicts when they inevitably arise?

o How will you distribute the proceeds?

o And finally, how will you measure success? New clients? Profitability? Deeper client relationships?

These issues and many others can be greatly simplified if there is one person in each firm who is clearly accountable to manage the relationship. Both firms, then, essentially become the other’s client, and if it’s going to work, the relationship cannot be taken lightly. For instance, it’s important to have some structured form of communication, such as regularly scheduled meetings and reports, as well as a process for periodically reviewing the venture’s successes and failures.

As you answer these questions and begin to form a plan, it will be easier to evaluate whether the joint venture is truly a good business decision. The stumbling block for many such deals comes down to how each party gets paid, given how much time and energy is required to make the ventures work. Many advisors, for example, will overpay for referrals from other professionals to attract more clients, and assets. That’s why it is important to carefully consider the nature of the incentives involved.

We were recently asked by an advisor to provide guidelines for the compensation structure in a joint venture they planned to set up with an accounting firm. The plan called for the CPAs to refer their clients to the advisor to expand their services into investment advice and get incremental revenue. To calculate those increments, the accountants told the advisors that the rule of thumb in their industry was a 25% payout on all revenues generated from the referrals, in perpetuity.

Like most rules of thumb, which often take on a life of their own, this one may be true. But such rules are not always logical, nor, in this specific case, are they in the best interest of the firm providing the professional services.

We tried to help the advisors put this referral fee in perspective. We generally advise clients that to have a successful business, the products and services they offer should show a gross profit margin of around 60%. That leaves only 40% of the revenue generated by any “sales” to pay for the product or service sold, and the costs of making that sale–including referral fees. If, in this case, the advisors pay 25% of total revenue from a client forever, that would leave only 15% of those revenues to pay for the analysis, consulting, and implementation of each client’s plan. While this may be acceptable in the first year, it certainly is not workable in subsequent years.

In joint ventures such as this one, the advisory firm is looking to gain not just a few ongoing clients but frequent introductions to new clients. So the reward for those referrals should come from short-term behavior; to keep the focus on developing more clients, more frequently. I recommend more incentive be put into the initial “sale,” and less on subsequent business from that new client relationship. Moreover, I would consider setting up breakpoint incentives that encourage the referring source to hit certain targets.

If some sort of trailing fee is necessary to motivate the referral source to provide legitimate leads, then the advisory firm will need to limit that payout to a level that makes economic sense. With 20% to 25% of first-year revenues paid up front, it’s hard to justify more than 10% on-going, and 5% may be more appropriate. If an advisor pays a higher referral fee in perpetuity, sooner or later he or she will have to decide whether it’s prudent to try to build a business around what have become low-margin, low-value clients. Imagine the dilemma–do you return the calls of the “full-fee” clients first, or the ones discounted under the joint venture? Do you provide the same degree of service to these discounted clients? Which clients do you care most about losing ?

That’s not to say that a joint venture can’t work, especially if it’s structured properly. But before signing on the dotted line, make sure the venture has the right business purpose, the right economics, and the right commitment, from both parties.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. He can be reached at

In joint ventures such as this one, the advisory firm is looking to gain not just a few ongoing clients but frequent introductions to new clients. So the reward for those referrals should come from short-term behavior; to keep the focus on developing more clients, more frequently. I recommend more incentive be put into the initial “sale,” and less on subsequent business from that new client relationship. Moreover, I would consider setting up breakpoint incentives that encourage the referring source to hit certain targets.

If some sort of trailing fee is necessary to motivate the referral source to provide legitimate leads, then the advisory firm will need to limit that payout to a level that makes economic sense. With 20% to 25% of first-year revenues paid up front, it’s hard to justify more than 10% on-going, and 5% may be more appropriate. If an advisor pays a higher referral fee in perpetuity, sooner or later he or she will have to decide whether it’s prudent to try to build a business around what have become low-margin, low-value clients. Imagine the dilemma–do you return the calls of the “full-fee” clients first, or the ones discounted under the joint venture? Do you provide the same degree of service to these discounted clients? Which clients do you care most about losing ?

That’s not to say that a joint venture can’t work, especially if it’s structured properly. But before signing on the dotted line, make sure the venture has the right business purpose, the right economics, and the right commitment, from both parties.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. He can be reached at mark.tibergien@mossadams.com.”>mark.tibergien@mossadams.com.