Ralph Adamo knows what makes advisory firm partnerships successful — and what makes them fall apart.
Mr. Adamo, who spent six years as a partner with FFR Advisory Services LLC, noted that the nine partners at that firm were “running isolated books of business and client relationships, sharing only common expenses.”
Like many failed partnerships he has observed since leaving FFR in 2006, models such as those at his old firm are “built to terminate when the adviser can take his book of business and walk away. That is the kind [of partnership] that collapses,” said Mr. Adamo, who now serves as president, chief executive and sole owner of Integrity Wealth Management Inc.
In contrast, partnerships with the best chance of success are those that fully integrate the businesses and assign different roles to the principals, he and other advisers said.
Each advisory firm needs to fill four separate roles, colloquially referred to in the industry as “find, bind, mind and grind,” Mr. Adamo said.
'ROLE DIVERSIFICATION'
“In other words, who will be the rainmaker, the lead adviser, the [chief operating officer]? You need role diversification,” he said.
It is worth figuring out how to make a partnership work, because there are strong arguments in favor of teaming up, business experts said. Partnering can be a less expensive alternative to an acquisition, and having a partner means having someone to cover for you when you take time off.
Sharing expenses, employees and other economies of scale all are good reasons to form a partnership.
Brian Church, national sales director for Capital L Group LLC, said that he has seen a surge of interest in partnering since the Dodd-Frank legislation was passed last year. The asset management holding company has acquired nearly $1.5 billion in assets under management in the past two years, primarily through buying smaller registered investment advisory businesses.
The Dodd-Frank law raises the assets-under-management minimum for Securities and Exchange Commission supervision to $100 million, from $25 million. The SEC estimates that about 4,100 of the 11,850 registered advisers will switch from SEC to state registration.
Advisers who want to avoid falling under state supervision may want to join forces to build up assets, Mr. Church said.
But like a blind date, a potential partnership that seems great in theory can quickly turn miserable once you are forced to spend time together. Advisers who have been through the partnership wringer said that they took away lessons about what to do differently next time, though not everyone said they would give partnering a second chance.
In 2008, Augie Perazzini, president and sole owner of Wealthpoint Financial Group LLC, entered into his first, and what he now believes will be his last, partnership “for the reasons most people enter a partnership — to gain economies of scale and to share expenses.”
In his 30s, Mr. Perazzini said, he was at the point in his career where he wanted to build a bigger practice and find a partner with complementary skills who could create “synergies” with his own business.
His partner was at the same stage in his career, and Mr. Perazzini had known him for many years. Mr. Perazzini declined to identify his partner.
He said that he was blindsided when, not long after joining forces, his partner engaged in what Mr. Perazzini deemed to be a major impropriety. Mr. Perazzini quickly scuttled the partnership in order to protect his own reputation, but the experience has left him hesitant to risk partnering again.
"TREMENDOUS BENEFITS'
“There are tremendous benefits to having a partner, but there is also a downside, from a compliance standpoint,” Mr. Perazzini said.
He plans to continue to build his $30 million in assets business by eventually bringing on junior advisers under his supervision.
But not all advisers have had such a bad experience.
Kelly F. Crane, president and sole owner of Napa Valley Wealth Management, is willing to try partnering again. His last experience with a three-partner firm ended in 2003 in what he calls a “friendly divorce” after eight years together.
Mr. Crane identified two issues that contributed to the breakup.
“What I found is that it is really easy to share expenses, but things get much more difficult when you are trying to share revenue,” he said.
The partners did some joint work on a client-by-client basis.
“You always have this issue of: "Who is doing more of the work? Is this split reasonable?'” which was always in the foreground, Mr. Crane said.
DIFFERENT VISIONS
A second issue was that over the course of the partnership, he and his partners came to have different visions of how they wanted to run the business. Mr. Crane said he became interested in developing “a high-touch boutique adviser experience.”
“My partner was more interested in pursuing an office situation where you are supervising registered representatives,” he said.
After the split, Mr. Crane made an acquisition of another advisory firm and is now looking for another to buy or partner with.
Mr. Crane, who manages about $50 million, said that he has learned that it is important to develop a clear plan for the partnership through extensive discussions. Due diligence is also important, as is both partners' integrity, he said.
Partners should have a formal agreement and a clear exit strategy right from the beginning in case things don't work out, Mr. Crane said.
LESSONS LEARNED
Jaime A. Hinojosa, president, founder and sole owner of Quality Wealth Management, which manages $30 million and supervises $300 million, learned the same lessons from two partnership experiences.
One problem in his past partnerships occurred when one partner brought in more money than another, which created friction. Mr. Hinojosa said that partnerships work better when everyone earns a salary and builds a common organization.
“You need to table everything. You need a process, and everybody needs to buy in,” he said.
Currently, Mr. Hinojosa is developing a partnership with several advisers, who are hammering out their roles. They also are trying to centralize certain activities, but putting it all together is difficult, he said.
Getting partners on the same page in terms of organizational structure is a key factor in success, said Mark P. Hurley, president of Fiduciary Network, LLC, which invests in advisory firms. He said that most partnerships don't work out, which is why he favors outright acquisitions.
Even when he is called in for advice, Mr. Hurley said, he has for years taken a pass on getting involved in advisory firms where the partners are “constantly fighting.”
E-mail Lavonne Kuykendall at [email protected].
