I am retained by financial advisors as their coach through bad breakups with their partners, and if unresolved, as their litigation lawyer to fight for what is rightfully theirs. In this article, the first of a two-part series, I will unpack some of the risks that advisors must consider before and during their partnerships with other advisors. Part 2 will unpack how to reduce these risks.
Advisors’ partnerships can reflect different permutations and combinations. Here are some of the more common partnerships I have seen.
A junior and a senior advisor team
The junior advisor may initially be hired as an employee/assistant and paid a set salary, sometimes with a bonus. The senior advisor is the sole advisor on the code and therefore earns the entire split with the dealer.
However, as the junior advisor gains experience, the senior advisor must develop a succession plan for the junior advisor; otherwise, the junior advisor has little incentive to continue working for the senior advisor.
The senior advisor who catches on, before the junior advisor leaves to develop their own book of business or to work with another advisor who will treat them as a partner, usually incentivizes the junior advisor by moving to a joint code in which the junior advisor adds both new clients and helps to grows the assets of the senior advisor’s existing clients, as well as gets a cut of the code. As the junior advisor continues to grow the business, the cut should increase to reflect that growth, as a way to keep the junior advisor incentivized. But the senior advisor might not always do this.
Risks
The challenge here is that as the relationship grows and changes, so must the terms under which the advisors operate. The junior advisor, who wants to earn more money to reflect his experience and relationship with the clients, can become frustrated, while the senior advisor can feel threatened, particularly since the junior advisor may have developed relationships with some of the senior advisor’s clients. The senior advisor may also harken back to the fact that the junior advisor only advanced due to the opportunities the senior advisor provided. A contractual agreement would be hard to negotiate at this point, given the diverging views.
The working circumstances can then degenerate. The junior advisor may hesitate to leave, as they believe they are better off hammering out an agreement with the senior advisor. The senior advisor will have to pay dearly if they terminate the junior advisor after many years of working together, and risks losing the junior advisor to another firm and having some of their clients follow. Also, the senior advisor might lose the opportunity to have the junior advisor pay him for his business as he approaches retirement.
Furthermore, the dealer, as employer or the one with contractual relationships with both advisors, might force the senior advisor to work things out with the junior advisor, so that the dealer doesn’t lose either of them. The dealer might threaten the senior advisor that the junior advisor now owns a portion of the business as reflected by the shared code.
The energy and stress in the office can become toxic if this situation continues without resolution. It is next to impossible to hammer out the terms of a succession plan when emotions are running so high.
Two similarly ranked advisors
Two advisors of similar rank see an opportunity to merge their practices using a single joint code and allocating a portion of the remuneration from the code to each of them. The major incentive to the advisors is that their assets under management together usually increase the advisors’ payout on the dealer’s grid. This makes sense in the short run as both advisors gain from the higher payout; it makes sense in the long run only if there is a written agreement setting out what happens in the event of a breakup.
Risks
There is usually no discussion between the partners about what happens if one leaves the dealer or if there is a reason for the code to be divided up. In such cases, it is unprofessional for each advisor to call each client trying to win them over.
Furthermore, I have seen partners who do not align on compliance practices. One is worried about how the other is not compliant, and rightfully so, because if one is sued or subject to a problematic compliance audit, this will invariably affect the other. It is clear that regulators may hold both registered advisors on a shared code responsible when anything goes wrong with a client under their shared code, particularly if the clients are not specifically allocated. I have represented advisors pursued by enforcement when their partners committed the compliance infraction.
Also, while the shared code can be split any way based on a verbal agreement (e.g., 80/20, 60/40, 50/50, etc.), the initial arrangement could be subject to change depending on whether the circumstances of each advisor changes. For example, a 50/50 split could be agreed upon, but one of the advisors then stops working as hard as they used to or stops servicing clients, and the other must pick up the slack.
From what I have observed, dealers will not change the code attribution sum without both team members agreeing. So, if a form directing the dealer to change the attribution is not signed by both, the dealer will not likely change it. While this issue applies to split codes, regardless of the type of partnership (including the first arrangement, above), the dealer usually is of the view that the code attribution is a reflection of business ownership. For example, if the code is 50/50, the dealer will not interfere, because they will not take a position on the ownership that would be inconsistent with the code attribution.
Family members
This arrangement is more common between parent and adult son or daughter (or son-in-law or daughter-in-law). There is usually a percentage of code attribution or sharing of remuneration between family members. The beautiful thing about this arrangement is that usually the parent is happy for the younger family member to succeed, and there is far less resentment than what I have seen when non-family members have a joint code. While I have represented many family members, usually they play nicely in the sandbox, and I am not retained to help resolve their differences.
Risks
While many of the risks described above for a junior and senior advisor team may apply here, I have seen fewer problems. It may be that they resolve issues without legal representation, or it could simply be that the parent wants the son or daughter to succeed them, and they want the son or daughter to prosper, even at their own expense.
Still, issues can arise if there are others on the team who believe the son or daughter is receiving a benefit that they should receive. Resentment and stress in the office can arise as a result. Some offices have a non-nepotism policy so that this is avoided. However, I have not seen such a policy in an investment or insurance team.
Different licences or certificate holders
Teams often form because the two (or more) advisors see their respective skills as complementary — for example, a certified financial planner and an advisor registered with the Canadian Investment Regulatory Organization (CIRO), or a portfolio manager (discretionary) and a CIRO-registered advisor or planner. Usually, they each stay in their own lane and benefit the client with their respective expertise.
Risks
There can rarely be a joint code arrangement in such partnerships because each needs to have the same licence to be able to share a code. Therefore, the payment can be complicated, as can be the potential tax and legal arrangements. You need to consult an employment lawyer and a tax accountant to enter into this partnership the right way.
Breaking up any of these partnerships can be painful and expensive. In Part 2, I will discuss how to plan for and avoid the risks.