This case study is based on the situation of a client of the Covenant Group. Names and details have been changed to preserve privacy

The reception area had all the markings of success. The leather wingback chairs, appropriate artwork, almost indiscernible classical music and subtle lighting gave the room the air of a third-generation law firm serving only the well-heeled and the well-connected.

I was, however, in the offices of Associated Family Wealth Management, a financial advisory firm focused on serving the affluent and ultra-affluent with “family office” services. AFWM had existed for less than two years; the permanence suggested by the external trappings belied the firm’s instability.

The concept was sound. Four successful financial professionals with complementary expertise, each of whom had reached a plateau in their individual businesses, had joined forces to offer fully integrated wealth management to no more than 50 high net-worth families.

From grandparent to grandchild, they would manage assets, cover risks, co-ordinate income, create legacies and handle the philanthropic desires of their clients.

John Myers, chartered financial analyst, was the investment specialist. Twenty years in the business, he had perfected an asset-management approach for high net-worth clients employing a comprehensive investment policy statement.

Steve Wentworth, a chartered life underwriter and chartered financial consultant, handled risk management. Creatively using life insurance to equalize treatment of children in situations of inheritance or business succession was his real joy.

Franco Vito, a chartered accountant and certified financial planner, had sold his private accounting practice to join AFWM so he could focus on financial planning. He loved using software to develop strategies.

Kevin McGready, a lawyer, had worked for eight years at a prominent law firm as an estate planning counsellor before joining AFWM. He wanted greater scope to utilize his expertise in the use of trusts and holding companies to minimize taxes.

It would be difficult to find a more qualified team to form a new family office practice. But the call I had received from John indicated otherwise.

“We are developing some good clients of the type we want,” he said, “and although we spent more money in the start-up than we planned and are behind our target revenue, we’re confident we’re on the right track. It’s just taking longer than expected, and that’s causing some friction among the partners.”

“Are there any other issues?” I asked.

“There is a general feeling that the contributions of the partners aren’t equal, yet we share equally in the revenue. Some guys seem to be putting in more time and effort than others. Funny thing: the guys who complain that others aren’t pulling their weight are being criticized for the same thing themselves.”

With this information as background, I now found myself at the head of AFWM’s boardroom table, flanked by two partners on each side. To break the ice and to test a theory I had, I said, somewhat jokingly, “Just so that I know where to send the bill, who’s the boss here?”

The downward glances reminded me of students when a teacher asks a question to which no one knows the answer.

“No, really,” I said, “who makes all the tough decisions?”

“We all do,” was the reply. “We are equal partners.”

“Do you ever disagree?” I asked.

“Yes, of course, but we always come to some sort of consensus.”

“Consensus is good, but it often means compromise and concession. Have you ever felt that you conceded on something even when you really didn’t want to?”

“I have,” volunteered Franco. “I thought we spent way too much on our office. As an accountant, I can’t see the payback. We should have started in a less ostentatious way and upgraded over time as the revenue increased.”

“I don’t agree,” Steve countered. “The clientele we are trying to attract expect us to have prestigious premises. If we spent too much money on anything, it was that high-powered software you have. In the beginning, we had lots of time to devote manually to each client file. We didn’t need $20,000 worth of software right away.”

John jumped in: “I’m OK with both the office and the technology we have in place. We each brought an existing client base with us and if we wanted to gain leverage from that, we had to signal to our clients that we were a highly capable firm. My concern is the money we allocated to marketing and public relations. We all have good connections and, if we each had a few meetings with key people, the word would spread soon enough.”

@page_break@“Kevin, what’s your position on all this?” I asked.

“I’m OK with everything we have done,” he replied. “My concern is recognizing the value of the individual contributions. On our most recent case, I did about 75% of the work because the issues fell mostly into my area of expertise. In another situation, that could happen to John or Franco or Steve. Do we just hope it will all balance out more or less equally in the end and everyone will feel treated fairly?”

“Does your partnership agreement cover any of these questions, or just the standard death, disability and retirement issues?” I asked.

“No, it doesn’t — just the basics, plus an agreement on an equal split of revenue and expenses,” I was told.

“Let’s ask another question,” I said. “Who holds you accountable?”

“Our clients do!”

“Your clients hold you accountable for the work you do for them, but who holds you accountable for your contribution to the firm?”

“We hold each other accountable for that,” they told me.

“That doesn’t seem to be working very well so far,” I commented. “That shouldn’t be too surprising. It is extremely difficult to have equal partners accountable to each other because, by definition, that would mean they aren’t equal. Someone has to act as a higher authority, particularly in times of disagreement.”

I told them experience has shown that partnerships that work best have several things in common: “First, they have a well-designed business plan that sets out expectations at two levels — for the firm as a whole and for each partner. The compensation typically includes an equal minimum income that allows each partner to maintain their basic lifestyle, some sort of ‘contribution enhancement’ that recognizes the business development results, actual hours spent, revenue generated, etc., for each partner, as well as an agreed-upon ‘pooled bonus’ if net profit exceeds the plan.

“The best firms have a methodology for ‘keeping score’ of hours spent, resources used and any other variables that impact the bottom line.

“Accountability is dealt with internally and externally. Internally, there always has to be a ‘final authority’ who manages disputes and casts the deciding vote in the event of a deadlock. In some partnerships, it is obvious who that person should be, based on their value to the firm, initial commitment of time and money, or simply because no one else is interested in the job. Some partners rotate it among themselves on a periodic basis. The remaining partners must agree to respect any decisions made by the final authority.

“Externally, successful firms establish an advisory board made up of key clients, outside professionals, mentors and others interested in the success of the firm.”

The balance of the day was spent reviewing the partnership agreement to ensure it addressed the key issues of revenue and expense recognition, compensation and dispute resolution. The partners concluded that they would rotate the role of “manager” among themselves every 18 months.

A method for tracking time and expenses was fashioned after legal and accounting models. A list of potential candidates for an advisory board was created and the terms of their engagement determined.

By the end of our session, the partners felt reinvigorated by what had been accomplished. We agreed to meet again in six months to see how the new plan was working and make any necessary adjustments. I was confident there wouldn’t be much to change. IE



George Hartman is a coach and facilitator with the Covenant Group in Toronto. He can be reached at george@covenantgroup.com.