To increase client assets and boost business, a growing number of advisors are opting for business structures similar to those used by accountants and lawyers: partnerships.
Many of the people forming these partners came from larger brokerages or mutual fund dealers. They were looking for something different—a way to pool resources into a new entity that broke free of the standard compensation grid—and were willing to sacrifice a little autonomy.
Marc Lamontagne, one of three partners at Ryan Lamontagne Inc. in Ottawa, Ont., used to work for a bank branch imbued with team spirit.
He expected his time at a financial planning firm to be characterized by the same level of collaboration. But despite sharing an office with a dozen other advisors, “I quickly realized I was working in the same office as my competitors,” he says.
So he formed a partnership, which in the financial services world come in a variety of forms: two or three advisors in a single location; a dozen advisors and other professionals at a single firm offering a range of services; or teams of partners who are themselves partners in a larger entity that has diverse operations.
Principals are typically not partners in the legal sense, since formal partnerships are tricky to execute. But they do control the equity. John Horwood, an advisor at Richardson GMP Ltd. in Toronto, Ont., has a team consisting of his wife, three partners and two associates who will soon make partner.
“Equity ownership creates a strong partnership culture at Richardson GMP,” says Horwood. “Each advisor that joins the firm has a voice and owns part of the firm.”
Still, there are similarities with traditional partnerships. “It’s very much like an accounting or law firm,” says Jim Lawton, president of Lawton Partners Financial Planning in Winnipeg. “Most advisors here are senior, and the growth in the firm comes from associates who join the firm.”
These associates work with existing advisors who are shareholders—and will ultimately take over those advisors’ practice and clients.
Lifestyle and lifecycle
Two features mark these partnerships. One is lifestyle. The ethos of a partnership states that serving the client serves the firm, and by extension serves the partners. This philosophy replaces competition among advisors with co-operation. Knowledge is shared, not hoarded, and there is less pressure to expand by adding new advisors: small can become beautiful, depending on the firm. Still, it can be a hard sell.
“I want to work in an office where we all have shared interests,” says Lamontagne. But that means some pooling of the client book. “It’s been tough to convince advisors.
I say, ‘Look, you’ll own a smaller piece of the pie, but it will be a bigger pie.’ ”
The payoff is better client service, he says. “If I’ve got a client with [challenging] issues, I can go to one of my partners and ask how he would handle it. I can even ask him to come meet with my client, because that partner has a financial interest in every single client in the firm.”
The second aspect is lifecycle. A partnership tracks an advisor’s career from recruitment to succession. There are other benefits: freedom from pressure to sell—and to sell particular products; liberation from transactional business; and the ability to look at client needs from every perspective, including legal and accounting.
Partnership is not for every advisor. It requires capital in order to buy equity in an existing partnership or to start one. It also works best with a book size substantial enough to sustain an asset-based revenue model, rather than commissions.
You’ll also need access to experts, either on staff or by referral, who can round out a financial plan. But the benefit is a brokerage where the partners, not the executives, are in charge.
“We’re entrepreneurial. We don’t like being told what to do,” says Lawton. “Problem is, this model would be extremely difficult to replicate.”
One reason is partnerships allow for specialization. Indeed, the need for specific expertise may be the impetus to set up a partnership. That’s how Lawton started: by pairing up with an insurance expert.
“We had complementary skill sets. In our existing firm, everyone has a minimum of two degrees,” says Lawton. “There are CLUs, CFPs, CFAs, CAs, lawyers and actuaries here. We have partners and associates with an incredible depth of knowledge.”
That was the reason Jay Nash’s wife Diane joined him and Kelly Roberts in 2001 at Roberts-Nash Wealth Management Group at Wellington West Capital Inc. in London, Ont. Jay and Diane met while working in the same building, but for different bank brokerages.
“Diane is very strong on the insurance and estate planning side,” says Nash. “Kelly and I, who both have a portfolio management designation, focus on the investment management. It’s allowed us to service clients to a much higher degree because of the diversification of expertise.”
Still, the team may not house all expertise on staff. Larger firms can hire professionals to supplement the partners; or those professionals may be partners themselves.
On the other hand, the partnership may hire specialized staff who aren’t partners. “Years ago, we made the decision to offer tax preparation as part of our services,” says Lamontagne.
His team decided to hire a full-time accountant. “That’s something you wouldn’t be able to do [in a non-partner model],” he says. Instead, an advisor would have to rely on the services of their dealer, or set up a referral arrangement.
Of course, expertise can be expensive. “There may be four people who actually meet the public in our firm but there are another half-dozen support people behind them,” he says. “Your typical independent would go broke with that type of infrastructure.”
One for all, all for one
Not all partnerships treat clients as part of one book. “We have no division of clients,” says Nash. “We all take care of everyone.” Everyone has an ownership stake, including the assistants.
Yet Lamontagne has his own book. He keeps a percentage of the revenue from his clients and a percentage goes to the firm. The firm looks after the expenses and at the end of the year, any profit gets allocated based on ownership of the firm.
Partnerships also tend to favour fee-based accounts. Both Horwood and Nash say 90% of their clients opt for this model.
“It’s easier to work with, and cleaner for the clients,” Nash explains. “It takes the emotion out of it,” says Nash. “When we make a recommendation, the client is not wondering whether there’s upside to us; the only way we make more is if the portfolio grows.”
And, under Canada’s tax structure, non-registered advisory fees can be written off against income.
It’s similar at Lawton Partners. Still, firms do have smaller clients, such as clients’ relatives, which may be too small to make a managed portfolio optimal. In those cases, Lawton says, the clients are diversified through low-cost mutual funds with a trailer for advisor compensation.
“With a small client, you can’t just put her on an ICPM platform and charge her fees. The accounts are too small to diversify properly without a mutual fund.”
The equity component is key for the saleability of the business.
“I’m 49—about the average age of a lot of advisors—so in 10 or 15 years when I’m thinking of retirement, there are going to be a lot more sellers than buyers,” says Lamontagne. “So we’re going to grow the practice by hiring associates from the bottom and training them. At a certain point we’ll start selling off pieces of the business. That’s difficult if you’re a sole practitioner.”
Horwood is older, but isn’t planning to retire soon. Still, he says, “We have a five-year plan for succession. We’ll ultimately end up with five integrated practices within our group. We’re devolving our book of business down to the next generation. So we have a significant book and we’ve now educated, trained and empowered the next generation of our team to start taking over. ”
As equity is passed from one generation of advisors to another, Horwood adds, “It’s about participating in the long-term equity of the business rather than just running your own business in a franchise model; equity creates more value than a model that’s just fees and commissions.”
Horwood thinks back to his previous life. “When I worked for a bank-owned firm, the guy in the next office was your competition and idea-sharing or transformative strategies would not happen,” he says. “In a partnership, everybody gets to speak and has a vested interest in each other’s success. And I love that model.”