In recent years, there has been a growing interest in both high-profile acquisitions of advisory firms and a more general 'urge to merge' as the increasing costs of running an advisory firm drive more to seek scale by banding together. Yet while the industry discussion often goes to the favorable results of the biggest mergers with the greatest success, the reality across most industries is that anywhere from 70% to 90% of mergers and acquisitions fail, financially speaking. There's little reason to imagine that advisory firms would be any different, suggesting that at least some of the vaunted benefits of large ensemble practices may be distorted by a significant survivorship bias.
Seeking to explore this issue further, a new industry white paper on "Best Practices in Investment Advisory Partnerships" has delved into what makes advisory firm partnerships work, and what causes them to fail. The white paper is cultivated from both the experiences of the authors (who themselves were advisory firm owners who went through a problematic merger) and interviews with dozens of advisory firm partners of businesses both large and small.
What emerges from this new exploration of advisory firm partnerships is the idea that in more ways than a few, an advisory firm is like a marriage, where deep trust and a mutual commitment to the success of the relationship is crucial to navigate the inevitable conflicts that will arise over time. While every individual and partnership is different to some extent, the triggers of partnership problems are far more consistent than most might expect.
Learning From Their Own Experience: The Partnership Resource
As co-founders and partners of an advisory firm that ultimately went through a problematic merger, Lisette Smith and Tanya Rapacz decided that they wanted to learn more about the dynamics of creating successful partnerships, ultimately founding a business together, The Partnership Resource. Building on their personal experiences, and an extensive series of interviews with dozens of advisors from both large partnerships and small, they have issued a new white paper entitled "Best Practices In Investment Advisory Partnerships" to share their knowledge and insights.
What Smith and Rapacz found is that the conventional wisdom of forming advisory firm partnerships—to find others you trust and respect, with whom you have a shared vision, to create a firm with a clear operating agreement—is not enough for establishing a successful partnership.
It's not enough to just have alignment on the big issues and trust that the details will sort themselves out in the implementation phase. Even if the details do sort out, eventually the firm will find some conflict or hit a speed bump. Perhaps the partners grow in different directions over time. Maybe their alignment is not quite as clear as they thought. Or the problem could be as 'simple' as disagreements about how to allocate the resources of the firm. In the long run some conflict is inevitable.
Accordingly, then, Smith and Rapacz conclude that the differentiator between partnerships that succeed and fail is that—like a marriage—it takes a commitment to the partnership itself and a desire to see it succeed that drives the partners forward to find an acceptable resolution to their differences.
In fact, underestimating the likelihood of conflict, and not having a decision-making or conflict resolution process ready to deal with it, appears itself to be a significant driver of partnerships dissolving.
The Tradeoffs of Partnerships
While the dynamics of every partnership will be unique to the partners involved, Smith and Rapacz also found that advisory firms tend to go through a consistent series of challenges as the number of partners grow.
While the creation of any partnership involves ceding some control, Smith and Rapacz find that two-person partnerships tend to exhibit the highest levels of satisfaction, driven in part by the fact that the partnership is still small enough to facilitate effective communication, and that partners with complementary skillsets tend to be effective in finding ways to carve up the duties that allows each to employ their strengths.
The fact that by the very nature of a two-member partnership decisions must virtually always be unanimous also helps to ensure the partners navigate and resolve any decision-making conflicts they face.
When the partnership transitions to more than two partners is when the problems tend to multiply.
