You have heard the saying that the fastest way to ruin a friendship is to become partners. Unfortunately, many advisors in ensemble practices can relate to this adage.
Advisory firms with multiple owners rarely avoid conflict between partners. The nature of the partnership dynamic often contributes to insecurity, inspires jealousy and exacerbates feelings of unfairness.
Why are these problems so common? Each partner brings an ego to the mix. Rainmakers often believe that they are the most important people in the firm. So too do the senior advisors or portfolio managers who create the value delivered to clients. Key management personnel also feel they hold the enterprise together and drive success. (For the purpose of this discussion, I'll refer to all multi-owner firms as partnerships though there are different terms based on the entity type.)
When partnerships are formed, all parties enter into the arrangement believing that their special combination of skills, personalities and experience will lead to riches and fame for all. Unfortunately, in many cases, partners invest more in the wedding than in the marriage. After the honeymoon ends, incompatibilities and misunderstandings can arise.
New partners commonly avoid the difficult initial conversations for fear of being perceived as a poor team player. In the early days of a partnership, most advisors choose compromise over confrontation, appeasement over agreement. While attempting to maintain an amiable relationship is noble, ignoring significant issues can lead to resentment. Pent-up emotions explode like cluster bombs at a later point, often when it is too late to have a rational, intelligent discussion about how to resolve the differences. Catalysts for this explosion include major events such as an advisor bringing in a very large client or achieving an extraordinary one-year return with client portfolios, or—on the negative side—spending a disproportionate amount of time entertaining centers of influence with expensive dinners and sporting events.
Many partners find it difficult to accept their responsibility to talk openly with each other, confront bad behavior, encourage good behavior and share openly but calmly how they feel about what's working and what is not. Adults talk. Children pout. Pouting adults suck the lifeblood out of an organization.
Having been on both sides of this relationship, I can attest to the value of creating a framework for how partners should value each other, especially when it comes to the question of who gets paid what and why.
How to Value Partners' Contributions
In reality, different partners make different contributions to the value of the business. Firms that allow compensation to float with profits alone are not considering all of the elements that other partners bring to the business, aside from the capital they have invested.
Remember, partners are also employees of the business. Profit distributions reward them for their ownership position. Compensation plans that include base pay plus incentives reward them for the roles they perform. Some partners have management responsibility, some have sales expectations, some are technical specialists and some are solely responsible for working with existing clients. Many do all of these. Compensation models should be created with the idea that different responsibilities carry different rewards but all activities have value.
