Tips for setting up a financial planning joint venture

Although financial planners can try to predict the cost of sourcing new clients, they cannot always predict the client's response. Col Fullagar explains why the resources a planner spends on networking may be better served on a well-planned joint venture.

In the halcyon days when mutuals ruled the earth, building a successful business was all about how well you could “prospect”.

Agent training days would be interrupted by the sending of raw recruits out into the streets with the instructions “do not return until you have sold someone a policy”. It was a tough induction and no doubt some are yet to return!

When the training wound up, those who survived were issued further instructions: “Now contact all your friends and sign them up as clients”.

Time and the industry have moved on, yet the same challenge of building a successful business faces many advisers today, with the key still being the ability to find a suitable supply of new clients, and the additional criteria that they fit into the demographic of the adviser’s target market.

Over the years “prospecting” has been replaced by “networking” but whilst the terminology may have altered, the means of expanding a client base are in some ways not totally dissimilar to those of the past:

• buying a book of clients;
• referred leads;
• lead-letters;
• word of mouth; and
• advertising, either in print or online.

All these remain in common usage.

Engaging in these activities takes time and money, so it is important to be able to accurately predict the business results that will arise; to the extent predictions are assured to align with results, an adviser is able to make an informed decision about how much time and money should be invested.

It is generally held that the most critical factor in achieving alignment is thoughtful planning, as without it predictably negative results are almost certain.

With the exception of “referred leads”, the above activities have a significant drawback: ie, even when the planning process is engaged, there is limited scope for the adviser to predict the client response to being approached.

There is another popular method of building a client base, however, for which this drawback can largely be removed if a sufficiently robust planning model is used.

The client base-building method of course involves the adviser entering into a joint venture partnership with another person or organisation.

Within this article, four components of the planning model will be considered and each will be broken up into checklist points.

Because each adviser’s business and possible joint venture partners will be different, several words of caution need to be sounded concerning the list:

• it is not in any priority order, as priorities may vary depending on circumstances;
• it is indicative only and should also be used to trigger other matters of relevance; and
• it is not definitive, as each item does not necessarily apply in all situations.

(i) The characteristics

Simply because a business opportunity appears to have merit, it is not necessarily the case that an adviser should automatically enter into a joint venture with another party.

As with any partnership, there are factors that will draw the two parties to each other and there are characteristics the prospective joint venture partner should demonstrate before the adviser takes the relationship to the next level.

Therefore, irrespective of whether the other party is an individual or an organisation, what are some things an adviser should look for?

Both the joint venture partner and the adviser should:

• be like-minded;
• have shared values;
• have an instinctive sense of being able to work together;
• have a shared desire and passion about working together;
• have an understanding of each other’s business;
• have a shared view and agree that the client comes first;
• have a shared view as to the characteristics of the ‘ideal’ client;
• have a mutual trust and respect for each other; and
• have a shared cultural and ethical fit.

The joint value partner should:

• have a professional presentation, personally and in regards to their business;
• have a solid reputation in their profession and the community generally;
• have access to similar clients in areas of targeted importance – for example, if the adviser is focusing on a particular occupation group, the venture partner should have clients in that group;
• be hardworking;
• be competent in regards to what they do;
• have the ability to identify a good potential client; and most importantly,
• have influence over and be respected by their client base.

In regards to any arrangement entered into, there must be a willingness on the part of the venture partner to proactively promote it to the client-base.

Other matters to consider, discuss and reach agreement upon include:

• how will the joint venture be promoted, what marketing material is available, what would be needed and how would it be distributed?;
• is training of the joint venture partner and their staff going to be necessary, how will this be undertaken and by whom?;
• what record keeping will be required; who will keep records and how will reporting occur?;
• how much time will need to be invested in the arrangement, what return is needed and how will success be measured?; and
• notwithstanding the relationship should be established on a sound business footing, there should also be an appropriate element of fun and enjoyment attached to working together.

Bearing the above in mind, traditional sources of successful venture partners include:

• mortgage brokers;
• accountants;
• general insurance brokers;
• solicitors; and
• community or business groups.

(ii) The arrangement

Having ticked the various boxes in regards to the joint venture partner, the next aspect to consider is the arrangement to be entered into.

In regards to the joint venture arrangement there should be:

• a shared vision about what is trying to be achieved;
• a willingness to formalise the arrangement and also to obtain formal legal input into it; and
• a shared view as to its longevity.
• The arrangement should be:
• equitable and balanced;
• sustainable; and
• commercially viable.

Arrangements set up on terms that unduly favour one party over the other rarely give rise to viable outcomes or last for any reasonable period of time.

The agreement formalising the arrangement should contain details of:

• the basis of client ownership;
• any cost-sharing arrangements;
• the basis of making changes to the arrangement;
• the holding of legal liability;
• the need or otherwise for a Board of Advice;
• whether or not there is an expectation of cross-referrals and, if so, the basis of this;
• whether or not the arrangement is or is not exclusive; and
• the basis of review and termination of the arrangement.

(iii) The remuneration split

Naturally an important aspect of the formal venture partner arrangement is the basis of the remuneration split.

The remuneration split:

• should be arrived at in a logical way;
• should be linked to the value added by each party;
• should be capable of being understood; and
• should lend itself to being measured.

Importantly, agreement about the basis of the remuneration split should be reached on an amicable basis.

Aspects of the remuneration may include:

• - whether minimum levels of activity are required prior to a remuneration split applying;
• - whether the split is pre or post the dealer split;
• - whether remuneration is a one-off or ongoing;
• - if ongoing, whether remuneration ends when the arrangement ends; and
• - whether a choice is made available - for example, remuneration split might be available either as 20 per cent upfront and some ongoing, or 40 per cent upfront only.

Arrangements may be made to remunerate on a tiered basis, for example:

• Level 1 is when the joint venture partner simply provides the adviser with a name and contact details – remuneration 5 per cent;
• Level 2 is when the joint venture partner institutes a formal introduction of the client to the adviser – remuneration 15 per cent; and
• Level 3 is when the joint venture partner assists with the administration of the new business process – remuneration 25 per cent.

Reaching an agreement about the remuneration split should be well considered and not rushed.

And finally, any basis of remuneration split should be sufficiently flexible such that it lends itself to receipt by the adviser of payment either by way of commission or a fee.

(iv) The review

Many promising joint ventures that started with high expectations and apparently sound planning have fallen down because an appropriate review process was not agreed upon.

The timing and nature of the review should be established and included in the formal agreement.

Targets should be set and achievement or otherwise of those targets should trigger pre-determined actions.

(v) Summary

As with any partnership, business or personal, success is all but inevitably a factor of:

• carefully considering whether or not both parties possess and demonstrate characteristics that are likely to align them with each other;
• ensuring any agreement covering the partnership is designed such that it is capable of lasting the distance;
• having a reward structure that reasonably reflects the value added by each party; and
• ensuring time is invested in the regular ongoing review of the arrangement.

Joint venture arrangements can be, and are often, a successful way for an adviser to grow their business.

However, not only can the potential be wasted, but also a significant amount of the adviser’s time and money – success requires a calm head and careful planning.

Col Fullagar is principal at Integrity Resolutions Pty Ltd.