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So you think you’ve found the one; that special financial planner you know you deep down you want to spend the rest of your working life with. But before you get too caught up in the romance, management advisor and business analyst at MGF Consulting Group, Max Franchitto, says a business ‘pre-nup’ is an absolute must.
There are three primary risks faced by brokers constructing informal referral relationships with other financial services professionals, says Franchitto.
“First and foremost, nobody’s going to take the relationship seriously; there’s no commitment, there’s nothing on paper. I basically told you that ‘I’m going to refer you business and when I come across something that looks referable, hey, I’ll let you know’. That casualness will frustrate the relationship, because one or other of the two parties is not taking it as seriously as the other.”
The second risk, he says, is that if you don’t have a ‘dos and don’ts’ list of how you’re going to manage the clients being sent back and forth, somebody could potentially do something with your client that you don’t approve of - and the ramifications could not only impact the perpetrator of the wrongdoing, but also you, because you referred them in the first place.
#pb# “Thirdly,” says Franchitto, “if you’re going to later on separate, you’ve got to have an exit component to the relationship. It’s all good and proper for everybody to be happy and excited about entering into a collaborative relationship, but you need to have that contingency in there of ‘when we separate, who’s going to get the dog and the kids?’ You know, are they my clients? We’ve got to have an understanding that if we part company, I’m not going to give your clients to [someone else].”
This last issue is crucial, he says, because unlike in a marriage, the possibility of separation is fairly certain – everyone retires at some point.
“You’re going to pass on your practice to somebody else – and, if you sell your practice and you’ve got collaborative relationships, what if those firms don’t like [the new person]? And that happens.”
But how should such an agreement look? Thankfully, Franchitto says it’s not necessary to hire lawyers and put together an expensive legal document.
“A memorandum of understanding might do the job… It doesn’t have to be a twenty-page legal document at great expense from a top-ranking law firm, it can be something as simple as ‘I will do this if you will do this and vice versa. I’m a great fan of simplicity. Keep it simple, but have it structured.
“It’s better to spend the money upfront to prevent an argument than to try and defend and argument later on. Prevention is always cheaper than the cure.”
