Advisors agree that forming a partnership is one of the best ways to build a business, but they also say that firms often make the mistake of not formalizing the arrangement, which can lead to major headaches.

“It can work really well if you find someone who complements your own skill set, say, someone who’s a good rainmaker, when you’re better at interfacing with clients once they’re brought in as clients,” says Rick Rummage, principal of the Rummage Group, an advisor training firm in Herndon, Va.

But he adds, “it’s really important that when you go with a partner that you develop a well-written plan defining how the partnership will work and how it will be divided up if you decided to end it or if one partner decides to leave.”

Chris S. Young, a CFP and partner in a six-advisor Raymond James-affiliated Dallas firm called Quest Capital Management, says that his firm began back in 1987 as just a group of several advisors who worked together under one roof “to share operating expenses.”

In 2000, they decided that they should have a formalized partnership, with defined rules, a formula for sharing revenue and a separation process for when someone left the partnership, whether to retire, go independent, or in case of medical reasons or death.

“We saw it like a marriage,” Young says. “You go in hoping it’s forever, but if it doesn’t work out you want to know how you’ll break up.”

When developing their plan, the partners brought in a lawyer and ended up “modeling it much like a law firm,” Young says.

Each year since, the firm’s partners have had an annual meeting, which he says they call a “shareholders’ retreat,” during which, among other things, they review and update the plan.

As part of that plan, Young says that there is a stipulation that clients belong to the firm, not the individual advisor, and if someone decides to leave, the clients stay.

Should a client decide on her or his own to go with the departing advisor, “the advisor has to compensate the firm,” he says.

The partnership agreement has helped to build the firm and individual advisors’ business, he says.

“Because we share revenue, we all help each other,” Young says.

“For example, say a client of mine is selling a business and there are a lot of issues. I can lean on my partners to help me advise the client, because handling the case well will help all of us,” Young says.

“Having a partnership that includes a dissolution policy in place is a good selling point to clients,” he says. “They know there is a process for handling them if their advisor dies, retires or leaves the firm.”

Rummage agrees.

“It’s amazing how many advisors in partnerships don’t get it in writing,” he says. “Yet in my experience, between a third and half of all partnerships end up breaking up or having someone leave.”

This story is part of a 30-day series on smart ways to grow your practice.