Early in Act 2, You have the option of "Hiring" Mercenaries, with that you can make a new custom character.
However, it sounds like that "bug" is happening because only "Main characters" are allowed to fight in the arena against each other, and are allowed in the hall of Echoes, also "Companions" get their own dialogue choices chosen for them in group dialog options.
It sounds like this is all happening because your friend is technically just taking control of a "companion" that was recruited, instead of being a "main Character" I don't know if Mercenaries have the "Main Character" status, or if its only possible for your 4th to be a main character as well from starting over with them included. Being a Mercenary might only fix a few of those problems but its worth a try.
(You can recruit Mercenaries from a blue lizard lady on your ship starting act 2)
