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  • Writer's pictureKevin Elvington

Ask the Expert: Should I Create an Employee Equity Ownership Program?

Updated: Dec 3, 2021

An Independent Wealth Management Business Owner Explores Whether to Offer Equity to Employees

Michael Madden, Contributing Editor, WSR

As owners of successful and well-established independent wealth management businesses know all too well, you can never look ahead too far when it comes to planning what you want your firm to look like in the future. And there’s never been a more pivotal moment for independent financial advisor entrepreneurs to kill multiple birds with one stone when it comes to some of the thorniest challenges and opportunities out there, including:

  • Attracting and retaining “next gen” financial advisors who are willing to help you grow your business for many years to come

  • Establishing a succession plan and contingency plan that maximizes the likelihood of your clients being supported according to the service standards you envision

  • Developing a viable alternative to the trend of independent financial advisor – business owners simply selling their firms in a change of control deal and moving on entirely

Without question, forming an employee equity ownership program has become an increasingly top of mind issue for owners of independent wealth management businesses

And in answer to a financial advisor reader-submitted question on this very subject, we’ve assembled three industry leaders for this month’s

Meet Our Expert

The Hybrid RIA Practice Management Leader: Brian Bunker is Senior Director and Head of Practice Management & Consulting at Stratos Wealth Partners, an independent hybrid RIA that is part of Stratos Wealth Holdings, a family of companies with over $20 billion in total assets

This Month’s Reader-Submitted Dilemma “I’m the sole proprietor of an independent wealth management practice affiliated with a dual registrant firm (we work with both the firm’s independent broker- dealer and corporate RIA). I founded the business 15 years ago, and we have over $300 million in client assets – 75% fee-based advisory assets, the rest in brokerage assets. Our annualized topline revenues are $2.2 million and our annualized EBOC (earnings before owner’s compensation) is $1.7 million.

We have one operations manager and two other financial advisors who joined my business over the past decade. They are all W-2 employees, they are each highly competent, though none of them are absolutely indispensable. All three of my employees earn a cash base salary and year-end cash bonus, and their compensation is competitive relative to the industry and where we are based.

I’m 47 years old, I enjoy my work and our client relationships, and I don’t have any need for a large, one-time liquidity event. In an ideal world, I’d like to slow down with my daily workload by the time I’m 60, but stay engaged on a part-time basis for as many years as I can thereafter. Candidly, I’d get very bored with a complete professional retirement.

Both of my financial advisors and our operations manager, who are each five to eight years younger than me, have voiced an interest in future equity ownership opportunities. We all get along very well, both personally and professionally, and I’d like to explore putting in place an employee equity ownership program.

Here are my questions for WSR’s experts: First, what are the key questions I should ask myself to ensure that an employee equity ownership program is the right path?

Second, what are the initial steps to get such a program up and running successfully?

And third, outside of employee equity ownership, are there any other incentive programs that can better align my employees with my business over the long run?

The Hybrid RIA Practice Management Leader: Brian Bunker, Stratos Wealth Partners

It’s a testament to your hard work and discipline to have built such a strong business while not having any urgent need for a one-time liquidity event. Congratulations!

But while your vision of your personal future and the level of work life balance you want is clear, I’d like to start by asking this question: When you envision the long-term future of your business, whether you remain engaged or not, what does success look like to you?

If part of what you’re looking to achieve is the creation of a stable and truly multigenerational firm, then exploring an equity ownership plan can be a versatile tool to help you reach this objective.

It sounds like you are also open to the idea of an employee equity ownership plan as a vehicle towards establishing an internal succession plan. If so, this is certainly a good approach when it comes to motivating those with an equity position to be good stewards of the business as you transition towards retirement in the future.

The process of migrating someone from ‘employee’ to ‘owner’ via an equity position requires a good deal of forethought and consideration – Not only consideration of the upside to such a paradigm shift, but of the potential challenges as well.

Each business owner will have multiple highly variable factors to take into account, but the following are some good “starting point” questions for you to ask yourself – You should answer them as candidly as possible, because you will have to live with the outcome of your decision:

  • First, as the founder of the business, are you comfortable diluting your ownership and control – either partially, or otherwise?

  • Second, are you prepared to share in the firm’s decision-making process and allow others to have a say in the future direction of the organization?

  • Third, do the individuals you’ve identified as candidates for ownership have the shared vision, management expertise, and leadership qualities to drive the firm forward as your day-to-day roles & responsibilities are reduced in later years?

  • And if the answer to the third question is no, what do you, as the owner, need to do now to prepare them for future leadership of the firm?

As for putting the plan into place, I would encourage you to take a future-oriented approach. Design a plan that works for both the firm and its employees today, but also works much farther down the road as your firm grows and evolves.

This includes addressing future scenarios under which employees can access equity, which may include the following:

  • Talent Acquisition: Consider the role of equity grants aimed at attracting new talent to the firm. This can be driven by a particular skill set or the candidate’s ability to add revenue upon joining the firm

  • Promotions: Equity grants alongside or in lieu of additional compensation for strong performance.

  • Retention: Consider granting or selling equity to key employees to retain them over the long term. For example, allowing top employees to buy-in at a discount to the market value, say 20-30% below what the equity could command in the marketplace. This rewards key people for their contributions to the organization while incentivizing them to continue operating in the best interests of the firm.

Of course, there are other viable options for incentivization to consider outside of redistributing equity. For instance, you indicated that your current employees are on a ‘cash plus year-end bonus’ structure.

A non-equity related option could simply be getting more granular regarding the drivers of the variable component of their compensation plan to better align with the firms critical Key Performance Indicators (KPI’s).

These may include both financial KPI’s, such as hitting certain thresholds of net new assets or households, net revenue change, and various profitability metrics as well as non-financial KPI’s, such as client retention rates or number of new referrals, just to name a few.

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