Ask the Experts Panel – Pushing My Sister Out of Our Wealth Management Business

Legal, practice management and executive advice on how to address a no-show sibling collecting a fat paycheck at a family wealth management firm

As the old cliché goes, you can choose your friends, but you can’t choose your family.  

But when it comes to mixing family with business, things can get even more complex.

Which brings me to our inaugural WSR Ask the Experts Panel, where we align a serious practice management-related challenge submitted anonymously from one of our readers with a panel of seasoned industry experts, who each provide guidance based on their own professional background and expertise.

This week’s question boils down to the owner of a second generation wealth management firm asking whether – and how – to best terminate the employment of a sibling.

Addressing this question are our panelists:

• Scott Matasar, Partner at Matasar Jacobs LLC, a law firm focused on supporting wealth management industry clients.

• Anh Tran, Managing Partner of SageMint Wealth, an Orange County-based, independent wealth management firm with $355 million in client assets, focused on serving high net worth individuals, families and business owners.

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

Without further ado, here’s our anonymous reader backstory:

I’m the majority equity owner of a second-generation independent wealth management business founded by my father in the 1980s with $200 million in client assets.  I joined the firm ten years ago after graduating from college and getting my CFP designation, and directly increased our revenues and assets during this timeframe by more than 30%.  

I’ve brought in many new clients, while getting to know my dad’s clients and the clients’ adult children very well, cultivating strong relationships with each of them.  Sadly, my father passed away unexpectedly last year.

In his succession plan and personal will, my dad gave me 75% of the shares in the wealth management business, with my sister – my only sibling and ten years older – receiving 25% of the shares in the business.  

My father’s only other stipulation was that he wanted my sister and her family to be “treated fairly by the business” going forward.

Here’s my problem:  

• For the past 20 years, my sister has been on the payroll under the title “Chief Operating Officer.”  

• She’s been given a $200,000 per year salary for most of this time, together with full healthcare and other benefits, despite only coming to work essentially once a week since “joining” the business.  

• Moreover, my sister has consistently resisted any efforts from us over the years to get her more involved in client-facing work…or any kind of work with the firm.

• Meanwhile, we have a full-time operations manager who does all of the ops and admin work my sister was supposed to do, at $75,000 per year, plus benefits.

I’ve proposed to my sister that it would be best for the business if we eliminate her role altogether, while ensuring that her 25% stake in the firm yields quarterly cash distributions to her as a shareholder.  Based on where the business is today, this would probably generate between $120,000 to $150,000 per year for her.

But both my sister and her husband – who hasn’t held a steady job for the past ten years now – are insisting that she must keep her current title, role, compensation and full benefits within the business.  Their argument?  Anything less is a “violation” of my father’s wishes that my sister “be treated fairly by the business.” 

They are now threatening to sue both the firm and me, personally.

Please help!

The Attorney’s Perspective:  Scott Matasar, Matasar Jacobs LLC

First, let me say that I am sorry to hear about the predicament you’re in.  I am often brought in to assist practices with ousting or buying out under-performing and over-compensated partners or team members, but this being your sister makes the situation even more complicated and emotionally fraught.  

The starting point with any analysis is the governing contracts.  It appears from your fact pattern that your sister does not have a written employment agreement with the firm, and that she therefore is an “at will” employee who can be fired for any reason—or no reason—as long as the termination isn’t discriminatory or otherwise illegal.  

The only other item that is relevant is your father’s Will, that requires she be “treated fairly,” unless the Operating Agreement or Shareholder Agreement has provisions indicating specific requirements for removing an executive-level officer of the firm.

As you have already figured out, her equity interest and her employment compensation are two totally separate issues.  Your sister holds the title of COO.  With it, comes meaningful compliance duties and obligations—as well as risks to your firm if a problem arises and your regulator then discovers the COO has a no-show job.  The current state of affairs cannot continue, either financially or regulatorily. 

I assume from your fact pattern that you are President or CEO of the firm, and as you have pointed out, you are also the majority shareholder/member. Presuming that your firm’s Operating Agreement or Shareholder Agreement places no limitations on terminating personnel, you need to pursue a strategy that will document your basis to terminate your sister, or maybe encourage her to start doing her job.  

Even though she is an at-will employee, you want to insulate yourself from accusations of wrongfully forcing her out in the event she sues you.  With the assistance of qualified counsel, I would schedule a formal meeting with her to set forth very clear, objective criteria for what you expect of her if she is going to continue to hold her job and make clear that there’s a new sheriff in town.  

Document your expectations to her in writing afterwards and make her sign it.  When she fails to meet those requirements in the following months, again document it in writing and notify her each time.  Eventually, you will have the basis to warn her she is in danger of being terminated and if she fails to improve immediately, you can move forward with the termination. 

By pursuing this strategy, when you terminate your sister’s employment, you will be able to demonstrate you first have provided her a more than adequate opportunity to improve her performance, and therefore the business has treated her “fairly.”  

If you feel strongly about maintaining family peace, one other option is to negotiate a settlement with your sister.  Offer her an attractive lump-sum buyout in return for getting her to agree to resign as COO voluntarily.  

Given her salary level, it will require a package that is far more expensive than your legal fees will be when you beat her in the lawsuit, but at least you’ll be able to keep seeing her at Thanksgiving every year. 

The Wealth Management Firm Owner’s Perspective:  Anh Tran, SageMint Wealth

As the managing partner of a wealth management firm as well as a practicing estate planning attorney, over and above the legal considerations, here’s the simple and practical take-away for you:  Don’t delay the inevitable.  It’s not going to work out between the two of you.  

Your best path forward right now is to find a way to terminate the business relationship as seamlessly as possible – And that means doing so before this issue bleeds into your business performance or potentially impacts the quality of service you provide to your clients.

You have a few potential options:  First, you can review your firm’s buy-sell provisions and buy out your sister’s 25% interest at fair market value – This would certainly seem to follow the spirit of your father’s testamentary wishes.

Second, you can keep the status quo in place – that means keeping your sister on the payroll as COO at her current compensation – to avoid any risk and cost of a legal dispute.

And third, you can review for non-compete clauses and transition your book of business out to a newly formed firm or join another firm – This last choice would be the most aggressive position to take.

The Practice Management Expert’s Perspective:  Brian Bunker, Stratos Wealth Partners

Family business disputes are particularly difficult.  The best outcomes often strike a balance between doing what’s right for the future of the business and establishing a path that allows for family harmony around the Thanksgiving table.

From a practice management perspective, it’s always helpful to view the situation through the lens of our fiduciary responsibility.  This means ensuring our actions and those of the organization we represent are operating in a way that puts the interests of our clients first.  An argument can certainly be made that resources directed to someone who has not demonstrated a commitment to the business and the clients you serve can be better allocated elsewhere.  

Regarding your father’s wishes for fairness, remind your sister that, as a 25% owner of the business, she remains eligible for the quarterly cash distributions you referenced in your question.  As the business grows, these distributions will increase, becoming more financially lucrative to her.  

Put another way, you should communicate to her that she will continue to be “treated fairly” as your father wished so long as she remains a stakeholder in the business.

As for keeping your sister on as an employee of any kind, let alone a C-suite officer:  Well, there’s a case to be made that having somebody on the payroll who refuses to do any meaningful work could have a serious de-motivating influence on the rest of your team.

Your other employees may be watching you closely to see if you will be more impartial and objective in how you run the business.  Don’t forget, we’re operating in an environment where experienced talent can and will find other options if they don’t like how their current workplace is run!

Michael Madden, Contributing Editor & Research Analyst, can be reached via email at mmadden@wealthsolutionsreport.com