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

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 Ask the Experts Panel.

Meet Our Expert Panelists

Let’s meet this month’s Expert Panelists:

  • 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.
  • The M&A and Succession Planning Expert:  David Grau, Sr., J.D., is Founder & President of FP Transitions, a strategic consultancy and M&A advisory firm that specializes in helping financial advisors value, protect, grow and transition their businesses from one generation to the next.  
  • The Hybrid RIA CEO:  Conor Delaney is Founder and CEO of Good Life Companies, an independent hybrid RIA with approximately $8 billion in assets, supporting well over 200 independent financial advisors across the country.

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.

Darn – Shouldn’t have completely retired…

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

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?
Survey the landscape to build a
future-oriented approach

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.

David Grau, Sr., FP Transitions

The M&A and Succession Planning Expert: David Grau, Sr., FP Transitions

In general, the best time to start a succession plan is around age 50, understanding that a succession plan is about building a sustainable enterprise and a stronger, investable business structure that allows you to retire when and as you see fit. The process revolves around a series of equity sales usually to more than one key employee, called a “successor team.” 

There are three key questions to ask yourself: 

  1. Is your practice properly structured to support the sale and purchase of equity? 
  1. What is your practice worth at this time? 
  1. Do you have two or more potential next generation owner prospects, now or in the near future? 

While not an issue for you given your present age, most internal succession plans require a minimum of ten years to do the job, and fifteen to twenty years is a better measure. With that, let’s add some perspective to each of those key questions to help you think through the process in more depth. 

Another question that must be asked is, “Do I have enough time to make this work?” 

In most cases, the process of building a sustainable enterprise, which is the foundation for a succession plan, will require some restructuring of your existing practice. These adjustments are intended to make your practice stronger, more profitable, and foster sustainable growth. 

The process focuses on four areas: organizational, entity, compensation, and cash flow structures. Your EBOC number suggests that your overhead is around 25%, but even with shifting to an earnings or EBIT/DA format and including “ownership compensation” in the picture for you and your successor team members, your profitability level should be more than sufficient. 

A succession plan always requires an entity structure. In every instance, we set up a new entity or amend an existing entity after the plan designs are complete and the spreadsheet models meet with everyone’s approval. We coordinate this step with your local tax counsel and set up an entity that is plan-specific and regulatory-specific. (Note: FINRA adds a level of complexity). 

Evaluating succession team members?
Stop looking for another you.

A formal valuation is usually necessary when implementing a succession plan. It is important for all parties to have an objective opinion of value in an equity transaction.  The appraisal results will be used to inform the selling price of a share of stock – understanding that price and value are different concepts. A formal valuation may also be necessary if conventional bank financing will be utilized, which is now a very common element in a succession plan. 

As to evaluating your prospective successor team members, start with the idea that you’re not looking for another “you.” 

The successor team members do not need to be entrepreneurs – their job going forward is different than the job you had to do as founder and sole proprietor. 

In terms of other employee incentive programs, we often utilize Synthetic Equity. This refers to a set of strategies and tools that are commonly used to provide key employees with some of the economic benefits of ownership, without actual stock changing hands.  Examples include Phantom Stock Plans, Stock Appreciation Rights, Profits Interests, etc.

While this may not be a good option given the fact pattern you’ve presented, it can enhance your firm’s sustainability because synthetic equity ultimately connects an employee’s financial reward to the success of the company. 

The Hybrid RIA CEO:  Conor Delaney, Good Life Companies

Conor Delaney,
Good Life Companies

First, congratulations for being an independent advisor!  It is a part of the industry that has the capacity to truly serve the best interest of the client.  That said, it does leave many financial advisors with questions like yours that aren’t covered in your series 7 materials.

Considering giving equity in the business you’ve built is a significant and personal decision.  

Professionally, there is nothing more precious to me than the equity of my practice and business. Deciding who to share that with can be tricky and you want to make sure you have a team that shares your values and vision for the future. 

It seems in this situation, you have a strong relationship with your team, and you trust them:  These are foundational considerations to any partnership arrangement. 

You will also need to be comfortable in sharing the decision-making process in the future.  Not having the only say on important matters can leave some owners questioning their choice to sell a part of their business. 

Are you ready to share your decision-making space?

In terms of first steps after you make the decision to offer equity to trusted partners, you should start by consulting your attorney. The range of legal considerations and corporate structures are best outlined by a professional.  This protects you, your potential partners and your clients. 

One critical protection I’d suggest including is a dissolution clause within your agreement that outlines how the parties separate amicably if the partnership fails.  

And, as an important point that you raised in your query, there are other incentive programs you can consider.  For example, profit-sharing plans or bonuses tied to practice performance metrics may lay the groundwork for future partnerships, but stop short of selling a part of the business today.

And for many employees or servicing advisors, cash today may be preferred to equity compensation in the future.  

Additionally, a buy – sell agreement may provide an alternative path for employees to take over the practice in the future, and when you are ready to retire your current employees could end up with 100 percent of the practice. 

As part of the agreement, the new owners could retain you as a part-time employee, which will let you avoid the boredom of complete retirement and ensure the continuity of service for your clients.   

Whatever you decide, best of luck with your continued professional growth and success!

Next Month’s Ask the Experts Panel

Many thanks to Brian Bunker of Stratos Wealth Partners, David Grau, Sr. of FP Transitions and Conor Delaney of Good Life Companies for sharing their insights for this month’s Ask the Experts panel.

As always, each of our issues is built on feedback and suggestions from the members of our WSR community, and this is especially the case with our monthly Ask the Experts feature.

If you have a dilemma or issue that you’d like us to bring together some of the best minds in the wealth management industry to address, please let us know.  All reader queries will be kept strictly confidential.

Michael Madden, Contributing Editor & Research Analyst, can be reached at 

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