Ask the Experts: Is an ESOP Right for My Financial Advisory Business?

Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

Wipfli, Stratos and tru Independence Set Out the Keys to Deciding Whether to Establish an ESOP and How to Structure It

When we think of employee stock option plans (ESOPs), we tend to think of exchange-listed megafirms compensating high performing executives, but ESOPs exist in small firms as well and can be tailored for financial advisory businesses with tens rather than thousands of employees.  

ESOPs meet a variety of needs for small businesses such as boosting employee loyalty, retaining top performers, providing avenues for succession, aligning employee and company incentives and improving morale – To say nothing of providing a potential liquidity event for the owners of independent financial advisory businesses.

Is ESOP the way to go?

And as private equity-fueled M&A consolidation continues to result in well-established independent financial advisory businesses being rolled up, ESOP plans are starting to emerge as a topic of discussion for the leaders financial advisory businesses who want to take a different approach in getting their liquidity events.

So what’s the proverbial rub?  Well, there are a few of them to consider.

First, before rushing into an ESOP, a firm’s owner must fully consider the following drawbacks: ESOPs can be costly to establish and cumbersome to administer, may require changes to your firm’s corporate structure, will lock owners into accepting new voices at the table and could require costly buyouts at inconvenient times.

Moreover, establishing an ESOP and the exact design of the ESOP fundamentally and permanently change the nature of the corporate structure and relationships with employees beyond the predictable near-term future.

To understand the fundamentals of ESOP decisions for a small financial advisory business, we spoke with three industry veterans, asking how a firm’s owner can determine whether an ESOP will be right for their business.

Introducing Our Expert Panel 

Ultimately, the decisions whether to establish a plan and how to structure it are specific to the individual business owner, and our panel unfolds the complexities surrounding those decisions. 

Thanks to the following experts for sharing their views and advice:

  • Paul Lally, Principal & Wealth & Asset Management Industry Leader at accounting and business consulting firm Wipfli, LLP, with over 84,000 clients
  • Brian Bunker, Senior Director & Head of Practice Management & Consulting at RIA Stratos Wealth Partners, with over $10 billion in assets, and part of the Stratos Wealth Holdings family of companies
  • Craig Stuvland, Chief Executive Officer of tru Independence, with $8 billion in assets, which provides back-office, compliance, marketing and investment services to advisors 
Paul Lally, Principal & Wealth & Asset Management Industry Leader, Wipfli

Paul Lally, Principal & Wealth & Asset Management Industry Leader, Wipfli, LLP

ESOPs are certainly worth considering as a tried-and-true approach used by many companies across various industry sectors to facilitate ownership transfers and heighten employee morale. In fact, there are currently over 6,600 ESOPs in the United States. 

But is an ESOP right for your firm?

Happy employees are productive employees.

There is no simple answer, and certainly there are limits on the size of a company sponsoring an ESOP. 

There are, however, some basic core guidelines that can help you determine when an ESOP is worthwhile for your business. There are a handful of ESOPs with under 10 employees and a larger number between 10 and 20, but in most cases at least 15 employees is a reasonable starting point.

The key issues to consider are the costs of the plan relative to the benefits, whether there is successor management, if the company is profitable enough to pay for the costs of buying shares, and whether you are willing to spend the time to learn about and manage an ESOP.

And to be clear, this is not a process that any business owner should embark on without understanding that establishing and maintaining an ESOP can be a complicated and costly process. 

Designing a plan, performing a feasibility study and implementing an ESOP all pose significant upfront costs. And after an ESOP is established, maintaining the plan can still represent a large cost. 

Ongoing administration and oversight of the plan is required, which includes an annual valuation, maintaining the details of each participant’s plan, keeping the plan current and accounting for policy changes and conducting the required annual valuation of the business.

All of this is not meant to discourage you from doing an ESOP, but knowing what is required up front is important.

As a rule of thumb, ESOPs work best for companies with over 20 employees, but a little back-of-the-envelope calculating can give you a much better idea if this is worth pursuing further.

Brian Bunker, Senior Director & Head of Practice Management & Consulting, Stratos Wealth Partners

Brian Bunker, Senior Director & Head of Practice Management & Consulting, Stratos Wealth Partners

When aspiring to build a multigenerational firm, few things are more important to future leaders than a sense of ownership. An established path from which to migrate from employee to owner can be an incredibly powerful retention and succession tool when implemented correctly. 

This is especially the case if there is a sole owner – Transitioning to broader based employee ownership can significantly contribute to the firm’s enterprise value, due to the stability and continuity such a move can potentially create. 

According to the ESOP Association, employee-owned businesses are 6.2 times more likely to retain key employees than conventionally owned companies. The competition for human capital within wealth management will certainly accelerate in the coming years, making ownership a powerful tool to help get the right people to support firm growth.

There are many variables and items to consider before choosing an ESOP, but these are three questions you must answer first:

Are you open to other people having a say in your business?

Are you comfortable with others having a say in the direction of the firm? As a sole owner you have the final say in the key decisions for the practice. But as new ownership is added, new voices should be heard. This can be challenging. 

Will your ESOP be “future-ready?” As the company continues to grow, you’ll likely be looking to attract additional talent and equity ownership can be appealing. It will be helpful to think through today what eligibility requirements you would like to have in place for future participation.

How would YOU like the plan structured? There is no right way to structure equity, and one size does not fit all. And there is no shortage of nuances and variables to consider. It’s important to design a plan that feels right to you.

Remember, the most critical asset a firm has is its workforce. Professionals incentivized through equity are generally more committed to the company’s long-term growth, and a well-designed ESOP can help align the goals of the company with the goals of the team.

Craig Stuvland, CEO, tru Independence

Craig Stuvland, CEO, tru Independence 

Whether an ESOP is the right solution for you depends on your company’s future goals. ESOPs are a popular option that can provide you and your employees with special tax benefits, including deductions and tax-deferred earnings. They can also be used to supplement your firm’s 401(k) or other retirement plans.  

ESOPs and other ownership plans can be used to incentivize a culture of thinking like an owner, enabling employees to understand through participation, helping them become aware of looking for ways to minimize expenses and grow revenues. 

The most important point to remember about ESOPs is that they can help you gradually establish a transition plan for your business by creating a market for your company’s stock and allowing you to sell your business over time instead of exiting suddenly.  

Eyes on the goal!

There are some drawbacks.  For instance, you can only use an ESOP in C or S-corporations, not most other professional corporations. You also need to be aware that as a private company, you must repurchase a departing employee’s shares. You could face major expenses in the future if many workers quit or retire at the same time. Moreover, any time your company issues new shares, the stock of existing owners is diluted. 

Finally, the cost of setting up an ESOP must be considered. In my research, costs range from $30,000-$45,000 for the simplest of plans. With so many other variables to consider, a qualified tax attorney and accountant will help you make a good decision.

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

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