Considering an equity ownership structure? Here are 4 questions to consider

As financial advisors age and start to think more carefully about their succession plans, they’re determining how to monetize their practices, create continuity for clients, and offer opportunities to other advisors and employees. Some approaches are well-known and understood — like selling agreements for some (or all) of the business, or a merger with a buy-sell/stay option for retiring advisors. Let’s talk about something a little different when it comes to transforming employees into owners: creating an equity ownership structure.

We’ve received a lot of questions about equity structures lately; there’s a lot of curiosity from firms. In our consultations, we can’t answer if it’s the right move for a firm — so much of that depends upon the advisors involved. But one thing is very clear: The sharing of ownership has to align with a firm’s vision. The time-consuming and expensive process involves shifting everything from compensation to financial management. It works best for firms looking to create a multigenerational practice with lasting value that will outlive the current owners.

If this reflects your vision for your firm, exploring equity options could give you a valuable tool to attract and retain great people. Offering employees an ownership stake can be a great behavioral and compensation incentive, and it often makes internal succession much easier. As you start to map out your plan for the future, here are a few key questions to consider early in the process.

1. WHO CAN PARTICIPATE?

One key question to decide early in the process is which employees will be allowed to participate. Is ownership something everyone in the firm can aspire to, or are the opportunities limited to select top performers? While the choice is yours to make, you do need to make sure that you’re fair and equitable. That’s why having well-thought-out criteria and guidelines for ownership is critical.

2. WHAT ARE THE CRITERIA?

Depending on which employees you want to participate, you’ll need to set some key performance indicators for the various roles and responsibilities you wish to recognize. While there are some common, easy metrics for advisors (e.g., assets under management, revenue to firm, years of experience, clients), you might also consider other competencies that speak to someone’s leadership and management potential. Also consider how and where you might want to integrate other key employees. What would the metrics be for a COO or CFO in a firm? How should a director of operations be considered? These are key factors in the success of a firm, and conversations should include these roles as well as how to reward long-term staffers.

3. IS THE TIMING RIGHT?

A succession conversation is the precursor to a discussion about offering equity. You don’t want to rush these discussions, though, as it can take six to 12 months to implement an equity structure from the time a decision is made to move forward. For advisors within two to three years of retirement, dedicating time to changing their firm’s structure and implementing an equity structure might not make sense. For other advisors, this could be a lasting legacy to the firm they’ve built up — well worth the time invested.

4. WHAT IS THE MOTIVATION?

It’s important to really understand what’s going on at your firm to be able to assess the pros and cons of any given strategy. A firm having difficulty retaining key employees needs to understand the reasons for that. An equity structure won’t cure a lack of mentorship or a temperamental owner, for example, and if the real issue is compensation, there are easier ways to address the problem.

As firms grow in complexity and sophistication, it’s not surprising that we’re seeing larger firms look for innovative ways to continue to grow and thrive. Moving employees to owners might not be the solution for every firm. For the right advisors, it can be a powerful way to attract and retain the top talent needed for growth — and to create an enduring business.

Kristine McManus serves as chief advisor growth officer at Commonwealth Financial Network.