Creating an equity ownership track: Look before you leap

While the economics have to work for the owners and partners of the firm, they have to make sense for the next-gen advisors, too.

For years, advisors in the independent channel seldom worried about creating equity ownership tracks for their firms’ junior associates. But as advisory firms have become more complex and sophisticated, the conversations are changing. More firms are discussing moving to equity structures within their executive ranks to attract and retain talent and make succession planning less onerous. And we think it’s exciting that many firms are willing to discuss equity ownership opportunities for next-gen advisors.

But moving to an equity structure may not be what your firm needs. So before undertaking this process, which usually involves a shift in everything from compensation to financial management, consider the following questions.

WHAT DO YOUNGER ADVISORS WANT?

If work-life balance is highly valued, advisors presented with an equity ownership opportunity may not want to spend more time and energy in the office. We have also seen reluctance from next-gen advisors to take on a lot of debt to finance an equity purchase, knowing they ultimately bear more of the firm’s risk. And they may have other financial objectives, such as purchasing a home or saving for a child’s education, that take priority over owning a stake in their firm. So, while the economics have to work for the owners and partners of the firm, they have to make sense for the next-gen advisors, too.

As a result, conversations about equity partnerships are sometimes driven by compensation concerns, particularly how to allow nonproducing advisors to participate in the upside of a firm. We’ve heard stories of firms losing talented people because another firm dangled a better offer in front of them. In one case, a highly regarded service advisor left for a $15,000 raise, which their old firm would happily have matched. While compensation is an essential component, it shouldn’t be the primary driver to make someone a partner. Instead, look for creative ways to incorporate firm profitability into bonus structures. And as a best practice, review benchmark compensation data as part of your annual salary reviews to ensure that you remain competitive in the marketplace.

HAVE YOU DEFINED THE EQUITY OWNERSHIP TRACK?

In every firm, there are key criteria for buying into a practice. In most cases, the advisor must be excellent at their job, show leadership characteristics, represent the firm well and be willing to help others succeed through mentoring and coaching. But there are often other conditions, such as a minimum amount of revenue under management or AUM, years of experience as an advisor, and evidence that they have the vision and insight to play a role in strategic decisions. So, before senior advisors discuss partnerships with next-gen advisors, it’s essential to articulate which key competencies matter most. This could include how senior partners will make space for a new partner or how the new partner’s role might evolve, and expectations should be clear on both sides.

IS NOW THE RIGHT TIME?

Firms can quickly change and grow over time, so timing is key. For example, it may not be the right time to undertake an equity ownership structure if a firm is in the middle of acquiring and retaining other firms. Or maybe a senior advisor plans to retire, and the firm doesn’t want any disruption until that succession plan is fully executed. There could be many reasons a firm wants to develop a partnership track without committing in the short term, so be honest about whether you have the resources now to devote to this process. If not, dangling a partnership in front of a key employee and not following through could erode trust.

CAREFULLY CONSIDER YOUR OPTIONS

Offering opportunities for others to share in the growth and profitability of your firm can greatly benefit everyone. But if your goal is to retain good people, offering equity in your firm may not be the only way to go, as there are easier ways to get creative with compensation.

An equity ownership structure is best for firms that want to be highly integrated, aim to build enduring firm value and are willing to invest the time to help their next-gen advisors succeed. So, before going too far down a path, look carefully at all of your options before taking the leap.

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