TRANSITION TALK

As an owner of a successful financial advisory business, you understand that the team you’ve built is vital to that success. Taking the next step and giving your top talent the opportunity to become owners can increase your growth and ensure that the business will continue to be successful–for generations to come.

Assembling this successor team and committing to a long-term partnership are important and weighty decisions. How will you know who will make a good partner? What traits and behaviors suggest that someone will make a successful owner? Much of that depends on your own values and priorities as the majority owner of your firm.

The term “synthetic equity” refers to a set of compensation tools that is commonly used to provide key employees some of the economic benefits of ownership without actual stock changing hands. While existing owners may benefit from synthetic equity by capitalizing on employee performance without relinquishing ownership, there are key benefits to next-generation advisors, too.

Reduced Financial Risk

One of the most beneficial aspects of synthetic equity for a next-generation advisor is that it does not require a financial investment in the firm. As a younger professional, you may already be juggling the financial obligations of a new family, a recent home purchase, or student loans, and you may not be interested in taking on the added burden of ownership buy-in–yet.

Today’s Independent financial advisors face an endless array of challenges and opportunities. Identifying challenges before they arise is key for finding solutions and developing strategies for tackling the issues that present the greatest opportunities for improvement and growth.

The four biggest opportunities are:

Equity-based compensation provides an excellent solution for practice owners who need a reward system that goes beyond the traditional salary/bonus structure and shares the economic value of equity, but not equity itself. 

A critical element in the success of any small business is its ability to recruit, reward, and retain talented advisors and support staff. To this end, equity compensation is often used to achieve these goals. Synthetic equity is a tool set that can provide ownership-level benefits without buying or selling actual stock in an advisory business.

To be clear, the process of transforming a single-owner practice into a sustainable business generally relies on equity. Equity, or stock, is what next-generation advisors invest in, and over time and with hard work benefit from, above and beyond what compensation alone can provide. Equity is the shareholder value created in a business managed from a bottom-line up perspective with a focus on earnings or profits as the ultimate financial goal. Equity is a powerful building and motivational tool, but with the opportunities come obligations. Because of these obligations, buying or selling equity isn’t the only way to offer key employees ownership-like benefits, nor is it always the best option.

As industry leaders in designing and facilitating internal succession plans for financial advisory firms, the leadership team at FP Transitions has its own talented, multigenerational ownership team in place. Our next-generation leaders have unique strengths and perspectives that keep our business constantly innovating and growing.

Your principal advisor has invited you to become an owner. Congratulations! The majority of next-generation advisors are energized by the demand for and the opportunity of succession planning, but most founders are stalled leaving successors frustrated. Your challenge as a successor is helping to make the process work for everyone involved. One important way to do that is to recognize the principal owner’s impediments and to help him or her understand the process and how accessible it actually is.

The Primary Obstacle

Like you, most successors—hamstrung by student debt, mid-stride in buying homes, building families, and still growing in their careers and earnings potential—don’t have money to invest in a business. Eager founders (“G1s” or first-generation owners) may seek to remove these obstacles by gifting or granting ownership, but this can taint the relationship as G1 may ultimately feel short-changed by giving away part of the business they built with their own sweat and toil. Beginning a partnership where one side feels cheated isn’t an ideal way to launch a successful, satisfying transition. There has to be a better way. In fact, many founders and successors come together each year with plans that are truly win/win. So where does the money come from? In many cases, the answer is the business itself.

In our first book “Succession Planning for Financial Advisors,” founder David Grau Sr., JD recounted one advisor’s early succession journey, including his ownership team’s bumps and triumphs as they executed the first tranches of their plan. Today, David circles back to provide an update on the successor team and all they’ve accomplished in six short years:

Ten years ago, around 2009, the founder and sole owner of Diversified Financial Consultants in Wilmington, Delaware, hired a local business attorney to help him develop a succession plan for his financial planning practice organized as an S-corporation. Calling on a practice’s local business attorney is a common starting point, and interestingly, it seems to be a common failure point when attempting to mesh the goals of the founder and next-gen advisors.. In this case, the founder’s attorney strongly suggested that in order for the founder to maintain full and unfettered control, the best course of action was a phantom-stock plan.The first draft was professional and thorough. It was also rejected out of hand by the team of prospective owners – they wanted to be real owners and investors in the business they were helping to grow.