As a talented, next-generation professional in a growing firm it is important to understand how synthetic equity vs. actual equity buy-in can benefit you as you make decisions about your career path. Synthetic can temper financial risk, help you maintain control and flexibility, and open access to ownership-like benefits for non-licensed team members.
There are two ways to make money from a financial services business: wages and profit distributions. But, there are four ways to build wealth from the same model: 1) Wages (including bonuses); 2) Profit distributions; 3) Equity income from sale of ownership stake; and 4) Equity value, or stock appreciation. Properly structuring cash flow and compensation are key to maximizing profit, encouraging business growth, and creating sustainability.
With all of the modern tools for practice valuations and equity management solutions available, some financial advisors still choose to use revenue splits, or a revenue-sharing arrangement, as a makeshift succession plan. For a practice owner, this can be a poor and shortsighted business decision.Revenue splits encourage the eat-what-you-kill strategy and drive an individual’s book of business rather than support the practice as a whole.
Synthetic equity can enhance your ability to recruit, reward, and retain talented advisors and support staff, and offers key economic benefits of ownership, without actual stock changing hands. It is an innovative set of tools that should be considered by every independent financial professional–especially in challenging times. Originally aired April 28, 2020.
A sustainable business is financially strong, has a long-term plan for continued growth, and is structured to last beyond the career of any one owner. Sustainability is about more than just the succession of ownership, it's about creating a business of trusted advisors that will carry on, continue to grow, and, most importantly, be there for clients when they need it most.
The financial obligation of purchasing ownership in the business can enhance an already strong sense of duty to the organization and can pull the bigger picture into focus. As an owner you're no longer responsible for just the projects on your own desk, but for the performance and success of the business as a whole.
The success of any small business depends on its ability to recruit, reward, and retain talented advisors and support staff. Equity is often used in addition to–or in conjunction with–compensation 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.
The separation between wages for work, performance incentives, and return on investment needs to be clear. The delineation is critical more a number of important reasons, including the ability to predict expenses, increase value, and create investability. Equity is a powerful compensation tool to attract, retain, and reward talent. It must be used with measured precision to achieve appropriate long-term results.
Balancing growth and profitability comes down to compensation structure and the equity pathways created. The profits generated through properly structured equity pathways are a catalyst for growth and the means to accomplish long-term strategic objectives including recruiting new talent, internal succession, and acquisition.
A large percentage of advisory practices have built in “fracture lines” by using a revenue-sharing arrangement to compensate multiple professionals in one office. In the independent sector your focus should be on creating a team of advisors that work together—compensated for contributing to an supporting a single enterprise—rather than individuals building their own books and leaving the practice with the clients and cash flow they’ve generated.
In times of uncertainty, it is always wise to focus on what you can directly control. Whether we look at politics, markets, regulation, news, or the state of the industry, there have been (and always will be) many events outside of your control as a business owner. How do you deal with this constant noise? Recognize it for what it is and focus on the things you can control with direct action.
Today’s independent financial advisors face a daunting array of opportunities (and challenges). The key to harnessing ownership opportunities is to identify impediments before they arise and develop strategies for tackling the issues that present the greatest opportunities for improvement and growth. Discover actionable guidance for seizing ownership opportunities and facing challenges head on.
Independent financial advisors face an almost overwhelming set of challenges, but with challenges come opportunities. These opportunities and challenges are often interconnected and fall into areas of mergers & acquisitions, growth & profitability, talent retention, and succession planning.
Enterprise Consulting is an end-to-end business growth solution. It is designed to adapt to your needs, your timeframe, and your goals to provide an effective and cost-efficient solution. It is a unique approach designed for a unique profession.
As businesses evolve they tend to move into a structure where value is attached to individual books rather than to the as a whole. To avoid this you need to set up a structure that is a business unit instead of just an accounting conduit. This webcast explains how improper structure can be dangerous for the ongoing growth of your business.
When it comes to understanding an "equity-centric" business model the structural details can be difficult to grasp. The parable of ship vs. liferaft will help to illustrate the problems many independent financial advisors face when trying to evolve their structures as they progress from a job to a practice, and ultimately, to a business.
The next-generation ownership of FP Transitions discuss their own experiences in taking the mantle to shape the team and future of the business. They explore hiring for cultural fit and potential value, the definition of “ownership mentality,” and how they might identify potential G3 leaders in the generation beyond their own.
As a next-generation advisor, before you ask for ownership from the existing owners of your firm, you need to demonstrate that it is not only something you are capable of, but something you have earned. There are four critical steps to take in your early career to jumpstart your path to ownership.
EMS Exclusive Resource
It may be tempting to think that simply granting stock or ownership to a key employee would be an easy way to achieve succession. But the tax implications and potential issues this causes should be carefully considered.
EMS Exclusive Resource
Too many advisors focus on revenue strength as the sole measure of their success, but creating and building enterprise strength is just as important for growing value. Maximizing enterprise strength depends on the selection of the proper entity for your business, the proper organizational structure within that entity, and the proper compensation structure for the cash flow of that organization.
EMS Exclusive Resource
Recruiting and developing a skilled team of advisors can be a daunting challenge for the owner of a financial advisory practice. Doing that, however, is only half the battle. Once you’ve chosen and trained your next generation how do you hold on to them? How do you keep them from opening up shop across the street? Create an ownership track and make the opportunity available to the best on your team.
Succession Management Exclusive Resource
Minority and Marketability Discounts apply to shares of privately owned companies. Both are used in the purchase and transfer of shares that do not hold full ownership rights or value. These shares are awarded/sold in various situations and include those that represent a minority equity share that is not entitled to the same voting rights that majority ownership shares do, as well as shares that cannot be easily sold on the open market due to restrictions in place by the firm.