As wealth management firms fight for the top financial advisor talent, equity pay is playing a key role in compensation plans and registered investment advisory firms’ businesses.
Giant RIAs are going beyond the traditional stock packages that wirehouses and other brokerages have offered their top advisors for decades to promote collective partnership in the company and reward incoming teams for choosing them out of the many suitors in the marketplace. Equity pay forges a lasting connection between advisors and firms quite literally through contractual vesting periods and a stake in the company’s growth.
For example, the incoming advisors who have built New York-based independent wealth management firm Snowden Lane Partners up to a group of 82 with $11.8 billion in client assets under advisement are “strongly encouraged to have some equity component as a part of their transition package to the firm,” according to CEO Rob Mooney. Equity “provides increased motivation and engagement and employee empowerment,” and “you get like-minded people,” he said, noting advisors get between 10% and 50% of their bonus in company shares with a seven-year vesting period up to what’s known as a “cliff” award in full at the end of that span.
“Every program is different,” Mooney said in an interview. “They understand the tax benefits of capital gains versus ordinary income. They understand the performance of the collective is very important to the valuation of the equity.”
READ MORE: Top 3 things young advisors get wrong about RIA equity
Across more than 1,300 RIAs that were part of Charles Schwab’s 2024 “Benchmarking” study of the channel, a median of one out of three employees held equity ownership in their firms. The share of firms skewed heavily at the large end, with two-thirds of RIAs that have at least $5 billion in assets under management providing equity to new advisors with a book of clients and 39% of those with $250 million or more doing so. Equity is “a key currency firms are using to help retain talent and support their succession strategies,” Schwab’s report said.
In addition, equity is emerging as a bigger component of the purchase price for RIAs in succession deals and other moves to the aggregators, according to a white paper on purchase-price allocations released last month by Mercer Capital, a wealth management valuation and M&A advisory firm. Since small RIAs are usually “an owner-operated business,” changing “from ‘owner’ to ’employee’ may feel like a demotion to some, even when accompanied by a multimillion-dollar payout,” Mercer’s report said.
“In the RIA industry, rollover equity has become more popular as a component of deal consideration,” the report said. “The benefits of rollover equity, from the acquirer’s perspective, are twofold: 1) rollover equity helps align the interests of the acquired employees with the acquirer’s business, and 2) rollover equity, like contingent consideration, offers downside protection compared to cash consideration. Advantages of rollover equity from the acquiree’s perspective include the satisfaction of continued ownership in the operations they manage and the opportunity to increase the value of their stock holdings alongside the acquirer.”
That’s a much different dynamic from the equity typically included as a form of deferred compensation for advisors at wirehouse and regional brokerages. Whether in a cliff or in a so-called straight-line or as-you-go amount that pays out in equal fractions of the total each year, the equity packages in the channel in most cases add up to about 5% to 15% of the overall compensation for advisors, according to Andy Tasnady, a consultant on compensation and other strategic questions for large financial firms who’s founder of Tasnady Associates and the data analysis partner for Financial Planning’s annual “Best Advisor Pay” feature.
Equity “works first as a retention device” keeping advisors at the same firm in order to collect the full benefits, Tasnady said in an interview. “There’s several benefits for both the advisor and the firm of deferred compensation. Some advisors, though, would rather have all their cash upfront, which makes it easier for them to move without leaving any money on the table.”
READ MORE: More RIA buyers are offering equity. Here’s what sellers should know
New York-based independent firm Steward Partners has reached a footprint of 270 advisors in 66 offices with $40 billion in client assets while awarding equity on an as-you-go schedule and in the form of performance incentives, according to Jeff Gonyo, the head of wealth management and senior divisional director for the southeast.
“Every single person at Steward has equity ownership — every support staff member, every back-office member,” Gonyo said in an interview. “They feel like they have ownership, they feel like they have voice and they feel like they have a responsibility.”
With advisors fielding interest among recruiters from across the wealth management industry offering ownership stakes, it’s important for them to understand that “culture is huge and the main driver here” and ask themselves “How much equity am I comfortable with?” through an “evaluation of the leadership team, the people who are running the organization and the people who are backing the organization,” said Mooney of Snowden Lane.
A lot of the conversations with prospective recruits in the wealth management industry boil down to money and the exact figures, too. In the wirehouse and regional channel, deferred compensation begins at “a starting point” of a 50-50 mix between cash and stock, Tasnady noted. Volatile stock values and the raw availability of shares factor into the discussion as well.
“If you have thousands of advisors you would run out very quickly,” Tasnady said. “Advisors could be offered stock again for recruiting at the large firms as part of a make-good offer because they’re leaving an equivalent amount of unvested deferred dollars at their prior firm, some of which is cash and some of which is stock.”
