This post is part 2 of my series on how advisors pay and incent their firm’s employees. In Part 1, we covered incenting your staff. This week we are focusing on the complex world of how ownership of the firm is mixed up with salaries and compensation. 

Owning a part of the firm is a different type of compensation. Here are some reasons why partnership is an incentive for employees:

  • It can become the most lucrative type of compensation
  • It typically results in a monthly, quarterly or yearly payout based on the firm’s success
  • It can continue after you’re no longer working at the firm
  • It means you have a seat at the table for key firm decisions

There are two constituencies for this topic: founding advisors who want to pass their firm onto another generation of employees, and younger advisors who want to become partners in a firm. We will therefore approach the topic from these two vantage points.

Identifying and incenting a G2

The founder(s) of the firm are first-generation advisors (G1). Their successor(s) are second-generation advisors (G2). Obviously there are further generations; G3 and so on. When considering the future of the firm, there are the following options for the G1 advisor:

  • Identify G2(s) and put them onto an equity track
  • Sell or merge the firm to another RIA
  • Close down the firm when the G1 advisor retires

Books have been written about these options and for the purposes of this post we will focus only on the first one.

Breaking it down, here are the phases of bringing a G2 employee into the partnership track:

Identifying the G2: They can come from a merger, from employing an advisor who does not have their own book of clients or they can be home grown — trained up within the firm after employing them straight out of college. There are many fewer issues with the home-grown approach! In fact some of the most successful successions we have seen have emerged out of a vibrant intern program. 

When is the right time to mention the possibility of a partnership track? From the G1 advisor perspective, it is only when you are sure that the young advisor is a really good fit with the firm, and is someone whom you trust and respect enough to be a partner. Here are a couple of good tests that we’ve learnt from advisors:

  • Test 1 – is this someone who you can delegate a crucial firm role to, without feeling that you must check up on the results? 
  • Test 2 – is this someone whom you are learning from and want to brainstorm firm strategies with? 

Finally, it’s good practice to not mention partnership to a specific individual until you feel they are a candidate for ownership. You don’t want to mismanage expectations. The timing can vary depending on the person, anywhere from two to 10 years from joining the firm. Of course, unfortunately, with the some people, the answer is never. 

Negotiation: When it is time, the negotiation starts between the G1 advisor and the G2 employee. The standard method is to get a valuation of the firm, decide on the percentage of the firm that the G2 employee will initially own, and then work out a payment plan for your G2 advisor. This sounds straightforward but in practice is difficult to execute. Most firms reach out to a consulting firm to help with the valuation, the facilitation of the deal and the contract paperwork. Our advisors have worked with such firms as FP Transitions and Succession Resource Group, but there are several other reputable firms in this space. There are many variations of this standard deal structure, which include using profit sharing to help the G2 advisor to afford the payments and different ways for taking account of the varying valuation of the firm over time.

Execution: Once the initial contract is in place, it should be reviewed regularly. At least yearly, a new valuation should be taken and the deal reviewed to ensure that everyone is still committed and that events have not occurred that make the deal unfair to either side. 

In terms of incenting your firm, there is nothing better than equity and partnership. If you think of law and accounting firms, it is the foundation in which they are structured. They have very specific time periods and ways of gaining access to the “partnership track” and it is truly a big deal when someone makes partner. In our industry, it is not as organized and firms all do it differently. But when an employee owns part of the company and often have had to pay to be there, they become much more committed to the success of the firm. The other aspect that is often missed is control. Advisors can make a lot of money, yet still not have any say in the big decisions on the direction of the firm. That only comes when they own a part of the firm.

Another variable that makes a big difference is the size of the firm. If the firm is around $50M to $100M in assets under management, it is likely that the G1 advisor is looking for a single G2 advisor to take over. For these smaller firms there are more risks to the transition. It is harder to value a small firm as the good will of the clients is so tied to the G1 advisor. There is always the risk that the relationship does not endure with the G2. And lastly, the G2 advisor must have a broad skillset, like the G1 advisor, which includes being able to sell as well as run a business. These are a lot of variables that have to work out to end with a successful transition. Larger firms have less risk and Business CEOcan often identify multiple G2 employees so that they are making multiple bets at success.

Finding the right firm and making the case

Now let’s switch places and take the viewpoint of the G2 employee. How should they find the right firm and then engage the G1 advisor? For this discussion, I am going to assume that the G2 employee wants partnership at some stage. This is not always the case and many employees never want the additional responsibility and commitment of firm ownership. 

Finding the right firm: When you are looking for a firm, it is important to understand not only the compensation structures and benefit packages, but also the firm’s approach to partnership. It may be years before the topic of partnership comes up, but is it an option? One of the most insightful ways of evaluating a firm is to ask a series of partnership questions. Who owns the firm? What percentages do people own? How do employees become a partner? You are not at this stage asking for partnership, just trying to find out how it works. If you see your interviewer squirming at the question, or saying that it might be an option “sometime in the future,” it is not a good sign. Transparency for a firm in terms of ownership, especially with these simple questions, is an important litmus test.

The big question: So you have been at the firm for a while. You have a good understanding of the craft of being an advisor. You have a good idea of the culture, success and efficiency of your firm. The big question is: do you open your own firm or do you like this firm enough to campaign for partnership? The answer is highly individual and depends on whether you have a true entrepreneurial spirit and how you feel about your current firm. Only the minority of people decide to open their own firm at this point — it is such a big gamble. However, it’s a great thought process to go through to see if your current firm is worthy of you becoming a partner, or if you should look for a new firm.

Making the case: Interestingly when raising the partnership topic the approach a potential G2 employee should take is the opposite of that of a G1 — you should do it as early as possible! You want your future goals to be clear to your firm so that there is no misunderstanding. This also allows you to identify and then execute specific firm tasks and roles that you need to accomplish as a pre-requisite to being considered for partnership. 

You should identify a mentor in your firm who will guide and advocate for you through this process. In a small firm, this is inevitably the owner and sole advisor. To make the case, it is up to you to identify roles that will showcase your performance at owner level tasks. Examples could be running the yearly planning meeting, or becoming the firm’s Chief Compliance Officer (never a popular job)! Showing the passion and commitment is the way to make your case to become a partner.

I’ve covered a lot of ground, and just skimmed the surface of the topic. To wrap up, I would make these three points:

  1. The ultimate incentive for an employee can be company ownership
  2. To maximize that incentive for the employee is to plot a transparent roadmap to ownership, with necessary accomplishment milestones along the way
  3. The G2 employee can incent the firm to make them a partner by proactively behaving and performing like an owner


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