Retaining Advisory Talent Amid a Cash Crunch
May 15, 2020
By Mrinalini Krishna, Financial Advisor IQ
One way to incentivize advisors without actually spending money is offering equity compensation, and this strategy is gaining momentum amid the financially-challenging coronavirus pandemic, according to a consultant.
While offering equity compensation and non-voting shares as incentives has been gaining ground over the past few years, consulting firm Succession Resource Group has helped RIAs seal double the number of such incentive deals in the beginning of the second quarter compared to previous years, says CEO David Grau Jr.
“We’re seeing more people than ever before leveraging equity compensation as part of the compensation package, whether using [a] phantom equity plan, sharing non-voting stock in the company, as a way to retain their top talents without having to use actual cash that they need and want to reserve for the business,” says Grau.
Such a plan could leave a practice with a 60-plus-year-old founder with 80% to 90% equity, a 45- to 50-year-old second-generation advisor with a smaller but material stake, and a third-generation 30-year-old advisor with an even smaller minority stake, for example, says Grau.
Jon Henschen, founder of St. Croix, Minn.-based recruitment firm Henschen & Associates, who works with independent broker-dealers, says he hasn’t seen an increase in offering equity compensation and non-voting shares in the independent broker-dealer space just yet. But he does say that the full impact of recent disruptions has not played out.
“Equity is a leap of faith. Cash is king, as they say. But when markets are going down and there’s not as much cash available, you have to be creative and think outside the box and offering equity is one of those out-of-the box alternatives,” he says.
Equity compensation could also help a practice grow, according to Succession’s Grau.
“The idea is if you can get your employees, your team members to think and act more like owners, then we’ve got more folks helping push this rock up the hill and, therefore, we should be able to grow faster and longer by diversifying our own pool,” he says.
Another benefit is diversification of the client pool.
“By spreading the equity out over multiple generations, these firms are now able to capture and build a multi-generational client base, which they’ve never been able to do in the past,” he says.
