Build a Sustainable Practice with an Equity Ownership Structure

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Are you taking steps to position your firm for the future? Whether you envision evolving into a large-scale enterprise or integrated ensemble or you’re a solo advisor considering taking on a succession partner, an equity ownership structure may be right on the money to help you build a sustainable practice.

Consider this: In an equity business model, all relationships are deemed clients of the firm, all revenue and expenses flow through the firm, and there is governance around decision-making, entrances, and exits. All of this can go a long way toward instilling loyalty and serve as an incentive to help you attract next-gen advisors.

If you’re wondering whether an equity ownership structure might be right for your advisory practice, take a look at the pros and cons below, as well as a few steps you can take to help you get started.

There’s a Lot on the Plus Side

With an equity ownership structure, you’re aligning the interests of everyone in the firm toward profitability and long-term growth. There are no more silos where each advisor has their own interests at heart—everyone works together to build value in the firm.

You’ll also create more flexibility. Not only can an equity structure help you attract and retain top talent by establishing a clear pathway to ownership, but it’s a more seamless way for you to minimize your work when you’re ready to step back. Because ownership is tied to a right to a share of profits, it can be extended to key employees in non-advisor roles, such as a chief operating officer. Your firm can also exist in perpetuity, providing continuity of service to your clients across generations.

But There Are Hurdles, Too

So why isn’t everyone adopting an equity ownership structure? For starters, it requires a big mental shift away from a siloed structure where everyone’s book of business is their own. Some advisors prefer an eat-what-you-kill model and won’t want to give up control, whether that’s over systems, processes, or individual client ownership.

Here are some important factors to consider:

  • Setup will take time, as you’ll need to work out a formal governance, compensation, and partnership structure.

  • If you decide to leave the firm, governing documents will determine the extent to which you may solicit clients to join you.

  • You’ll still be tasked with attracting and training the future partners who will lead the firm when you’re gone.

  • You can no longer run personal expenses through the firm. This can be a big adjustment if your business and personal finances are intertwined.

  • Changing your business structure can have significant tax implications, so you should talk to an accountant before making any decisions.

Laying the Groundwork

If you decide the benefits outweigh any potential challenges, what’s next? As mentioned earlier, moving to an equity ownership structure is a significant shift in mindset, so start there. Think about your vision and goals, and be sure that the new structure you create is aligned with both.

Once you’ve done that work, follow these four steps to move forward:

  1. Create standardized systems. Everyone now has a shared vision, and you’ll want to be consistent across all areas of the business. This includes everything from client onboarding and paperwork processing to investment management and financial planning. By creating standardized systems, you’ll ensure that every client has the same experience, no matter which advisor they work with.

  2. Professionalize your P&L. By adopting professional accounting practices within the firm, you can centralize financial management. This will help shift the firm’s focus from top- to bottom-line performance and provide you with a clearer picture of what’s driving success, so you can think more like an entrepreneur. And that will, in turn, help drive the firm’s long-term growth. Additionally, having a clean P&L is critical since the valuation of an equity firm is commonly based on a multiple of earnings as opposed to revenue.

  3. Formalize the advisor compensation system, and establish partnership criteria. This is important for two reasons:

    • When you establish a transparent pay structure, covering everyone from paraplanners to senior advisors, employees will be confident in what to expect in terms of compensation and profit distributions.

    • It will allow for advisors to both recognize the economic value of buying in and have the financial capacity to do so.

  4. Consult with your CPA and attorney. They will help determine the best tax structure for the entity and draft the necessary paperwork to put your governance structure in place. There’s more flexibility here than you may think, so consider your firm’s purpose and values when setting up this structure. For instance:

    • What kind of ownership do you want? You could let everyone purchase a small stake after they’ve passed a certain tenure. An inclusive structure where everyone can participate will create a powerful recruiting tool and a team of dedicated employee-owners. On the other hand, you may not want to dilute ownership and prefer to limit it to high performers who are the future leaders and successors of the firm.

    • How are you defining ownership? It’s possible to create either a single class or multiple classes of partnership, which can impact decision-making both in terms of who has a seat at the table and how voting takes place.

    • Will you have a buy-in option? If one of your goals is to make it easier for younger advisors to join, you might want to put internal financing options in place, such as structuring the first buy-in entirely through profit distribution or giving a discount to internal purchases.

The Key to Staying Power

While creating an equity ownership structure will take some work, it could be an ideal solution for helping you build a sustainable practice. As long as you customize the structure to offer clear benefits for you as well as those who participate, it can help you achieve your growth objectives by giving everyone a stake in the firm’s success and enable you to establish a built-in succession plan.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.



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