Taking stock of your advisory business

As multi-adviser firms grow in revenue and number of advisers, it’s common for ownership structure to evolve organically. As a result, many firms look and feel like highly integrated organizations: they share a business name and website, reside in a common office space, split expenses, utilize centralized staffing and infrastructure, and even use uniform methodologies to manage investments and deliver financial planning.

Despite that functional integration, however, ownership often remains siloed. At many firms, advisers are valued and compensated based on their respective client bases. As firms strive to build enterprise value, create ways for future partners to buy in and design a lasting business model, it may be time to reevaluate ownership structure.


At this inflection point, an alternative approach is to adopt an equity-based ownership structure that separates client management from ownership. With this model, all revenue flows through the business, owner and nonowner advisers are compensated fairly for their role in providing professional advice to clients, and overhead expenses are deducted. The remaining profit is distributed to owners based on their proportionate equity holdings. Profit distributions should be 20% to 30% to sufficiently compensate owners for their investment — and the risk — of being an owner in the business.

Unlike a business with siloed ownership, an equity-based ownership structure aligns all owners to the financial success of the firm. Everyone works together to build the firm’s profitability and enterprise value, and that benefits all owners collectively. Nobody is incentivized to focus on their own sleeve at the exclusion of other owners. Firms may want to consider this model if they want to ensure that everyone is working in lockstep to grow the value of the firm.


Perhaps more than anything, though, succession planning is driving firms to reconsider ownership structures. This is especially true for firms cultivating an internal succession plan with the intent to eventually sell to next-generation advisers from within.

Let’s say a partner at a multi-adviser firm wants to sell clients to three next-gen advisers inside the firm. With a siloed ownership structure, the partner will likely need to identify specific client relationships to transition to each of the next-gen buyers. This essentially becomes three separate deals with three different buyers, incentivizing next-gen advisers to focus on their individual acquisitions.

With an equity-based ownership structure, an internal transaction would transition shares or membership interest in the firm, and decisions about who manages client relationships would be distinctly separate. Client relationships could be divvied up, for example, so each client has a next-gen adviser named as a lead adviser and another as a secondary adviser—with no impact on ownership. In addition to compensation for their roles as financial advisers, the new next-gen owners would receive profit distributions commensurate with their acquired shares, helping them finance their respective acquisitions.

[More: How employee stock ownership becomes a succession plan]


The trade-off with this model is that it dilutes the impact of business development on a respective owner’s compensation and value. In other words, adding to a firm’s client base increases the revenue and value of the overall firm, rather than giving a direct boost to the adviser who sourced the prospect. This is a valid concern.

To some extent, this trade-off can be minimized by adding incentive compensation for sourcing new clients. Ultimately, though, this model deemphasizes top-line growth of individually owned sleeves, instead emphasizing the collective growth of bottom-line profitability and enterprise value. Whether that trade-off is worth the alignment of interests and succession flexibility depends on the preferences of the firm’s owners.

As you envision your firm’s future, now may be an opportune time to revisit the ownership structure. Get a head start to align interests, create flexible options for succession, and design a pathway for next-gen owners—and work closely with your compliance team early in the process to ensure that you’re meeting regulatory requirements. It could be a transformative pivot toward your ideal practice of the future.

[More: Discover what your clients want with a survey]

Kenton Shirk is vice president of practice management at Commonwealth Financial Network.

The post Taking stock of your advisory business appeared first on InvestmentNews.

As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *