Greg Hoffman was ready to get out of the advisory business. To be sure, he had a good run — closing in on 30 years — and had built a nice, small-town business in Nevada, Mo.

With around 200 clients, over $120 million in assets and a stellar reputation for retirement planning, Hoffman Financial Resources, a dually registered LPL affiliate with offices in a historic former Carnegie library, had become a veritable local institution.

But Hoffman, 56, says he was ready for a “change of scenery and another chapter.” A question posed by his firm’s advisory committee set him in motion: “What happens to us if something happens to you?”

Hoffman, who ran a one-man shop, contacted local universities with finance programs, looking to bring someone into the business. As it happened, Ross Lawrence, a recent graduate of the University of Arkansas, was looking for an advisor job. He had completed a Merrill Lynch training program, didn’t want to leave the area and Googled RIAs within a 20-mile radius of his home.

Lawrence, 28, was hired by Hoffman in 2011. The two men clicked, and Lawrence “fit in beautifully,” according to Hoffman. He learned the business, got to know the clients and became deeply involved in the community.

Lawrence also wanted to become an owner. “From the beginning, I treated the job like I owned the business,” he says. Lawrence was polite, but not shy: “Almost immediately, he asked me, ‘When do you want to get out of here?’’’ Hoffman recalls.

But Lawrence had “no clue” how he might be able to finance a purchase. At a Peak Advisor Alliance conference, Lawrence came across a Live Oak Bank booth and learned the three-year-old company was working with the Small Business Administration to provide financing for junior advisors like him to buy into advisory firms.

Lawrence, Hoffman and Live Oak began talking last year. On Jan. 1, 2016, Ross Lawrence became the owner of Hoffman Financial Resources. Working with the SBA, Live Oak financed a 10-year loan allowing Lawrence to buy 75% of the business, using a promissory note from Hoffman to complete the rest of the purchase.

Hoffman is staying on for at least a year and couldn’t be happier. “I wanted to make sure my clients were treated like family and had no interest in selling to an unknown entity,” he says. “The clients are comfortable with Ross, he’s doing all the right things and so far it’s been a seamless transition.”

Nicely done, right? Here’s the problem: The equity transfer from Hoffman to Lawrence appears to be the exception among advisors that proves the rule.

According to research in “People and Pay,” FA Insight’s 2015 compensation report, “advisory firms have not improved the rate at which they are admitting new owners, nor have they increased the share of primary owners within their teams.” Only 13% of firms surveyed in 2011 had a new owner — a figure that remained the same four years later.

And according to the 2015 Fidelity RIA Benchmarking Study, the median number of owners for all advisory firms surveyed was only two.

What’s more, RIA owners are continuing to leave the business at a rapid rate. Indeed, the percentage of firms with owners who are within three years of exiting has more than doubled since 2011, and the share of owners leaving the business within seven years has also increased in the past four years.


The scenario is unsettling, to say the least — if not approaching a crisis point. “Where firms will find a sufficient number of replacements for these soon-to-be-departing owners is unclear,” the report states. Dan Inveen, a principal of FA Insight and its director of research, says, “The data is not encouraging.”

Why are owners so reluctant to distribute or transfer equity? Among the most commonly cited reasons are a reluctance to give up control of a company they have nurtured, grown and poured time and money into, as well as the all-too-familiar human tendency to procrastinate.

According to Inveen, many founding owners also have “a not so healthy fixation on looking for successors who are just like them.” As a result, he says, they’re unnecessarily limiting the field of potential buyers.
To make matters worse, there are a limited number of younger advisors in the business to begin with: Only 20% of advisors are under the age of 35, according to FA Insight’s 2015 study.

One issue for buyers is obtaining financing, because most commercial banks won’t provide loans to buy RIAs. Younger buyers have been reluctant to use personal assets as collateral for loans, and founding owners have hesitated to finance a large loan to a junior advisor through a promissory note.

And all too many owners won’t act to distribute equity until there’s a “trigger event” to disrupt the status quo, such as illness, a family crisis or a major problem with the business, says industry consultant John Furey, principal and founder of Phoenix-based Advisor Growth Strategies.

“We saw one case where an owner wouldn’t transfer any equity, and he was in his mid-70s,” Furey says. “Finally, his employees said if he didn’t sell the firm to them at a steep discount, they would quit. It was a horrible situation.”


There are encouraging signs, however, that a number of forward-thinking firms are taking steps to more broadly distribute and transition equity.

According to FA Insight, the largest percentage of new owners purchase shares through a financing plan, followed by the use of cash up front.

Distributing earned equity as part of an incentive plan or through outright granting of shares is also popular. And, of course, some advisors become owners through mergers or acquisitions, swapping their contributed book of business for an equity stake.

A recent whitepaper by aRIA, the Alliance for Registered Investment Advisors, one of the industry’s most influential study groups — composed of executives of advisory firms — stresses the importance of ownership development within firms.

“For advisory firm owners who want to enhance their firm’s valuation, distributing ownership beyond the founders is almost universally beneficial to firm value,” the
report states. The best-managed firms set equity criteria, usually a set of guidelines consisting of quantitative and qualitative measurements, says Furey, who founded aRIA and wrote the report.

In addition to revenue contributions, Furey says, criteria can include boosting the firm’s value proposition by investment performance, enhancing client experience, community involvement and developing internal teams and leadership.

Advisors with growing books of business may receive more direct forms of equity, such as voting class shares. For key support-level employees, Furey explains, less permanent equity, such as profit-sharing interests, phantom equity (which allows employees to participate in profit distribution without actual ownership rights) or deferred compensation may be more appropriate.

“Providing equity should result in incenting professionals to continue to grow revenue,” the whitepaper concludes. This results in benefits for the firm, the founding partners and the next generation of ownership.


Indeed, aRIA member Neal Simon, CEO of Bronfman E.L. Rothschild, says he “fundamentally believes in tying employee compensation to the success of the firm.” For example, Bronfman has granted some of its key employees equity appreciation rights, which allows the holder to share in the firm’s growth if it appreciates in value. Management shows each employee how much those rights will be worth if the company doubles in value.

At Simon’s previous company, Highline Wealth Management (which Bronfman bought last year), Simon issued several key employees phantom equity. This program allowed the employees to both receive profit distributions and, in the event of a liquidity event, convert to actual equity.
Simon is thinking big — Bronfman has over $3.5 billion in AUM, and Simon wants it to double in value within five years — and he wants to incentivize others in the firm to do the same.

Allowing access to equity, Simon says, “ties motivation to financial success, rewards key employees and, with a five-year vesting period, is also a retention vehicle.”


When it comes to a broad distribution of equity, SignatureFD, a $2.5 billion Atlanta-based firm, practices what it preaches: 21 of its 53 employees are partners.

“It’s a fundamental part of our philosophy,” says Heather Robertson Fortner, a partner in the firm and its COO. “We believe broadening equity was the right thing to do. In order to attract and retain the most talented people, they have to have the opportunity to participate in the company’s growth.”

“We let all partners participate in the growth of the firm based on the value they contribute. Cash compensation and equity participation are based on production, generation, management and overall value creation,” Fortner says.

In addition to revenue generation, she explains, this can also mean working with a team to improve the firm’s data and tech capabilities, client experience, internal culture or client communities, including women, executives, lawyers or entrepreneurs.

Employees who meet specific metrics (some subjective, Fortner admits) are granted a combination of cash and a percentage of the firm’s increase in future value.


But transferring equity isn’t for everyone. At Waldron Private Wealth, a $1.2 billion RIA that is based in Pittsburgh, the founder, John Waldron, retains 100% ownership.

A big reason, President Matt Helfrich says, is that the firm, which works with high-net-worth clients, has been “unnerved” by ownership transfer issues.

“We’ve seen the issues that can surface around ownership,” Helfrich says. “You’re talking about big amounts of money, and people try to get too cute. And the same people you’re negotiating with at night, you have to work next to during the day.”

Instead, Waldron uses incentive compensation to “motivate staff to think and act like owners,” Helfrich says. Employees, for example, are rewarded for their performance in such initiatives as fostering the advancement of junior staffers to upper management and increasing the amount of business from client referrals.

Equity transfers also may not be a priority for solo practitioners or owners of smaller firms who simply want to keep working. “If work itself is the reward and not the economics, it’s probably not an issue,” Furey says.
Overall, however, the benefits of thinking about future ownership “far outweigh” the alternative, he warns.

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