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Who’s buying? Equity conversations at RIAs

Reeling in talent from other RIAs may force firms to consider their equity plans.

With more than half of RIAs failing to successfully recruit from other RIAs, equity is something that “probably needs to be discussed a little bit more in the industry,” says Lisa Salvi, vice president of business consulting and education at Charles Schwab.

About 73% of firms grabbing employees from other RIAs share equity with non-founders, according to Schwab’s 2019 RIA Benchmarking study.

“I'm not saying they're sharing equity with the people they are hiring [right away]. They generally are not,” Salvi says. Instead, they are presenting a well-articulated ownership plan to recruits, which is “very compelling for the people looking around the industry,” Salvi says.

Why RIAs are sharing equity 7/22/19

In addition to appealing to advisors at other firms, the prospect of sharing equity can draw in students looking to enter the field.

“They don't expect to be handed equity. They just want to know if that's a possibility,” Salvi says.

When it comes to sharing ownership, firms usually do it one of two ways: with their successors or more broadly across the firm.

Of the over 1,300 firms that filled out Schwab’s survey, 71% of them shared equity with non-founders, primarily to retain key talent or as a means of succession strategy.

Firms sharing equity more broadly are being strategic, Salvi says.

“They're trying to incentivize more people in the firm to feel like they have a financial stake in the firm's success and that they're contributing to growth,” she says.

Schwab hasn’t quantified performance between firms that offer equity broadly and those that don’t, Salvi says. “I will say anecdotally, when you talk to the firms that have really taken the time and developed an equity sharing program of some sort, they're very, very happy with the results,” she says.

How RIAs are financing equity 7/22/19 Charles Schwab

As firms grow, it becomes more and more common for them to give up ownership.

“Once you’ve crossed the billion-dollar threshold, [about] 83% [of firms] share with non-founders,” Salvi says.

There are several options for financing, according to Schwab. Firms primarily use banks, internal financing and outside investors. Most often, employees finance their equity purchases at RIAs, according to the study.

“Sitting down and getting clear on what you're trying to accomplish is definitely the very first step and incredibly important,” Salvi says, adding that firms need to make agreements clear and lay out exactly how an employee will buy in and buy out, and who will make those decisions.

“There's a very interesting discussion around mandatory retirement ages, which is something that can be an emotional topic for people,” Salvi says, noting that she has seen some firms mandate a three-year retirement period after an advisor reaches a given age.

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