How to Think about Compensation with Succession in Mind

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The most successful RIA firms have well-developed advisor career paths.

However, many small businesses in the finance industry have yet to make career pathing a top agenda item.

A new study from Franklin Templeton suggests that a significant number of registered investment advisory (RIA) firms are considering a change of ownership over the next five years, yet many are unprepared to hand over stewardship of their firms to the next generation of young leaders, while also underestimating the time to be taken for this endeavor.

The advantages of creating career paths are manifold. Primarily, it helps advisors maximize their potential and strengthen relations with their employer.

Sowing the seeds of transition

Career development, advisor retention, and succession planning should start as early as possible, right from the time new employees are onboarded, or as family members start managing business affairs.

On developing and retaining future leaders, Fidelity Investments suggests three steps:

Helping young advisors establish and embed into the firm: Effective actions include providing training and tools for success, and creating a supportive team structure to help new advisors pick up effective techniques and skills quickly. One tactics is to pair new advisors with more experienced advisors who can teach them best practices. Another is to encourage and sponsor certifications and licenses that expand their knowledge, improve their expertise and enhance their credibility. Of course, aligning compensation to performance also builds motivation, and creates yet another impetus for advisors to do their best work.

Identifying and investing in high performers: Effective communication, adaptability, discipline and problem-solving have emerged as key skills for just about any industry that works closely with clients. RIA firms should monitor performance to home in on high-potential advisors who can be influential future leaders. A review of hiring practices is also necessary to determine if the firm is selecting professionals who fit in well with the corporate culture and demonstrate the characteristics sought.

Enabling top talent to deliver exceptional performance: RIA firms need to consider the ‘softer’ factors driving employee motivation and loyalty. These could include the flexibility to set their own hours for a good work-life balance, flexible or remote working schedules, a chance at financial freedom, or working conditions that create gratification in their work.


Compensation plans to consider

Profits interest

Profits interest is an equity right based on the future value of a partnership, offered to high-potential advisors, making them partners in the practice. Advisors don’t have to contribute capital. Profits interest can be an effective tactic for firms set up as partnerships to reward and gain the loyalty of employees. It also motivates advisors to dedicate themselves to the firm’s growth as they now have a share in its future value.


An RIA firm set up as a partnership is owned by a group of owners is valued at $1,000. The firm grants a new advisor a 10% profits interest, entitling him/her to 10% of the appreciation above $1,000. In the event that the firm is sold immediately, the profits interest grant would not apply. However, if the company was subsequently sold for $5,000, the advisor would be entitled to $400.

The advisor would also not pay tax upon the grant of profits interest, but will be liable to pay tax on the $400 made from the sale of profits interest.

True equity

True equity can be earned by advisors contributing to new revenue. True equity grants can have unique tax implications, and must hence be planned carefully.

Phantom stock

Phantom stock is an incentive compensation whereby the firm promises to pay an amount to an employee for material contribution to the firm, at a future date, defined as a certain number of years or when an event is triggered, such as the advisor attains a certain age, retires or there is a change in the controlling ownership of the firm. The amount is tied to the firm’s stock value.

In general, family business owners may consider phantom stocks as a form of equity-like incentive to non-family members.

Final word

RIA firms have a number of options to plan compensation for their most promising employees. Planning career paths and interlinked rewards structures should begin early to retain existing advisors and attract new talent who may otherwise be poached by, or prefer to join, competing firms. Encouraging an open dialogue about tying an advisor’s success to the benefits he/she receives, be it a “soft benefit” or compensation-based, can go a long way towards the advisor’s future success, and in turn, the success of the firm.

This article is not intended to serve as tax or legal advice, but merely for general informational purposes. You should consult with your tax and legal advisors regarding the implications and consequences surrounding the actions discussed herein and its impact on your, and your firm’s, specific situation.




Matt Hayon is the Chief Operating Officer of Compass CFO Solutions LLC, a provider of outsourced CFO, accounting, and bookkeeping services to the wealth management industry. Compass CFO Solutions’s services allows RIA firms to spend more time growing their business. Learn more at

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