RIA equity pay: owners urged to pick structure and entity

Consulting firm Succession Resource Group held a webinar last month for registered investment advisory owners on using equity compensation to retain advisors, support succession planning and affect firm valuation. The presentation was led by Julia Sexton, director of strategic organizational planning, and Nicole Frey, director of team solutions.

Presenters said firms must set clear goals before offering ownership stakes. That initial decision determines whether to use phantom equity, which gives economic participation without formal ownership, or actual equity grants or purchases that may include voting rights and legal responsibilities.

Sexton advised owners to define the purpose of equity compensation first. She warned that unclear objectives can produce plans that do not match long-term strategy and that create administrative and governance problems.

The presenters identified a common practice of assigning ownership tied to client relationships or revenue splits. They described that approach as creating a siloed business model that can undermine succession and reduce company value. Sexton estimated the difference between client-based ownership and firm-based ownership can reach about $1 million in valuation over a decade, depending on circumstances.

When firms move toward actual ownership, governance design and partner selection become relevant. Sexton highlighted that new partners assume fiduciary duties and can influence decisions. She urged firms to evaluate candidates on leadership, cultural fit, communication and decision-making skills, not only production metrics.

Frey focused on tax and compliance matters. She recommended documenting where goodwill resides-whether with individual advisors or within the operating entity-and routing revenue, expenses and profit through a corporate entity rather than personal accounts. Doing so establishes a contractual basis for income assignment and can reduce audit risk.

Frey noted that firms using an S corporation should show auditors that owners receive a reasonable salary. She also said advisory practices tied to external brokerages or other RIA arrangements may need additional steps before implementing equity sharing.

The presenters discussed entity and management trade-offs. Frey described a manager-managed limited liability company as an option for founders who wish to retain operational control while reserving some decisions to members. She referenced an SEC no-action letter that confirmed advisors can place certain commission revenue into an operating entity to cover expenses, with firms still needing to account for specific nuances.

Succession Resource Group recommended phased equity approaches. One example is phantom equity tied to value appreciation or liquidity events, with vesting, tenure and performance tests. Recipients of phantom equity can later obtain actual ownership through grants, purchases or equity swaps used in some mergers and acquisitions.

Speakers emphasized that details such as voting rights, timelines and tax consequences require clear drafting and alignment with the firm’s goals. They said equity is intended to represent value only after owners determine where that value resides and how sharing it fits the firm’s growth and succession plans.