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​by Rachel F. Moran, CFP®

Rachel F. Moran, CFP®, is a senior financial planner with RTD Financial. She currently serves as chair of the FPA NexGen community.

We’ve all seen the figures; advisers are aging. There is an abundance of opportunity for young professionals entering the financial planning profession. Unfortunately, it doesn’t seem as though this opportunity necessarily translates to a meaningful transfer of ownership. Founders are struggling to develop and implement sound succession plans. Perhaps they cannot seem to find capable hands or are reluctant to part with a portion of the lucrative earnings generated by their established firm. Whatever the reason, I believe that the firms that can transition ownership to the next generation will thrive, empowering and engaging the future of our profession.

My Experience

At the time I joined RTD Financial, we had six owners, which in and of itself, signified opportunity. Our founder, Roy Diliberto, had thoughtfully engaged the next generation of owners to implement and execute his own succession plan. Ten years after founding the firm, he offered ownership to both our current president and CEO. By the time Roy was prepared to sell his shares and divest, the existing partners were able to finance his buy-out, ensuring the legacy of RTD was in the hands of trusted partners who were motivated to ensure the business thrived.

Roy also had the forethought to include a provision in our shareholder agreement, requiring partners to sell their shares upon turning age 70. This provision has been instrumental in paving the way for new owners, introducing a natural partner progression that has provided significant clarity. With this backstop, we are better able to plan for transitions in ownership.

In joining RTD Financial, I made it clear that I was committed to building my career there, and was very interested in ownership. Over the past four years, I began to take on more responsibility, serving as director of the marketing committee and participating in semi-annual strategic planning meetings. Last year, our CEO and I sat down to discuss the role of a shareholder, what it means, and what’s involved. We continued to meet every few months, each meeting increasing in formality and significance. We discussed the financial responsibility, valuation and financing terms, increased management and business development responsibilities, and the personal responsibility. We loosely discussed timing, and when I felt I would be prepared for this opportunity.

At my year-end review, I received the proposition I’d been seeking. Our shareholders had unanimously agreed to extend an offer. Would I like to buy into the firm? Despite numerous conversations and frequent contemplation, I was still a bit anxious. Was I prepared to invest hundreds of thousands of dollars (literally) into this company? Was this the right time? Was I prepared to commit my career to this firm at such a young age? Of course I had previously considered these factors, but when faced with the decision, I was revaluating everything.

Employees: What to Consider

What should employees consider when propositioned with this rare opportunity? When researching this question myself, I found there was little material dedicated to addressing the buyer side of this equation. From my own experience, when considering ownership as an employee, I’d urge you to look at the numbers, consider your long-term career goals, and objectively evaluate the pros and cons.

Your first step should be to perform due diligence. Review your firm’s financial statements, revenue history, and profit margins. Take a look at client demographics: average age, average fee, length of relationship, and retention. Evaluate industry-benchmarking studies, identifying areas in which your firm strays from “the average.” Although your valuation method may be fixed, research alternative methods, computing the cost of buying-in under one method versus another. You may consider consulting peers who have contemplated a similar decision to confidentially discuss firm structure, offer details, and share company dynamics. I’ve found many of my peers have been willing to share their experiences, providing guidance in uncharted territory.

When evaluating a decision of this magnitude, it’s important to consider your long-term career goals. Are you on board with the company’s vision and passionate about their mission? What about your potential partners; do you trust their judgment? Do they have integrity and a strong commitment to the organization?

One of my peers, Daniel Johnson III, CFP®, shareholder and senior financial planner of Parsec Financial, provided the following advice: “The weight of the decision is not only monetary, but more importantly a career decision. Serious consideration should be taken to determine whether this firm is the company with which you want to plant deep roots. Of course, the partnership terms and ownership transition are very important, but should be secondary to the career decision.” Be sure you envision a future with this firm, and share common values.

Finally, pull together a good old-fashioned pro/con list. For me, the pros of ownership included the fact that I could actively contribute to the strategic direction of my firm, and my equity would align with my desire to contribute in a meaningful way. I would have the ultimate job stability and could make an investment that may pay off handsomely. The cons included making a concentrated investment in a single company, and of course, a temporarily reduced paycheck.

Employers: Why Consider

Offering young planners ownership in your firm may be a daunting proposition, especially if you’re a sole proprietor. As such, consider starting small, offering a minority position to talented young employees that allows them to experience the shift in thinking and increased responsibility associated with ownership. Doing so will demonstrate your commitment to their future, allowing you to retain top talent and motivating your employees to grow with you. And grow they will; offering equity to young employees will incentivize them to drive value. Beginning to shift ownership well ahead of your eventual retirement will allow you to capture that value while ensuring your clients will be well taken care of.

Minority ownership or the prospect thereof has the power to motivate, and most importantly, retain talented employees. In today’s environment, the barrier of entry for establishing a financial planning firm is extremely low. Many of my frustrated peers have left to start their own firms after realizing there was no opportunity for ownership in their future. If you want to attract and retain talented young planners, establishing a path to ownership is critical. Be sure you are clearly communicating expectations and required competencies for obtaining ownership to employees. A defined ownership path signals both opportunity and a commitment to business continuity.

Motivation is a powerful force, and there is no stronger motivation for growth than ownership. Although it is difficult to measure the passion and pride associated with ownership, Jeff Weiand, CFP®, AIF®, GFS®, shareholder and president of RTD Financial, can attest, “It’s real.” It’s been said that if you want someone to think like an owner, make them an owner! Young planners will recognize the tremendous investment you are making in them. Johnson urges owners to, “invest in these new partners and give them more than you think they deserve; they will know that you are doing so and will feel an even greater desire to protect the legacy you started.” These young owners will be eager to lead the firm to growth, ensuring the firm is a priority for the duration of their career.

Bringing on a young owner can allow you to effectively capture the value of your firm, however you must start early. If you wait to offer ownership until you’re ready to retire, young planners likely won’t be able to afford your steep valuation and you may be forced to sell to an outside party. Hire with the end in mind, taking the time to train and develop young planners with ownership potential. Bringing on young owners allows them to participate in wealth-building opportunities through profit distributions; and ideally, they will accumulate enough wealth to buy you out upon your eventual retirement. Plan ahead to bring on young owners slowly over time, ensuring your legacy will live on as you intended.

Perhaps the most important consideration is that of your clients. How will you ensure they are taken care of following your eventual exit from the business? Weiand shares that having an ownership structure in place “goes a long way toward ensuring our clients will be cared for by individuals who have a vested interest in the success of our clients and our firm.” Additionally, many prospective clients are concerned with continuity. Offering ownership to key employees demonstrates a commitment to your client’s future, and will ensure these young owners stand prepared to serve.

My Decision

In deciding whether to buy into my firm, I found that when I began to scrutinize the opportunity in such detail, blemishes surfaced that were once easier to ignore. It’s a natural transition in thinking as you begin to consider dedicating financial resources to the organization. This deep dive certainly opened my eyes to inefficiencies, risk areas, and potential process improvements, however I chose to view these as opportunities, motivating me to effect change; the results of which could untimely provide financial benefit as I work to increase the value of my firm.

Ultimately, after consideration of the factors outlined here, I accepted the offer to buy in as a shareholder of RTD Financial. While I still have much to learn, I am optimistic about my new role and the future of my firm. After all, with new challenges, comes new opportunity.

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