The Future of Financial Advisory Firms
Here are the four pillars that stood out to our team as essential to supporting and accelerating high-performance wealth management firm growth. These pillars represent the trends, strategies, and opportunities that will influence independent financial advisors’ success in not only meeting but surpassing their annual growth goals.
Contingency Planning – A key to acquisition success?!
To start with, let’s define the term “Contingency Planning.” Contingency Planning is specifically referred to you creating a plan (a contract) that defines what to do with your business in case of your death or disability (temporary or permanent). Given the regulatory environment you exist within as a financial advisor, and the limitations that FINRA’s continuing commission policy places on you (IM-2420-2), it is prudent to come right out and say it – YOU NEED A PLAN. And not just for the obvious reason of taking care of your clients and extracting the value your family deserves. A contingency plan can be the key to a successful acquisition. Here are two major reasons: 1. Most advisor sales/acquisitions have all or a part of the purchase price that is seller financed on an earn-out, promissory note, or combination of the two. This means the seller is going to loan you money over some period of years. They WILL require that you have a plan in case something happens two years into the deal, and insurance is only part of the solution. They want to know that you are a responsible business owner and have a plan for your own business, so they can rest assured that if something happens, your clients (and theirs) will be left in good hands (and that the balance of the note/earn-out will be paid). 2. Contingency planning is a fantastic way to build your acquisition pipeline. If you asked 100 advisors who are over the age of 60 about selling their practice to you, statistically you might get lucky and find one that is interested in talking. However, if you asked the same 100 advisors about their contingency situation, you’d find that most know they should have a plan in place, but don’t. If you asked them about working together to create some type of death/disability plan, you will get a lot more positive responses. So how does that turn into an acquisition? When I help advisors create these types of plans, my first recommendation is to communicate the plan to the key stakeholders (i.e. the clients, OSJ, BD, spouses, etc.). Once the clients have been told about you and your role the contingency partner, you will be the first person the advisor thinks of when its time to start slowing down. I have helped many of my clients create two or three of these plans each year, and I can tell you this strategy pays dividends. It will take time, but it is a valuable part of the acquisition strategy. It also provides a great service for the advisors you create a plan with, because the alternative (dying without a plan) makes for a very unfortunate story.
The True Power of Succession Planning — A Retirement Readiness Guide
Building a successful independent financial advisory firm that can support the firm’s key stakeholders is a significant accomplishment. But building a successful firm is the first milestone, not the end of the journey. Once the firm is established and stabilized, the next milestone should be to create a sustainable enterprise. This goes beyond figuring out the service and pricing model, attracting and retaining loyal clients, solid branding, and a trustworthy reputation.
Set Your Firm Up for Success — Using Entity Structure to Unleash Growth
Starting your business as a financial advisor is an exciting prospect. You’re setting the foundation for a successful future and commitment to growth. Whether you are creating a platform to last the duration of your career or working to formalize/upgrade your established enterprise, effective entity planning and setup will serve as the base on which you can build and hopefully as a springboard for future generations. But there are important considerations to navigate when setting up an entity that are almost always overlooked and go beyond using your state’s website or an online filing service to establish an entity. Financial advisors have unique considerations and constraints when it comes to forming business entities, which are even more important to get right as you grow and scale your business. Here are the areas that you need to examine when choosing an entity type. Getting the Basics of Entity Right Why Financial Advisors Set Up a Legal Business Entity Business goals play a major role in choosing the ideal structure for an entity. Short-term needs and long-term goals are important to consider, but there are also highly specific reasons unique to financial advisors for choosing an entity. Entity Structure as a Personal Liability Shield Protecting yourself and your personal assets from business risks is paramount. Your E&O insurance is great but won’t address your other liabilities as a business owner. Personal liability protection becomes a concern when your firm grows, you hire/fire, sign contracts, retain outside experts, and you take on larger amounts of more complex engagements. If you have business partners, you could potentially be held liable for their actions. Creating an entity is a simple and effective way to ensure that liabilities stay with your firm, not you as an individual. Equity Sharing Enables Firm Growth When you grow your financial advisory firm, equity sharing is another factor to consider. More firms attract and retain quality talent by structuring incentive programs that leverage the value and equity in the business. Equity sharing can be an effective way to fulfill promises of advancement to rising stars as part of your firm’s career path. It can also be used to add new business partners and merge with other advisors as your firm grows and evolves. Having an entity and the related governance agreements in place gives you something that is easily divisible and helps ensure you can get the equity back should you need to. When operating as a sole proprietor, equity sharing is effectively impossible since a sole proprietor consists of only one professional, and adding a second then creates a defacto partnership with no liability protection or tax savings, which isn’t the intended outcome for most advisors adding a partner or junior partner. Tax Advantages of Proper Setup Setting up an entity will not guarantee you’ll save money on taxes, but when done right, most advisors do have tax savings – which, as you grow, becomes more and more material. But beyond the typical tax savings (again, when done right), you will find major tax savings as you leverage the entity to buy practices, sell equity internally, or merge outside practices in. Extended reading: First DOL, Now IRS Gunning for Advisors Advisory Firm Entity Structures and Taxation Understanding the Difference Between Legal Form and Tax Status When setting up an entity, there are two different aspects to keep in mind that can be confusing: the basic legal form and the tax status. The legal structure is registered with your state, such as a limited liability company (LLC) or corporation. This legal form determines which laws in that state apply to the entity. This may mean that there are statutes regarding how that entity can be managed and operated, and business formalities that must be followed. The tax status pertains to how tax authorities like the IRS view your entity. For instance, you’ll notice on the tax forms that there is no box to check for an LLC, because an LLC is only a legal form, not a tax status. In the example of an LLC, you must then choose how the LLC will be taxed. A single-member LLC, for example, is usually taxed as a sole proprietorship (a disregarded entity) where the income and deductions are reported on your personal tax return. Multiple-member LLCs are usually taxed as partnerships, unless you elect to have your LLC taxed as an S-corporation (but it’s still an LLC in the legal sense). If you form a corporation, the IRS needs to make a distinction whether it’s a C or S corporation, because it makes a dramatic difference tax-wise. There are also nuances to consider, such as who will/can own an interest in your LLC or S-Corp, and understanding the pros and cons of each entity type as it pertains to the legal and tax implications. Pass-Through Taxation for Financial Advisors To further elaborate on tax status, most entities have what’s called pass-through taxation. This means that the income isn’t taxed at the entity level, but your share of the income and deductions passes through to the personal level. This makes the income subject to Social Security and Medicare taxes. If you own an S-corporation, the taxation is also pass-through, but with some differences. S-corporation shareholders need to pay themselves a “reasonable” salary that satisfies the IRS. This salary is reported on Form W-2 with payroll and income taxes withheld. However, the profit distributions to the owners are not subject to Social Security and Medicare taxes. C-corporations are not pass-through. The income is taxed at both the entity and shareholder levels. Officers of C-corporations need to be paid salaries reported on Form W-2 with payroll and income taxes withheld. Dividend payments are taxed at the dividend rate and are not subject to Social Security and Medicare taxes. Choose the Right Entity Structure Advisors Should Consider More than LLC vs S-corp Selecting the right entity type often seems easy, it’s likely a limited liability company or S-corporation. You do a quick Google search, or hopefully have a conversation with your local CPA or attorney, and they’ll share their recommendation. However, before making such an important decision, it is critical to make the selection in the context of your
Employee Retention Guide for Advisors – 2024 ed.
Strategies to Fortify Employee Retention and Minimize Advisor Turnover In the fast-paced and competitive realm of financial services, the role of employee retention strategies has never been more critical for registered investment advisors. Independent advisors understand that retaining a skilled and dedicated team is as essential as acquiring new clients and expanding services. This article explores the multifaceted world of employee retention, providing insights into what the most effective advisory firms are doing today.
Buying a Book of Business- How to Acquire a Financial Practice
Whether you are just starting out as a financial advisor or you are simply looking to expand your established business, buying an existing book of business could be the right move for you. Opportunities for business acquisitions are becoming ever more common, as the average age of many financial advisors edges closer to retirement.
What is Phantom Equity and How is it Used?
As an incentive to motivate hard-working key employees, private employers can issue phantom stock, also known as “shadow stock,” as equity compensation. While the value of these phantom shares will rise and fall in line with the company’s stock, the employee will not gain any actual ownership over the company or minority shareholder rights.
How to Acquire a Financial Practice
Those employed as financial advisors will likely come to a time in their career where they would like to make a vertical move. Once this stage is reached, there are few clear paths available. Some may decide to dig their heels in and open their own financial advisory firm, scrounging up clients where they can and providing the best possible service to ensure the success of their practice.
Making Sense of the Great Resignation
The pandemic has not only upheaved our personal lives over the past year and a half but it is doing the same to our professional lives as well. The U.S. Bureau of Labor Statistics reported that 4.3 million Americans (2.9% of the entire workforce) quit their jobs in August. This is another record-breaking month after the previous record-breaking months. At the end of July, there were 10.9 million open positions in the U.S. In a survey conducted by Morning Consult for Prudential in mid-September, they found that 46% of full-time employed U.S. adults were either actively looking for or considering a new job search. Why have so many workers decided to forge a new path and call it quits with their current employer? And what does it mean for small business owners?
What You Need to Know About the FINRA Rule
On August 24, 2015, the SEC implemented FINRA Rule 2040. This rule is related to whether and how people who are not registered as broker-dealers can receive compensation that derives from financial transactions.
