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About SRG

Succession Resource Group is a boutique succession consulting firm based in the Pacific Northwest, serving clients across the country. SRG was founded by David Grau Jr., MBA in 2012 after nearly a decade of helping advisors with valuation and succession planning. SRG's team of experts leverage their industry expertise, combined with best-in-class resources, to help advisors, agents, and accountants manage the equity in their businesses...

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4 min read

Leveraging Your Growth: Equity Compensation Strategies for Advisors

Mar 15, 2016 9:50:27 AM

Most financial advisors are aware that a succession plan is important to their business and clients. Based on the last study done by InvestmentNews in 2012, 94% of respondents acknowledged the need for a plan, yet only 7% of those respondents actually had a plan.

There are a host of considerations and challenges when considering your firm’s succession plan, such as who will participate, are they ready, can they afford to buy in, do they have spousal support on their decision, can you afford to let them buy-in, do you want to have a partner, are you ready to start sharing your firm’s financials?

These are challenging questions with long-term implications, whether you do something or not. But, succession planning takes many forms and there are many “tools in the toolbox” allowing you to start fostering an environment that nurtures employees and gets them to gradually start thinking and acting more like an owner – and that is every owners dream, is it not? --- To have your team as invested in the business as you are.

If you are not ready for a partner, but would like to start creating a path to ownership and add another resource beyond cash compensation to help retain your top talent – consider a phantom equity plan.

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Phantom Equity

“Phantom equity” is a generic term that refers to a right to a cash payment/benefit (or the ability to convert phantom units to actual voting shares) upon a designated event in the future where such payment is based on the value of an equivalent number of shares of the company.

When the payout is made (upon meeting certain objectives, such as sales, profits, or other targets), the value of the award is taxed as ordinary income to the employee and is deductible to the employer, or in some cases if the phantom equity plan is part of a succession strategy, the units might equate to some discounted buy-out value.

There are many ways to construct these plans, and based on how they are constructed, you can incent a variety of behaviors. For example, if you planned to retire in the next 5-7 years, you could build a phantom equity plan that would share a percentage of any growth in your company’s value beyond today’s value with your successor. This ensures they share in the upside/growth (if any), remain invested in the success of the company, allows you to provide an additional benefit beyond basic cash bonuses, and will help the successor afford the eventual buyout since they will receive a discount on the final purchase price (discounted for their equity in the growth since the plans inception).

Phantom equity plans like this are being used more and more by advisors as a simple solution and first step in a more robust plan for the future of the firm.

Potential Complications

While incredibly simple and effective, there are potential complications with phantom equity plans. One of the complex elements of these types of plans are the potential tax implications of dealing with deferred compensation rules as defined by Section 409A of the Internal Revenue Code if the phantom equity is granted incorrectly/sub-optimally. Phantom equity plans (e.g. Stock Appreciation Rights), are exempt from the deferred compensation rules under Section 409A, but only if the units are granted at the fair market value of the company at the time of the grant/issue to the successor.

To avoid these tax implications, having the company valued by a third-party is a great way to help insulate yourself from unforeseen tax consequences of an otherwise simple strategy. Section 409A contains extensive rules regarding the valuation of closely held companies and safe-harbor valuation methods which place the burden of proof on the IRS to refute the valuation if audited.


Succession Resource Group can assist you in developing your succession plan and provide a cost-benefit analysis on whether a phantom equity plan may be a useful resource for your situation. A phantom equity plan is a great way to avoid having to give your successor the money to buy you out and is a great tool to attract, retain, and reward top employees. It is important to ensure that your plan is developed hand-in-hand with your CPA/accountant and attorney to ensure you are well advised and can avoid the pitfalls contained in IRC 409A.

For more information on succession planning or how to leverage equity sharing in your business, call us at (503) 427-9910 or email us at

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David Grau Jr.

Written by David Grau Jr.

David Grau Jr., founder and CEO of Succession Resource Group, specializes in succession and M&A consulting for advisors. As a leading M&A consultant with a history of service in the United States Navy, David is recognized as a thought leader and accomplished speaker. He is prominent in the financial services industry, especially on topics related to M&A and next-generation strategies, having delivered over 200 presentations for organizations like the Financial Services Institute (FSI) and FPA.