Five Building Blocks of an Attractive Compensation Model
Hiring and retaining talented employees is a top priority for most business owners. Effectively doing so has become increasingly difficult in the financial services industry. The number of advisors approaching retirement and exiting the industry far outweighs the number of new advisors joining. This gap is further exacerbated by the Great Resignation. As a result, organizations are struggling to find the human capital needed to grow their business and plan their internal succession.
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. Privately held businesses can retain talent for their chosen vesting period as the phantom stock appreciates, and also ensure that their key employees are personally invested in the company’s performance. This arrangement can be very beneficial for both managers and employees, but there are several things to know before deciding if a phantom stock program will work for your business. How Does Phantom Equity Work? Once an employee makes a big enough contribution to the company’s performance, their employer may choose to give them a number of phantom shares based on the significance of the contribution. The employer is able to dictate the terms of the program and will present the employee with a vesting period. The length of this period is established by the employer at the time of grant and most attorneys would tell you the vesting is often set at five years, which is when the employee is “vested” and could receive a payout. The challenge with vesting is related to taxation of the phantom equity plan for the employee. Yes, it is great to create a plan that vests quickly and is perceived as more “liquid” by the employee. Unfortuantely, once the equity is vested and there is no longer a risk of forfeiture, the employee will need to pay taxes on the non-cash compensation, which is likely to force them to liquidate some/all of their phantom equity, even if they otherwise wouldn’t. For example, if the employer is growing quickly, and the employee vests in year five, even if the employee doesn’t exercise the phantom equity to be paid out, the risk of forfeiture is gone and the taxes are due from the employee as if they had been paid out. To avoid this, the plans Succession Resource Group helps establish with clients typically have vesting tied to a specific triggering event, and not a moment sooner. By pushing the vesting out and connecting it to a triggering event (such as a sale, the founder’s retirement, or the employee’s retirement), the employer can now control when the employee has to pay taxes – pushing the tax liability out until the employee would expect to receive cash. In the meantime, the plan can continue to appreciate in value as the employer grows without generating a short-term tax liability, and the phantom equity plan can act as intended – as a form of “golden handcuffs.” Once the vesting period is completed or based on the agreed-upon payout schedule, the employee is paid based on the appreciation of the company’s actual stock price. As there is no buying or selling of real shares, this bonus is considered regular income for tax purposes, not as capital gains. It is also possible for some phantom stock programs to convert the cash payout into the real equity along with voting rights, the details of which would depend on what the employer is willing to offer. Types of Phantom Stock While the specifics of these programs are decided by each individual employer, there are generally two kinds of phantom stock awarded to key employees. These are called “appreciation rights” and “liquidation rights” plans. While similar in many respects, the two types have key differences. Appreciation Rights Appreciation-rights allow employees to benefit from the increase in value of the company following a grant, but does not give employees any perceived value at the time that the program begins. Instead, the amount awarded is actually the difference between the actual stock price at the time of the program’s payout and the price at the start of the vesting period. This type of phantom stock plan is more beneficial for the company, as it still encourages the employee to improve company performance without being as significant a cost for the company. That said, employees stand to gain nothing if the company’s actual value does not increase. Liquidation Rights This version of a phantom equity plan does grant employees the full value of the equivalent number of actual shares. Employees would still need to remain with the company for the entirety of the vesting period, but they would not have to run the risk of completing the program empty-handed. Liquidation Rights plans work really well when an employer is using the plan initially to reward past performance, such as showing appreciation for key staff that may have accrued some “sweat equity” in the business. That said, the company would need to be prepared to pay out that full amount on time or at least convert the value to actual ownership in the business, no matter how high the actual share price may have risen on the market. Shortfalls and Benefits Like any venture in any business, phantom stock-based compensation plans come with their share of possible issues, but plenty of positives that outweigh the other considerations. Shortfalls Some of these potential issues have been reviewed already, but it is critical that any employer considering implementing this kind of equity sharing plan bear them in mind. As stated previously, when employees do vest, employers must ensure that they have enough cash to pay out the amount when the vesting period is over. Offering more phantom shares than you will be able to payout could be detrimental, so it is important to take that into consideration. Again, plans provided by SRG have some failsafe mechanisms built-in to ensure this isn’t possible, but it is important to run pro format scenarios to calibrate the plan before use. The company is also required to report any phantom stock plans to the real shareholders of the company as well as the DOL. It is also important to start have an annual third-party valuation
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.
What Low-Interest Rates Mean for M&A in 2022
2021 has been the year of the merger. Coming through the back end of a global pandemic, the world of mergers and acquisitions (M&A) has responded in a record-breaking fashion. In just the first quarter of 2021, global mergers and acquisitions deal-making totaled 1.3 trillion (US) dollars, an increase of 94 percent compared to Q1 of last year. By October, worldwide M&A deals had surpassed 40,000 and 4.4 trillion (US) dollars. According to Refinitiv, a market data provider, this was the strongest opening nine months of any year since records began in 1980. This nine-month total beats 2015’s full-year record of 4.3 trillion (US) dollars. It is safe to say that the final quarter of the year will follow suit.
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?
FINRA Rule 2040: Payments to Unregistered Persons Explained
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.
The Impact of Regulation Best Interest for Brokers-Dealers
On June 5, 2019, a new set of regulations from the Securities and Exchange Commission (SEC) was introduced. The package aims to “enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.”
Financial Services and Other Employee Benefits
As any employee knows, there’s more to hope for at a job than just the salary. One of the biggest factors of whether or not someone will accept an offer is the benefits package. These are the things that help them feel supported in ways beyond their paychecks, and they can have a huge impact on employee experience.
How to Determine Your Business Valuation
As a business grows and develops, there may come a time to consider selling it. You might even be approached with an offer. And while plenty of owners decide they are happy to continue forward at full steam, there are good reasons to think through all the options.