Guide to Financial Advisor Equity Compensation

Joining a new firm is an exciting step forward in your career. But before you can begin serving clients, you have to work out the details concerning your new role. A focal point of the negotiations may be your compensation and benefits package. And your firm may offer equity compensation in addition to your regular salary. Here’s how this benefit works.

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Understanding Financial Advisor Equity Compensation

Equity compensation is a type of ownership benefit that businesses may convey to their employees. In place of cash, you have an opportunity to own a stake in the firm that you work for.

The form your equity compensation takes depends on the firm you work for, and may include:

Employee stock purchase plans (ESPPs), which allow you to purchase shares of stock in the company at discounted prices
Restricted stock units (RSUs) and restricted stock awards (RSAs), which require you to meet certain conditions before your shares are fully vested
Performance stock units (PSUs), which tie the number of shares you receive to performance benchmarks
Phantom stock, which allows you to receive compensation based on the company’s performance, without holding any shares
Stock options, which give you the right to purchase shares of the company’s stock at a future date
Stock appreciation rights (SARs), which allow you to receive the appreciation value of stock shares over time

Both publicly traded and non-traded financial advisor firms may offer equity compensation to their employees. Aside from how the program is structured, liquidity is a key consideration.

Working for a publicly traded advisory firm means it’s easier to sell your shares on the open market. With a private company that isn’t listed on any stock exchange, you may have to wait until the company enters an initial public offering (IPO) or is acquired by another firm to collect the value of your shares.

Benefits of Equity Compensation for Advisors

An advisor reviews the benefits of a financial advisor equity compensation package offered by a new firm.

Advisory firms may use equity compensation packages to attract and retain top talent, without having to offer higher salaries. Equity compensation is also useful as an incentivization tool if employee or company performance governs how many shares you receive.

The benefits to advisors can include:

Potential for portfolio growth if the shares you own in the company appreciate significantly in value
Deeper sense of connection to the firm you’re working for
Flexibility, if your firm offers multiple stock ownership avenues to choose from
Possibility for tax benefits if you’re able to defer capital gains tax on the sale of shares

How much value you realize may depend on what form your equity takes and your interest in investing in the firm that employs you.

An ESPP, for instance, allows you to buy into your company’s stock below market price. You can invest automatically through payroll deductions, and your plan may place no limits on when you can sell your shares.

Trading shares through an ESPP can trigger tax implications, however. Additionally, you may expose yourself to more risk than you’re comfortable with if a sizable portion of your portfolio is dedicated to company stock.

Market fluctuations and increases in volatility can reduce the value of your holdings, potentially causing a drag on the rest of your portfolio. You may need to spend more time monitoring your portfolio to ensure you have the appropriate weighting of assets to maintain a level of risk that you’re comfortable with.

Navigating Financial Advisor Equity Compensation

If you’re preparing to accept a new position and your future employer broaches the topic of equity compensation, don’t rush the discussion. Instead, take time to ensure that you understand what you’re being offered.

Here are some questions you may want to ask as you negotiate your equity package:

What type of equity compensation are you offering?
Is opting in optional, or will I be required to participate?
When will I be able to liquidate shares?
Is vesting a requirement to realize the full value of any ownership shares I receive? If so, how does the vesting schedule work?
Are ownership shares tied to performance benchmarks? If so, are the benchmarks set at the employee level, the company level, or both?
Are there any blackout periods or lockout periods in which I would be unable to sell my shares?
What happens to my shares if I move to another firm or decide to go independent and start an RIA?

Your future employer has likely heard these questions before, so don’t be afraid to raise them.

Incorporating Equity Compensation Into Your Financial Plan

You spend so much time helping your clients with their financial plans, but it’s important to spare some attention for your own. Here are a few tips to help you work equity compensation into your financial plan for maximum benefit:

Review your portfolio at large. Of course, you’ll want to consider where shares of your firm’s stock fit into your overall portfolio and adjust accordingly. Initially, your company’s shares may not take up a significant part of your holdings, but that can change over time if you’re purchasing shares automatically on a regular basis. You may need to do some rebalancing to ensure your asset allocation remains on target.
Understand your vesting timeline. Depending on how your equity compensation package is structured, it may take a few years or just a few months for your shares to vest. Being aware of the timeline can help you plan your next steps once your shares are fully vested.
Consider how to use your shares. Assuming your shares grow in value, you may be interested in how you can put them to work. If you’re able to sell your shares, you may use the proceeds to add to your retirement portfolio, pay for your child’s college education or fund a different goal.
Review the tax implications. Selling ownership shares could trigger a taxable event, and it’s important to consider what that means for your broader tax picture. Strategic planning can help you minimize your tax liability should you decide to sell your vested shares.

Bottom Line

An advisor reviews their financial advisor equity compensation package with their new firm.

For a financial advisor, equity compensation can be a tempting addition to an employee benefits package. If you’re planning to start an RIA, you may consider offering this benefit to new employees as you build your team. A thorough understanding of equity compensation can help ensure this valuable benefit doesn’t go to waste.

Tips for Growing Your Advisory Business

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In addition to equity compensation, consider the other benefits you may be offered when joining an advisory firm. For example, does the company offer a 401(k) or similar plan and is there a matching contribution? Will you have access to paid time off, sick leave and vacation benefits? Does your employer reimburse out-of-pocket expenses, student loan repayment or tuition assistance, or access to career training? Looking at the full package can help you assess how much you stand to gain at your new company.