How firms use equity for succession planning, recruitment

As financial advisors approach retirement, succession plans help ensure their legacy and ongoing service to clients. However, younger advisors may not have the capital to buy large books of business.

Many retiring advisors don’t want to sell their practices to large institutions because they’re concerned about client service and the unwinding of their work, said Joe Millott, principal and founder of Toronto-based Acquatio, which helps financial advisors with mergers and acquisitions.

Letting younger advisors buy in to a firm creates an opportunity for owners to sell their equity and for these advisors to receive dividends, and also aligns the firm’s interest with advisors’ interests.

“It creates real skin in the game for the [new] generation and real risk for … capital loss, which means they’re now firmly in the same position as the founder who started the business,” Millott said.

But it’s challenging to find a valuation that both the selling owners and buying advisors feel comfortable with, he said. And younger advisors still need to finance equity purchases.

Advisor.ca spoke to three firms that each have a different approach to passing equity on to the next generation of advisors. One firm makes some employees partners, another offers the opportunity to buy company equity, and a third uses equity as a signing bonus.

Minting partners: Pembroke Management

• Employees who become partners can buy equity
• Some dividends are reinvested in funds the firm manages for clients
• At 60, partners begin to sell their shares to younger partners over five years

Montreal-based Pembroke Management Ltd. has about 40 employees, 12 of whom are equity-owning partners, said Nicolas Chevalier, managing partner with Pembroke.

“Talented individuals want to make money, but also they want to find an opportunity where they can make a difference,” he said. “A vehicle to do that is ownership.”

Partners, who have ownership in both Pembroke’s private wealth and investment management businesses, include investment professionals, support team members and salespeople. They’re chosen based on historical and expected contributions, whether they “live and breathe” the firm’s culture and how well they work with others, Chevalier said.

Over the course of their working lives, partners are encouraged to reinvest their dividends in the same Pembroke funds they manage for clients, in an aim to create an alignment of interests, Chevalier said. These funds are typically the largest component of a partner’s portfolio.

Pembroke manages more than $100 million in assets under management (AUM) for employees and their families, he said.

Many founders want to maximize the goodwill they built in their practices, and the best way to get a high price usually involves selling to a larger organization at a multiple of earnings before interest, tax, depreciation and amortization (EBITDA) or a percentage of AUM, he said. “These are big numbers, and it’s tough for younger employees in our organization to pay that amount of money.”

Instead, when partners turn 60, they begin selling their shares to younger partners at book value, ensuring operational continuity and talent retention, he said. The transition occurs over five years and “allows the younger people to step up and flourish in the organization when they are in their forties and their fifties.”

Since clients belong to the firm and not any particular advisor, at retirement each book of business is transitioned, not sold, to another advisor over time.

If a partner dies before retirement, their estate must sell their shares back to other partners. The board of directors recommends how much equity each partner buys and which new partners to introduce.

Pembroke doesn’t offer stock options because the option holder participates only when things go well, Chevalier said. “I would prefer people who, when they make a decision, they view the upside and the downside, not just one side of it.”

Employee stock purchase: PWL Capital

• Employees apply to the board to buy shares
• Shareholder meetings are open to non-owner employees
• Departing employees sell their shares back to the firm

Montreal-based PWL Capital Inc. has offered employees the opportunity to buy company equity since 2021, and more than 20% of the firm is now owned by the next generation of employees, said Cameron Passmore, executive chairman and portfolio manager with PWL. The company has 44 shareholders, representing over half its head count.

During an annual liquidity event each April, employees can apply to the board of directors to buy shares, and existing owners can trade shares.

Prospective shareholders must explain to the board why they want to own shares, Passmore said, although “we’ve never turned anybody down.” The number of shares each employee can buy is capped based on a formula determined by the board.

The company’s shareholder meetings are open to non-owner employees so they can understand how the business is run.

Passmore has noticed that employees with equity are thinking more like owners: “How do you make trade-offs? How do you make sure you’re bringing enough new clients [so] you can afford the ambitious plans you have?”

Most of PWL’s advisors built their books “from the ground up” after they joined, Passmore said. Departing employees sell their shares back to the company.

PWL is classified as a Canadian-controlled private corporation, so advisors may be able to take advantage of the lifetime capital gains exemption. Passmore encourages employees to seek tax advice.

PWL doesn’t offer equity as part of a compensation package. “If you’re granted [equity], there’s really no risk,” Passmore said. He believes equity is valued by employees more when it’s paid for through hard work.

Equity based on book revenue: Harbourfront

• Advisors joining from competing firms receive sign-on bonus
• Firm may provide financing to buy a retiring advisor’s book

Vancouver-based Harbourfront Wealth Management gives advisors coming from competing firms a signing bonus of company stock and a forgivable cash loan, said Danny Popescu, founder and CEO of Harbourfront.

The bonus is tied to the estimated percentage of revenue the new advisor will generate for the firm. Advisors get a slice of the dealership as well as Harbourfront’s fund company, and they continue to own their books.

“What we’re teaching our advisors is, ‘Hey, come to us, and now you can own three businesses instead of one,’” Popescu said.

No advisor has turned down equity and asked for an all-cash offer instead, he said.

Harbourfront’s value is determined by a private equity firm that invested in the wealth management company in 2022. At the time, it was worth $426 million, Popescu said.

Offering equity for book revenue has helped Harbourfront grow, Popescu said. The company started with six employees and was valued at $11 million in 2013 and is now worth about $500 million with 250 staff in 33 branches.

“What we’re teaching our advisors is, ‘Hey, come to us, and now you can own three businesses instead of one.’”

—Danny Popescu

When an advisor retires, they typically sell their shares to another Harbourfront advisor. Some have sold a portion of their shares as they eased into semi-retirement. For example, lead advisors with two of Harbourfront’s teams sold a significant chunk of their shares while keeping their top clients.

If a younger advisor wants to buy an older advisor’s book, Harbourfront can provide financing to keep the book in the company. The loans are funded from the firm’s cash flows.

It’s hard to get external financing to buy a book of business, Popescu said. “Collateralizing a book of business is next to impossible.”

Harbourfront paid a dividend in the early years, but partners voted to reinvest in the business instead, Popescu said.

“Advisors should really look under the hood when they’re looking at equity, and ask about profits… so you can get a sense of how valuable your equity truly is,” he said.