Equity Compensation Tools Can Help Advisors Attract, Retain Employees

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In the competitive landscape of the investment advisory industry, retaining top talent is essential for the long-term success and growth of investment advisory firms. To incentivize and reward key employees, investment advisors often turn to equity compensation tools.

These tools are mechanisms through which investment advisors can grant ownership stakes or the right to share in the profits of the firm to key employees. They can incentivize employee loyalty, align interests, and encourage long-term commitment. Although there are many flavors of equity compensation tools, in this article, we will provide an overview of two of the most important ones — equity and profits interests — and discuss the terms often associated with the grant of such equity compensation to firm employees.

What Is Equity?

Equity is a direct interest in the ownership of an advisory firm. Advisory firms may grant equity outright to employees or may require employees to contribute capital to the company in exchange for their equity or to buy their equity in the firm from another owner.

Employees receive the right to participate in the equity of the advisory firm typically must become an owner (or member) of the advisory firm, which requires them to sign the firm’s operating agreement or shareholder agreement (which governs how the firm manages its affairs and delineates the rights and obligations of all owners). They also are bound by the terms set forth in the operating agreement or shareholder agreement.