THE LONG VIEW

Evan Simonoff

Private equity is now in the driver ’ s seat at many RIAs — and has its own set of priorities .

HEN ADVISORS LOOK BACK ON THEIR PROfession ’ s evolution five years from now , 2023 is likely to be remembered as the year private firms asserted themselves as controlling owners of many large RIA firms . A combination of factors , ranging from the retirement of some founders to the 2022 bear market , triggered this inevitable change of de facto control at many firms .

Now the question becomes : What do these PE firms want to achieve and how do they plan to accomplish it ? When they started to invest gingerly in this space two decades ago , they saw RIAs as unknown quantities — and the feeling was mutual .

It was obvious the advisory business represented a “ classic private equity play ,” explains Jonathan Stern , a partner in charge of the investment management unit at Berkshire Global . The business was fragmented and characterized by entrepreneurial , non-professional management that lacked expertise in marketing , sales , distribution and technology , he says .

What independent advisors had in their favor was a business model they believed was a better mousetrap and a messianic faith they could deliver superior services . The model resonated with many affluent baby boomers and that was enough to carry firms through some lean times in the early years before the Great Recession .

When the markets boomed in the 2009-2021 period , RIA owners largely

When PE firms started to invest gingerly in this space two decades ago , they saw RIAs as unknown quantities — and the feeling was mutual . pursued one of two paths . A few reinvested in growth , but many chose to “ take out ” capital and save for their own long-neglected retirements , Stern observes .

The result was that most underinvested in their firms , and that opened the door for PE capital to move in . Then , as the trickle of PE investments turned into a wave five years ago , the new investors realized they were competing against deal-driven first movers , rivals like Focus Financial , Hightower , United Capital and Fiduciary Network , most of which promised to leave advisors ’ dayto-day businesses largely alone .

Despite rising markets , some PEbacked aggregators didn ’ t get the results they wanted , Stern says . Many have now brought new operations-focused management to streamline the organizations , and sought to convert the businesses into integrators . Increasingly , the “ acquire anything ” strategies are seen as recipes for failure .

Today , the challenge is to sustain growth at a time when the rainmakers who brought in new clients are aging out of the business and younger advisors are taking their place . “ A lot of firms are trying to design themselves so clients are clients of the firm , not the advisor ,” Stern says .

By treating the clients as constituents of the firm , instead of the rainmakers , the new owners can address so-called “ key-man risk ,” but it leaves open the

20 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2023 WWW . FA-MAG . COM