FA ’ s 2023 RIA Survey And Ranking based consolidator was forced to pay 14.5 % in payin-kind convertible debt over six years to guarantee its return to the Bain investors . A CI investor relationship specialist spoke with Financial Advisor and said that the RIA business has in fact been growing faster than its debt , theoretically protecting equity in the mother ship . He declared there are no guarantees to the debt holders that would hurt the parent company itself , CI , or its stockholders , but 14.5 % is more than 10 % above 10-year Treasurys .
Many CEOs agree that private equity is more patient capital and understands the RIA space better than public markets , but critics say the race to leverage individual firms and gobble them up shows the worst of the aggregator model . Simply trying to arbitrage EBITDA multiples ( assigning a high multiple to a large entity and using the stock as currency to buy many smaller firms at lower cash-flow multiples ) without integrating the businesses creates a lessthan-ideal model . Indeed , many of today ’ s acquisition vehicles like Mercer and Creative Planning portray themselves as integrators , not aggregators , and are adding dozens of professionals in areas like tax planning and estate planning to build out client relationships beyond basic asset management services .
David DeVoe , founder of investment bank De- Voe & Co ., says Focus likely went private because its valuation as a public company seemed to be at a discount to what private companies were paying . He adds that public investors are less comfortable with
61.42 %
Charles Schwab
RIAs ’
PRIMARY CUSTODIANS
32.82 %
Fidelity
26.30 %
TD Ameritrade
9.21 % Pershing
HOW FIRMS CHARGE FOR SERVICES
AUM Fees
Hourly
Subscription Fees 2.88 %
27.26 % Flat Fee / Retainer
Other 10.56 %
44.91 %
97.31 %
“ There ’ s thousands and thousands of advisors out there ; there ’ s more RIAs that are being created each year than are getting acquired .”
— DAVE WELLING , CEO , Mercer Advisors
higher debt ratios . In a private equity setting , the ratio of debt service to cash can max out at 7 times , “ but the public markets expect to be closer to 4 and a half or so .” ( Focus said its net leverage ratio in March was 4.41x , and said it was committed to being in the 3.5x to 4.5x range .)
“ So by going private ,” DeVoe continues , “ you actually create space to bring on additional debt that would have been constrained as a publicly held firm . So [ Focus ] was arguably undervalued and by taking it private they had more access to capital for acquisitions .”
DeVoe continues that private equity firms had already anticipated some of the interest rate increases and modeled that into their original purchase prices , but says rates then rose further than anyone imagined . “ When you run a large organization , you have to be sensitive to how much debt you take on and what your debt service is .”
In a way , these firms are trying to get over the hump : If the stock markets rebound , these bets will have likely paid off . But before the S & P 500
SERVICES OFFERED
CATEGORY
% OF FIRMS THAT OFFER THIS SERVICE IN-HOUSE
% OF FIRMS THAT OUTSOURCE THIS SERVICE
AVG . % OF CLIENTS USING SERVICE WHEN OFFERED
Financial Planning 98.27 % 0.77 % 72.00 % Alternative Investing 56.05 % 9.21 % 38.48 % Asset Allocation 95.01 % 1.15 % 95.38 % Bond Management 69.10 % 10.75 % 56.47 % Business Consulting 35.70 % 5.18 % 15.12 % Charitable Counseling 75.62 % 4.22 % 31.55 % Digital Advice Platform 15.16 % 3.26 % 28.90 % Equity Management 70.44 % 6.14 % 77.79 % Estate Planning 63.92 % 20.35 % 57.02 % Exchange-Traded Funds 77.74 % 6.14 % 78.15 % Fund Of Hedge Fund Selection / Oversight 24.76 % 4.41 % 22.07 % Group 401 ( k ) Advice / Sales 52.40 % 5.76 % 15.47 % Health Care 20.73 % 12.67 % 27.91 % Hedge Fund Selection / Oversight 27.83 % 3.84 % 24.10 % Impact Investing * 52.78 % 5.37 % 15.55 % Index Funds 70.25 % 5.37 % 73.68 % Institutional Fund Management 36.47 % 2.88 % 35.29 % Insurance Planning 63.92 % 11.90 % 46.35 % Manager Selection / Oversight 58.54 % 2.11 % 72.57 % Mutual Fund Selection / Oversight 80.61 % 1.73 % 83.14 % Real Estate Investment Trusts 49.14 % 6.53 % 45.63 % Separately Managed Account 52.59 % 9.79 % 38.04 % Tax Planning 73.90 % 9.98 % 68.01 % Tax Preparation 23.61 % 16.70 % 37.97 % Cybersecurity Protection 15.74 % 7.68 % 56.74 % * Category included socially responsible and sustainable investing .
JULY / AUGUST 2023 | FINANCIAL ADVISOR MAGAZINE | 29