July / August 2023 www . fa-mag . com

KNOWLEDGE FOR THE SOPHISTICATED ADVISOR

‘ Knock Yourselves Out ’

What if we told pre-retirees to go ahead and spend instead of save ?

Here ’ s Looking At You , Retirement

Like certain movie lines , some people ’ s retirements will be improvised .

Is AI Cool For Wealth Management ?

Advisors figure out how to make friends with machines .

A Lurking Threat

Will your custodian leave you on the hook for cybercrimes ?

S I WORKED WITH SENIOR EDITOR ERIC RASMUSSEN ON the annual RIA survey for 2023 , it quickly became apparent to me that the overarching matter affecting advisors is the huge investment of private equity capital in their space since 2018 . It speaks volumes about how fast the business has been transformed from a cottage industry of mom-and-pop shops into a true profession in just a few decades .

This doesn ’ t mean there won ’ t be growing pains galore . In the end , it ’ s all about fiduciary responsibility .

Just as advisors have a fiduciary responsibility to their clients , mostly the affluent and mass affluent , PE firms also have a similar duty to their clients , typically pension funds and the super-rich .

There are a few ironies here . The modern financial advisory business exists largely because of a provision in the Revenue Act of 1978 that created 401 ( k ) plans . Few knew at that time that these newfangled defined contribution plans would displace traditional pension plans as many Americans ’ primary vehicle to fund their retirement . The sweeping retreat of old-fashioned pensions has exacerbated retirement insecurity for many Americans . In Europe and other developed nations , such plans remain more widely used .

For PE funds , the shrinking pension market represents another threat — the loss of their best institutional investors . That ’ s one reason private equity doesn ’ t just want to invest in the RIA business ; it also wants clients of RIAs and other investors , like 401 ( k ) plans , to invest in private equity in the worst way .

Just imagine for a second that a PE firm owns a big stake in your RIA and several of your competitors also wants to offer some of its funds to your clients . What could possibly go wrong ?

What could possibly go wrong ? A cogent argument can be made that ordinary Americans , now deprived of pensions for the most part , should have access to private equity , an investment that leading thinkers in finance like Nobel laureate Eugene Fama have called a unique asset class .

But the conflicts of interest can easily multiply . Financial advisors ’ first fiduciary duty is to their clients , but principals of RIA firms also have a duty to their shareholders , often themselves .

Just imagine for a second that a PE firm owns a big stake in your RIA and several of your competitors and also wants to offer some of its funds to your clients . While there is nothing nefarious about this kind of arrangement , it warrants some serious examination about the ethics and conflicts .

A handful of these conflicts are already starting to appear . That ’ s one of many reasons I think you ’ ll find this month ’ s cover story worth a long summer read .

Evan Simonoff

Email me at esimonoff @ fa-mag . com with your opinion .

6 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2023 WWW . FA-MAG . COM