Private equity eyes advisory firms, but at what cost?

Private equity investors have their eyes on the financial advice market, but there’s a debate brewing among industry executives over the merits of using that private capital.

“Here’s a news flash, Charlie: the independent space has been discovered. Everyone knows about it,” Shirl Penney, president and CEO of Dynasty Financial Partners, said, referring to the segment’s rapid growth. “So private equity is absolutely coming more full force into this space.”

Relatively high client-retention rates among firms and standard client-age demographics make firms’ revenue streams “sticky,” and therefore a good bet for private equity money, RIA and independent broker-dealer executives said Tuesday afternoon at Fidelity Investments’ Inside Track conference in New York.

$1 TRILLION PILE

PE firms are currently sitting on roughly $1 trillion in ready cash, a record amount. But some observers question the viability of infusing private capital into the financial advice business.

“On the independent broker-dealer side, there is private equity ownership. I think it’s a very de-stabilizing thing for the advisers,” said Richard Lampen, president and CEO of Ladenburg Thalmann Financial Services Inc.

Ladenburg is a network of independent brokerages such as Securities America Inc., its largest, that’s grown through a series of acquisitions.

Financial advice business “requires a longer commitment” than the traditional time frame for PE investments, Mr. Lampen said. That window is often three to seven years.

Michael Farr, president of investment advisory firm Farr, Miller & Washington, agreed, saying private equity can be “disruptive” and advisers that turn to private capital should know their partner is making a long-term commitment.

“A PE firm needs a return on their equity at some point. They’ve got to have a sale,” Mr. Farr said. “If someone has to monetize it, it’s going to disrupt your business and that’s going to be a problem.”

GROWTH STRATEGY

Of course, there are those who believe private-equity firms can be valuable partners, and PE money is necessary to continue growing at a healthy clip.

“You can only grow organically so fast,” said Michael Bapis, partner and managing director at The Bapis Group, a wealth management practice that’s part of HighTower Advisors.

“Where are the highest cash balances of any place on the street right now? It’s private equity firms,” he added.

James Poer, president and CEO of Kestra Financial Inc., which owns a broker-dealer (Kestra Investment Services) and RIA (Kestra Advisory Services) said his firm has been through a number of ownership changes, three of which involved private equity. The PE firms fostered “the best operating environment.”

“There is a realistic approach in understanding how to achieve goals,” Mr. Poer said. “They at every turn have made significant investments in the organization to improve value proposition and help us be a better company.”

“It’s been a fantastic process for us. I recognize it’s not that way for everyone,” he added.