On the surface, the independent retail financial advice space hardly seems like fertile ground for
private equity activity. Between escalating regulatory costs, combined with demographic and technology shifts redefining how consumers receive financial advice, there is plenty of uncertainty about the industry's future.
The election of Donald Trump and other industry factors, however, could reshape the landscape — and possibly start a renewed interest in the independent space among
private equity players.
From sparking the possibility of reduced regulatory pressures over the next four years, to the possibility that transformational technological and demographic pressures will be more easily overcome than generally assumed, there could be a real opportunity for the first time in years for
private equity players targeting this industry.
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Here's where to look for potential transactional activity in 2017 and beyond:
• Small-to-mid-sized IBDs. With costly regulatory hurdles possibly in retreat, smaller IBDs could have new hope. For all the effort that large IBDs and RIA aggregators have put into luring away successful producers at smaller firms, most have remained in place. The reason is simple: These advisers enjoy the unique personality and culture of their small firms. From a private equity perspective, this translates into opportunity. Valuations are low, relationships with core customers remain surprisingly sticky and a good deal of existential risk has the potential to be alleviated. It wouldn't be a shock to see an established private equity firm acquire a handful of smaller IBDs, keeping their brands intact while centralizing non-adviser facing shared services to achieve scale and cost efficiencies. It's a tried and true past formula, and it's an approach that potentially could be back in vogue again.
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• Technology service providers. Over the course of the past 12 to 18 months, investors have poured capital into early stage tech providers focused on the IBD space. With a potential shift in the next White House's regulatory approach, start-ups whose value propositions are based solely on being able to help achieve 'DOL readiness' may not do well. However, opportunistic private equity firms late to the fintech game could do very well by diving deep and focusing on secondary market acquisition targets for whom DOL readiness is incidental, where the primary mission is on leveraging new technology to facilitate transitioning commission-based business to fee-based relationships. These technology providers will continue to have relevance in any regulatory environment.
• Super OSJ firms. The DOL rule, whether it survives or not, have brought many independent advisers to realize they would benefit from a more robust support infrastructure, which is where the super-OSJ model comes into play. While most super-OSJ firms are 100% cash distributive businesses that enjoy very little brand equity beyond the advisers, and therefore don't present a serious opportunity for private equity investors, others have much more promise. In recent years, there has been a move among certain super-OSJ firms to bring together primarily fee-based advisers who serve a focused common client demographic under one brand, while offering these advisers equity in the firm. Private equity players would do well to closely examine acquisition targets who fit these characteristics.
• RIA firms. We are about to see an explosion in
consolidation here, led by well-established RIA firms looking to acquire their sub-$100 million AUM peers that either don't have or want to eliminate their brokerage business. Private equity firms have an opportunity to create a new
consolidation template for RIAs, focusing on solving issues such as how to structure equity deals with small firms willing to collapse their RIA registrations.
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The independent retail financial advice industry has existed for many years longer than the doomsayers who periodically emerge to opine about all the ways in which this space is doomed.
In the coming year and beyond, it's clear that private equity firms with a disciplined investment process, plentiful capital resources and a willingness to partner with established experts in the industry could find significant value creation opportunities.
Larry Roth, formerly the CEO of Cetera Financial Group and CEO of AIG Advisor Group, is a strategic adviser and private investor in the retail independent financial advice industry.
