Misinformation about private equity ownership distracts advisers at vital time

Here are key questions advisers should ask when assessing a firm owned by private equity

The COVID-19 global pandemic has been a human tragedy as well as an economic tragedy on a devastating scale. In response, financial advisers have been burning the candle at both ends to help individuals, families and business owners make sense of the overwhelming uncertainty. Their tireless efforts have kept clients focused on their long-term plans, preventing irrational, fear-driven behaviors that can destroy future outcomes.

This is a vital time when our industry’s shared mission of serving the members of this noble profession – who need the best possible support more than ever – should take precedence over campaigns that seed anxiety among financial advisers, without adding value to the important work they do.

There is no clearer example of this than the recent drumbeat about the alleged dangers of private equity-owned wealth management firms. Like most chatter aimed at provoking reactions, the argument relies on generalizations and some outright fictions.

First of all, clearly there is no one-size-fits-all description for private equity-owned firms, any more than there is a blanket characterization that could be applied to all publicly traded firms.

Cutting through the negative innuendo, there are four key questions that advisers should ask themselves when assessing the strengths and advantages of a firm owned by private equity.

1. What is the duration of the private equity fund? Let’s start by debunking the myth that private equity firms are “flippers” that seek a quick exit from their investments. The duration of the fund that owns the wealth management firm and when the firm was acquired in the fund’s life cycle are the two key items of information for financial advisers seeking guidance on whether private equity owners are long-term partners, and when a future liquidity event will likely take place.

A fund with a 10-year duration that acquired a wealth management firm in year one, for example, will likely take a much more long-term view than a wealth management firm owned by a fund with, say, a three- or five-year horizon or, for that matter, a public company playing to short-term, quarter-over-quarter Wall Street expectations.

2. Is the growth trajectory of advisers affiliated with the private equity-owned firm superior to the general market or the growth of advisers at other firms? Let’s also address the fiction that private equity firms are all cost cutters, when the opposite is clearly the case in many instances. The best gauge of this is whether a private equity-owned firm’s “same store sales” are growing. In many cases they are. For example, over the last three years, the average growth rate of our advisers has increased significantly, outpacing the industry averages reported by public company peers. In our case, private equity owners represent “patient capital” that isn’t ruled by short-term quarterly targets. Private equity can provide access to long-term capital investment that enables outsized investments in product, technology, marketing resources, succession and M&A solutions, and much more.

3. What is the private equity-owned firm’s track record on launching complex technology rollouts? A firm’s success — or lack thereof — at launching major new tech platforms and tools can also be revealing about how well its management operates and how much backing it truly enjoys from its private equity owners. Digital tools for client onboarding, wealth management, adviser marketing, succession planning and more must be intuitive enough for advisers and support staff to master quickly, sophisticated enough to add significant value and thoroughly protected by best-in-class cybersecurity suites.

Such resources don’t come cheap, nor do the top-caliber internal technology leaders needed to create and manage them. Well-run private equity firms tend to invest what they need to realize the long-term benefits of effective technology among their portfolio companies, and aren’t constrained by how such costs look on a quarterly basis.

4. Does the private equity firm have a true focus on the financial services space and demonstrated expertise within it? There are, of course, private equity firms that own a wealth management firm because they acquired it at the right price, and it is part of a diversified portfolio. Advisers rightfully should be wary of firms with such owners. But by the same token, this does not mean that a private equity firm should own only wealth management firms.

The reality is that private equity firms can more effectively position the wealth management firms they own for success — and their affiliated advisers — by building a portfolio of complementary financial services companies that also encompass asset management, payments transactions and lenders. Private equity owners with a broad and deep knowledge base and strategic relationships can provide invaluable growth resources that directly benefit financial advisers.

TIME FOR THE DIALOGUE TO MATURE

It benefits neither our industry nor financial advisers when misinformation and myths are disseminated that stoke fear and uncertainty among the very advisers who are trying to keep their clients calm and cool-headed during an unprecedented national crisis.

The COVID-19 pandemic presents our industry with a historic opportunity to underscore the essential role advisers play in our society.

Part of this requires that the industry move the public dialogue away from taking jabs at each other’s ownership structures and instead focus on what we do to help advisers manage more efficient businesses, outperform growth objectives and best serve their clients.

Jamie Price is CEO of Advisor Group, the nation’s largest network of wealth management firms.