Private equity serves clients well

There is much discussion within the wealth management industry as to whether the massive influx of private equity has had a positive impact on client deliverables or a negative one. Has the outside ownership of RIAs caused firms to abandon their fiduciary relationship to their clients in order to serve their shareholders? Or has the additional capital, along with increased competition, enabled firms to do more for their clients?

As one who has been a recipient of private equity, I believe that it has been good for our profession and good for our clients. Virtually all of the largest RIAs have private equity backers and the maturation of this profession wouldn’t be where it is without that capital. Here are the four areas where I believe outside capital has had the most impact.

Client services

Larger RIAs are able to offer many more services to their clients than small shops. Long gone are the days when asset allocation and basic financial planning will win a new client. Many of the private equity backed RIAs have in-house specialists that can offer clients tax planning, tax preparation, estate planning, insurance advice and more. 

It’s tough for small, independent advisors to compete with the larger firms when it comes to client offerings. Sure, they may create a network of other professionals to refer their clients to when it comes to items beyond traditional financial advice, but it’s not the same as being able to offer it from one shop. Furthermore, many clients today prefer having all their financial needs taken care of by one firm.

Employee development

Large firms offer greater career opportunities for their associates. Oftentimes, great talent gets stunted in small organizations and never have the chance to flourish. When small firms merge into these larger, PE-backed serial acquirers, it’s not uncommon for an employee to take on much larger roles in than what they were fulfilling before.

In addition, larger wealth firms are able to hire young, inexperienced folks and train them. Because they often lack resources, small firms frequently don't have the luxury of investing time and energy in employees, especially if it won’t generate a payoff in profits for the business for two or three years. Just imagine what better-empowered advisors can do for clients' welfare.

Increased productivity

Thanks to technology, advisors can serve substantially more clients today than they could even a decade ago. There are tools that manage portfolios, do tax-loss harvesting, take notes from meetings, complete tasks, and so on.

It’s tough for small firms to keep up with the latest technology, and you can't blame them: in the digital arms race, they're often outgunned by larger firms that have dedicated teams looking for the best tools to increase productivity while providing outstanding services. 

Growth

Most smaller wealth firms are no longer growing. Their AUM may be increasing on an annual basis, but for many, if you strip out market returns, these firms are flat to shrinking. Clients withdraw funds to meet living expenses, clients fire their advisors from time to time, and clients pass away. 

The PE-backed firms are highly focused on organic growth and are willing to invest in marketing and sales to generate new clients.

Clearly, there are some downsides to having so many private equity investments in this space, but by and large, these investors have been good for the industry.