PE investments are good for RIAs. What about clients?

As 2021 enters its third month, the explosion of consolidation in the RIA space over the past decade shows no sign of slowing. Even a global pandemic that virtually shut down multiple economies, including its lingering economic effects in the U.S., has not slowed the appetite that private equity firms have shown for registered independent advisory firms. 

In the first weeks of the new year alone, no less than three deals involving firms that collectively held more than $120 billion in assets under management were made, as Bruce Kelly reported in January.

This level of consolidation, while good for the industry, also brings attention to other corners of the space. As Jeff Benjamin wrote in his Feb. 22 cover story, “The unquenchable thirst for wealth management,” private equity investors have been flooding into the RIA space as wealth management firms, their valuations and assets under management continue to rise through this impressive stretch of consolidation that’s lasted the better part of a decade.

While that article is focused on wealth management, it’s yet another example of how private equity has turned its attention to the financial services industry at large. Just look at the deal last week in which two PE firms, GTCR and Reverence Capital Partners, agreed to acquire Wells Fargo Asset Management for $2.1 billion.

Talk to any PE firm long enough, Jeff Benjamin wrote, and the conversation inevitably turns to the appeal of the fee-based business model enjoyed by most RIAs, which has been one of the few areas in financial services that remains immune to significant fee compression.

The influx of PE money into the space is a huge vote of confidence for the health and future of the RIA business model. PE investors love businesses with recurring revenues that provide a reliable source of growth, like an RIA.

So the focus naturally turns to the seemingly irreversible influence of private equity money on the industry and what that might mean for clients of a firm that’s been bought by private equity.

Some industry observers have voiced concerns. For one, firms may be hostage to PE shareholders; they’re basically controlled by the board and will have to meet their revenue targets each quarter — or else.

PE firms could choose to fully monetize RIAs, increasing their fees for instance, instead of protecting client interests. There hasn’t been much evidence to support that claim, and RIAs will rightfully have to maintain the best interest of their clients. But the interest in getting a positive return on investment could bring pressure on financial advisers to squeeze more revenue from clients.

While PE buying is clearly a positive development for RIAs in the short term, the jury is still out on what effect the growing influence of PE ownership will be on the clients of acquired firms in the long term. 

Considering the outsized influence private equity capital has had on other industries, this represents a gray area that merits close monitoring right now and going forward.