First, the good news. With the growing influx of private equity investment capital — Genstar Capital’s buyout of Mercer Advisors, KKR and Stone Point Capital’s investment in Focus Financial Partners, and most recently, Thomas H. Lee Partners’ purchase of a major stake and $100 million recapitalization of HighTower — even the most ardent detractors on Wall Street must admit that independent RIA firms have become legitimate players in the financial services industry. And for the independent firms themselves, this new capital means larger businesses, more resources and greater opportunities.

The bad news? There really isn’t any such thing as a free lunch. Translation: Thanks to my 34-plus years covering the financial services industry, I can’t help but wonder how this newfound largess will change the independent advisory industry — and whether all that change will be positive.

To get an insider’s view of how outside capital can affect independent RIAs, I spoke with Dan Bernstein, chief regulatory counsel at MarketCounsel, the business and regulatory compliance consulting firm to the independent advisory industry. What does he believe are the advantages and challenges of private equity in the RIA business?

“The primary concern when a private equity firm invests in an RIA is how the RIA will be able to continue to act as a fiduciary,” he says. “This often depends on what the goal of the investment is. If the PE firm simply believes in the independent RIA space and that their business expertise can help the RIA, then there isn’t much of a problem. However, typically, private equity firms that invest in independent RIAs already have investments in other financial services businesses — often, many other businesses.”

Dan explains, “The mere ownership of multiple financial businesses is conflict of interest. And, if they’re in the space because it’s ’fragmented’ and they want to take advantage of the ‘synergies,’ and believe that ‘we can make it all work together,’ that raises concerns about distribution, and recommending affiliated products. At that point, the combined business starts to look like a wire house, rather than a fiduciary RIA.”

The problem with financial services is there’s usually a lot more money to be made “selling products” to anyone who will buy them than there is in simply providing advice that’s in the clients’ best interests. It seems that mixing PE investors, who typically have relatively short return on investment goals, with fiduciary RIA firms, which focus on clients’ best interests, is a formula destined for friction.

What suggestions does Dan have for RIA owners contemplating PE financing and how can they determine what that future business relationship might look like? “The main issue is: Why is the PE firm giving [the RIA] the money?” he says. “Don’t be shy about raising this point. Ask them about their business plan and about their business. Why are they investing? Ask about the rest of their investment portfolio, and their previous acquisitions.”

There’s also research that can be done, adds the regulatory expert. “If the PE firm bought into other RIAs or broker-dealers, look to those [Form] ADVs. They can give you a good look at what your life might look like in the future. And you’ll get a look what your ADV will look like, and that you’ll be explaining to your clients.”

He also says it’s worth asking “how much control they’ll want to have, and [how much] you’ll give up. I have seen completely hands off, you run the firm deals, and others that are much more hands on.”

Read the above carefully. One of the main reasons independent advisors are independent is for the freedom and control they have over their working environment and how they take care of their clients.

One final point made by Dan: “All this is not to say that PE capital is something to avoid. If you can be comfortable with the above, the additional capital can be a real benefit. But remember: If this was all good, then everyone would have done it.”