Are independent advisors really independent anymore? We’ve been asking ourselves that question a lot lately, as the wealth management industry has evolved over the past few years.
If you were to use one word to describe how wealth management is changing, it has to be “consolidation.” From large deals like LPL Financial’s acquisition of Commonwealth, to smaller roll-ups, deals in this space happen daily, changing the landscape for advisors.
Some deals make strategic sense, and there’s nothing wrong with merger activity per se. Yet, more and more, the rationale behind these deals raises questions about the influence of one important, and increasingly worrisome, factor: the role and intentions of private equity.
Private equity has reshaped wealth management, giving firms access to growth capital and driving up valuations. Early in the private equity push, the capital had a good deal of strategic use.
When TH Lee bought Hightower in 2017, the deal let Hightower turn around its struggling finances and bring in new ownership to clean house and change its business model — setting it up for growth.
Strategic private equity deals such as this one seem like a thing of the past, though. After a rush by major PE firms to invest anywhere and everywhere, valuations have risen but opportunities to cash out for PE players have shrunk.
The market for initial public offerings in wealth management is virtually closed, leaving PE firms and financial sponsors to sell companies to each other.
We just saw that recently when NewSpring Holdings sold Wealthcare Capital to Sammon Financial, which already owns a number of different wealth management firms. You don’t need a crystal ball to predict that shifting from owner to owner in this business will likely happen more frequently in the future.
While the headlines around these deals concentrate on volumes and valuations, the impact of these activities on advisors has attracted far less attention. For advisors, independence comes in many forms, but at its base it’s usually tied to a desire for freedom: freedom to choose everything from their business models to their technology.
They want control over who they serve and how they manage their firms. But especially, they desire the freedom to build a business aligned with their values, mission and ideal lifestyle.
When advisors begin their careers or break away or change registered investment advisor platforms, they make their decisions based on which partners best align with their values or plans. The alignment associated with their mission has to be the top factor.
When private equity comes in, suddenly there’s a risk of misalignment. That’s little wonder. After all, private equity firms have to act in the best interest of their own investors, meaning they are focused on cutting costs, driving valuations and preparing the asset for exit.
The business of managing client wealth is not part of that equation. It may seem like the simplest of logic, but wealth management firms started by wealth managers prioritize wealth management in their decision making process.
Owners and financial sponsors of wealth management firms put investment returns for their partners in mind first. Which approach is better for advisors and — more to the point — which is better for clients?
The growing misalignment between the objectives of private equity firms (and some large consolidators) and the values of independent advisors will be one of the defining stories in wealth management in the years ahead.
We’re already seeing the casualties of once value-driven, client-first firms being compromised by outside interests. In stark contrast, the beneficiaries of true alignment — like XY Planning Network members — are thriving. XYPN's benchmarking studies reveal the exponential growth that occurs when advisors build firms rooted in their values, mission, and ideal lifestyle.
We believe there is a distinct advantage for advisors who set up their businesses in ways that mean they’ll never have to worry about who their owners will be — or the control they might have to relinquish if that changes.
Sadly, as the industry continues to experience consolidation and misalignment between private equity ownership and front-line advisors, it also risks losing the philosophical thread of why freedom and independence matter in this business.
Independence was a powerful force that changed money management over the past few decades. We all remember the past promises about how clients would benefit when teams broke away from the oligopoly of the wirehouses to form independent RIA practices.
Independence was seen as critical to empowering advisors to better serve their clients — by acting as true fiduciaries and throwing off the shackles of high-fee, pre-selected investment options and products they were pressured to offer. This was freedom.
Few people speak about that zeal for freedom anymore. Even among breakaway advisors and firms, more and more large entities are announcing plans to step in — not just to support the independence of advisors, but to manage and control the details.
Fewer options exist for advisors who want to explore differentiated business models, revenue streams or client bases. Even RIA custodians compete against them.
This is a shame. But the good news is that it is not too late. Physics tells us that every action has an equal and opposite reaction, and that tends to happen in business, too.
Private equity will likely tire of recycling firms among one another for diminished returns and hunt elsewhere. Then, hopefully, the entrepreneurial zeal of advisors will become the biggest industry trend once more. Let freedom ring.
Alan Moore is co-founder and CEO of the advisor support platform XYPN.
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