Private equity (PE) firms have driven consolidation in the registered investment advisor (RIA) market for the past decade, snapping up RIAs and driving up valuations with a seemingly endless supply of capital. Due to the combination of strong fundamentals enjoyed by advisory firms and the positive macro market trends that point to continued growth in assets under management, PE firms are entering the space in record numbers. While the impact that the influx of capital is having on merger and acquisition (M&A) activity and valuations has garnered the greatest attention, the profound effect that this new capital is having on the actual business of wealth advisory firms is playing out before our eyes with increased clarity.
Accelerating the growth of RIAs
RIA firms with PE investors have become formidable players in the market – accelerating the pace of advancement and innovation in the RIA space, while creating disparity between firms with PE support and those without. Most notably, PE investors are shaping the future of RIAs through:
- Expanded services and capabilities: PE capital allows firms to make strategic acquisitions and/or make de novo investments to expand services and capabilities. This not only enhances the client offering but also provides advisors with better solutions to more effectively retain and attract new clients.
- Regional and national powerhouses: PE funding supports the growth and expansion of RIAs into new markets, allowing them to have a local presence with national or regional brand recognition.
- Technological enhancements: Investors are pouring tens of millions of dollars into technology to personalize solutions and better manage client interactions. Advanced platforms are being used to leverage data analytics and machine learning to identify trends and make more informed investment decisions, optimize internal operations, protect against cyber-attacks, and enhance online experiences for attracting new clients.
- Professionalization: PE leaders contribute professional business management and governance to RIAs to provide for stronger leadership and greater profitability and operational efficiency.
Impact on smaller RIAs
The wealth advisory business continues to be a relationship business, and RIAs are not seeing a mass exodus of existing clients moving to these larger platforms. However, the better funded and more technologically equipped RIAs are starting to make it increasingly difficult for smaller RIAs to recruit and develop new advisors and to attract new clients – essential to grow their firms.
As a result, RIAs are starting to partner with PE-backed platforms earlier in their lifecycle to provide better tools and solutions for their clients and to grow their firms more effectively. RIAs see real value in platforms that offer growth opportunities through enhanced services and capabilities, training and development for new and existing advisors, and better technologies that make advisors’ lives easier and allow for greater connectivity and functionality to clients.
For firms that are struggling to attract new business or expand their offerings, considering a PE-backed relationship may be a viable option. While some RIA firms fear a loss of independence, it’s important to seek out investors who are aligned to their priorities and goals and have their clients’ best interests in mind. In the past, consolidation was a means to an end – now it’s a means to a bright future.
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