July 24, 2024
A Day in the Life of a Financial Advisor
July 24, 2024
You’re looking for a new financial advisor, someone you will give access to your life savings. Don’t you want to know how they spend their time?
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We know private equity (PE) investors have been acquiring healthcare resources and pressuring these organizations for profit. The same is true for financial advisory firms.
More and more registered investment advisors (RIAs) and wealth management professionals are selling their firms to PE agencies. In fact, one report found that 6 out of every 10 advisory firm acquisitions were backed by private equity.
In this article, we’ll review why PE is targeting wealth management firms, why advisors are selling, and what this means for you, the client.
It’s easy to see the reason so many private equity firms are buying up RIA firms: Profit.
Advisory firms often operate with little capital and have high-profit margins compared to other industries or sectors. Just as with healthcare and real estate, financial advisors fulfill an essential need for millions of Americans, making it a staple service. There will always be clients requiring such services, making it an ideal investment choice.
And despite the drawbacks for both advisors and clients, advisors sell their firm of accept PE investment for several logical reasons.
There are several reasons why an RIA or broker chooses to sell their firm to private equity. The promise of additional capital and resources to grow their firm and cut through the competition is tempting. Even large advisory firms that are acquiring smaller firms are backed by PE investors.
In other words, it’s all about growth.
Registered investment advisors who want to retire or expand their operations look to private equity as an efficient answer. But it’s not necessarily the best one.
Initially, RIAs benefit from the influx of capital. With a PE investor, they can better afford and leverage high-quality, innovative technology. They have the funds to invest in aggressive marketing efforts or expansion.
The problem is that many of these advantages are short-term gains.
Like in the healthcare sector, PE ownership or investment is all about profit. Most investors operate on a short timeline of 5-7 years, many with the end goal of either reselling the firm or liquidating it. This friction creates a number of issues that directly affect advisors and their clients.
A recent study from the University of Oregon highlights the tensions between PE and advisors' goals. According to its findings, private equity ownership increases the percentage of advisors committing misconduct by 147%. It’s inferred that the pressure for higher profits may prompt advisors to cut corners and neglect client interests.
Furthermore, private equity owners often lack experience in financial planning and wealth management. This can lead to unintentional and costly errors across the board. Coupled with loose regulations, there is little to keep these firms accountable.
There are additional risks for advisors, too. For example, private equity investors may have more experience and knowledge about the acquisition process than an individual advisor. As a result, advisors engaging in selling their firm can be taken advantage of. Deals may include extensive financial burdens on the advisory firm, such as giving the PE investors extensive control over the firm and prioritizing investor returns in case of firm closure.
No answer is clearcut. Private advisory-owned firms have an intrinsic drive for profit over people. Yet even independent brokerages and fiduciary firms alike can neglect client interests for personal gain. And as PE buys up more and more financial organizations, it’s possible that many clients won’t have a choice.
Consequently, it’s important to rigorously vet whoever you choose to work with. Clients can look for a number of things to weed out unscrupulous advisors, such as:
No matter how the firm is run, trust is the most important aspect of any relationship and should take priority over all else. Friends, family, and second opinions can give you clarity on whether or not a specific advisor is right for you.
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