The transaction merging Buckingham Strategic Wealth into The Colony Group under the private equity-fortified umbrella of Focus Financial Partners understandably drew headlines last May.
Focus had gone private in a deal with Clayton, Dubilier & Rice about nine months earlier, valuing the New York-based registered investment advisory firm aggregator at north of $7 billion. After that (and the departures of longtime Focus CEO Rudy Adolf and the other co-founders, Rajini Kodialam and Leonard Chang, in 2023), the rollup of Buckingham into Colony reflected a new approach: merging the 90 Focus-owned RIAs into a series of a few giant "hubs" rather than a dispersed network of independent partners in the conglomerate.
Focus
For RIAs, though, the deal represented only the latest in
The mega-RIAs argue their dominance ultimately serves the clients through lower costs and efficient operations. Others point out
All of which is prompting conversations across the profession. They're taking place
In the case of the Buckingham-Colony deal, the
Even though the planners themselves weren't selling insurance, the mass ouster was one of the, "I'm sure, unintended consequences," of the deal, said Joni Alt, a senior wealth advisor with Arlington, Virginia-based
"We're looking at it, because this could happen again for other members within our group," she said. "As an association, we want to make sure that we continue to have the high standards that we have."
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The raw numbers of consolidation
In light of the constant stream of M&A deals that usually stem from advisor retirements or the competitive needs of scale, the available numbers tracking fragmentation and consolidation in wealth management don't sound particularly surprising.
RIAs with $5 billion or less in assets under management represent
That concentration holds true at comparable levels even when removing RIAs that have brokerage business or other commissionable products or services. In a much smaller group of 2,920 fee-only RIAs
RIAs are increasingly following the pattern of market concentration that's already in place at the brokerages. The 25 largest brokerages have 93% of the assets in the channel, and the 10 biggest manage 58% of the pool, research and consulting firm
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And wealth management firms of all types are drawing investment from private equity firms or PE-backed acquirers at a high clip. Deals are on pace to increase slightly this year to 330 and maintain their consistently higher volume than before the pandemic, with an estimated 130 of those involving firms with at least $1 billion in client assets — the highest total in three years, according to investment bank and consulting firm
RIAs are proving a valuable and attractive investment, but some signs of business concern have popped up alongside that substantial growth.
In a "pulse" survey at the beginning of the year among a group of 70 RIAs that are consulting clients of
"The loss of assets due to clients lost has always been very low in the independent advisory industry, but it seems to be gradually (and dangerously) increasing," the report said.
The lawyers would like a word
Outside these industry metrics, the lawyers for several former RIA clients
Restrictive arbitration clauses represent one of "three major areas where we see problems from growth in the investment advisory space needing to be fixed to maintain fiduciary obligations and the regulatory agencies needing to catch up to this exponential growth," according to Adam Gana, a managing partner of law firm
The other areas, in the plaintiff attorney group's view, are that there should be greater oversight of asset transfers carried out by financial institutions to detect fraud and a minimum level of "errors and omissions" insurance at 2% of a firm's AUM.
In arbitration, the RIAs often include a variety of provisions that amount to higher costs, less public disclosure of cases and a lower likelihood of success for clients, Gana said.
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Some use fee-shifting language forcing clients to pay the firms' expenses if they lose while prohibiting the firm from defraying the customers' costs in a defeat. Others limit the types of claims clients may make against firms.
In general, the cases can prove hard to track because there is spotty or nonexistent mention of them in SEC filings. Inconvenient venues — from a geographical point of view and in terms of forums such as the American Arbitration Association — carry higher filing expenses than FINRA's arbitration processes as well.
"It prices investors out of access to justice, and to us it is a major violation of a firm's fiduciary obligations," Gana said. "Like in FINRA, clients should know what you're being sued for and how you're handling those things. Investment advisors have a greater responsibility of disclosure. It's unfair to the consumer."
At least two SEC reports
Unless the RIA "has made effort to gauge whether the client understands these provisions and the client has provided informed consent," many of them represent conduct "placing its interests ahead of the client's interests in violation of the fiduciary duty," the Investor Advocate office concluded in its report.
The report called for the SEC to consider temporarily suspending the use of mandatory arbitration clauses in RIA advisory agreements with clients until the commission can further study the costs and benefits of the RIA arbitration process. Thus far, the SEC hasn't taken any actions on arbitration amid its push on any number of rulemaking fronts that are now
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RIAs are critical or, at least, ambivalent
While fast-growing RIAs may dismiss that issue as a matter for the SEC, they may be more likely to listen to the criticism from within their own ranks
On the one hand, the flow brings resources that enable greater scale. On the other,
The private equity capital is seeking a return on the investments into RIAs
"Now I have to go back and garner growth for my firm just so we don't get taken apart," he said. "The clients who always get hurt the worst are the ones who are seen to provide the least amount of revenue. … When it's all about maximizing shareholder wealth, the people who are hurt are the bottom 5% to 10% of clients."
Those customers and others may seek out smaller RIAs that have more control over their operations and more personalized service, according to Thompson and Jason Ray, the co-founder and president of Philadelphia-based
Smaller RIAs display a "differentiated value proposition" based on their ability to connect with younger clients whose highest-earning years and peak wealth is in front of them, Ray said. In contrast, the giants are trying to serve their clients and their shareholders at the same time.
"These consolidators and RIA aggregators are going to continue to take up market share," he said. "Independence is a key factor in being able to deliver your ideal client experience. That kind of dual fiduciary duty really changes your business a lot."
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The larger RIAs acknowledge that growth for its own sake isn't always beneficial to their customers, even as they cite some compelling advantages to clients from their scale.
Alpharetta, Georgia-based
The firm's clients have reaped savings ranging from 35 to 60 basis points off their recurring fees as a result of its bigger size, Mayhue noted. Capital investments, hiring and M&A deals reduce outsourcing, deliver cheaper and better technology and bulk up services in areas like tax, trusts, estates, customer communication, portfolio management and, yes, insurance.
"There's no way that a smaller firm could attract that type of talent, even if they could pay for it," she said. "You can just have that best-in-class talent and that best-in-class advisor experience."
Representatives for Focus, Colony and Buckingham didn't respond to requests for comment about the NAPFA exits. However, the new CEO Nathanson's interview with
There will be "a tension between independence and interdependence" in the next 10 years, but, "I believe you can have both," Nathanson told the publication.
During a panel at last month's
"If you're not willing to take private equity or another form of capital, are you comfortable that you can fulfill your fiduciary obligations to your clients without it?" Nathanson said. "And these days, I think you have to ask yourself that question honestly."
Some of the toughest guardians of the fiduciary duty in the profession are answering that question much differently. Where the giants see areas like insurance, brokerage relationships and alternative investments as part of comprehensive fiduciary services, the critics point to possible conflicts of interest that fail to put clients' interests above those of the firms.
NAPFA members are trying to find the right boundaries for planners seeking to reduce conflicts across thousands of advisory practices. Last year, the organization had "a real big hoo-ha" over recurring commission trails that led to updated membership guidelines enabling planners in the group to accept
The group's board is currently considering whether private equity ownership of a firm could affect a planner's membership status, but hasn't yet reached a decision. Where they see questions about insurance as "very easy and straightforward," those about private equity ownership are more difficult, she said.
"We really want to be as transparent as we can possibly be, because our first goal is really to serve clients," she said. "There's always a conflict of interest out there, and the more that you can reduce or try to alleviate them as much as possible, I think it makes it easier for consumers."
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Fundamental questions for RIAs
Big RIAs that draw those distinctions in different ways than NAPFA are nonetheless trying to make sense of how to balance the business goal of their growth against the fiduciary duty.
In
Mallouk, whose Overland Park, Kansas-based RIA aggregator
The RIAs need to assess whether the private equity investors are trying to purchase growth or buy-out equity and gain a sense of their timeline for getting a return on their capital, but it "can be good for everybody if it's executed perfectly," Mallouk said.
"Private equity comes in, and they will force institutionalization on that firm, which is good for the client," Mallouk said. "The client needs to have cybersecurity in place, and independent financials and all of this stuff. That's definitely good for a client. You're far less likely to have a disaster. So I think from that perspective, it's good. But the private equity firm does not give a shit about the client. They have a fiduciary duty to their investors. So their duty is to come in and make sure they extract as much earnings out of your company as possible in a finite period of time."
Ritholtz CEO Josh Brown brought up a conversation he had with planning entrepreneur Michael Kitces the previous day in which he and Kitces were discussing RIAs that received minority investments from private equity firms only to realize that they are "putting effectively new oversight" on themselves and getting replaced by the third year "if the growth isn't there." He asked Mallouk what he would say to RIAs considering that type of M&A deal about the risk.
"Everyone wants to talk about the price they got," Mallouk said. "There's a thing in this business that everyone knows: 'You tell me the price, I'll tell you the terms,' right? And you see this even in the large-cap space. I truly believe that some people don't understand the deals that they're entering into, even people that run very, very large RIAs."
After its second outside infusion of capital
"Our team is more experienced, we cover more services, have far more negotiating power to utilize on behalf of clients and are physically closer to our clients," he said.
Asked about the
"I think the main negative is if a new team is not integrated well, or not willing to integrate, it creates major cultural issues. This is why we are so selective with the deals we do, and why we will only bring on firms that match our overall approach and want to integrate," Mallouk said. "The key is to keep your eye on the clients. If you focus on the bottom line, short-term deals and so on, your attention is in the wrong place, and the clients will suffer. The team will suffer, too, as they get off track dealing with problem acquisitions or growth that compromises the offering."
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The murky outlook from here
In a multifaceted discussion about RIA growth and the fiduciary duty, tougher regulation and better coordination among the SEC, state agencies and FINRA could play a role as well, according to Gana of PIABA. Brokers who are barred by FINRA can sometimes stay in the industry through an RIA, he pointed out.
"We're seeing more and more fraud in the investment advisory space, because, for whatever reason, there seems to be less-efficient regulation," Gana said. "There are more and more investment advisors that are not subject to regulation the way that they were when they were brokers."
Others see heightened regulation as another factor driving business advantages to the largest firms. The Department of Labor's new retirement advice rule, which is
Regardless, he's worried that the race toward consolidation could be taking the profession away from serving clients, he said.
"At the end of the day they're just creating the same thing that we ran away from. From a business perspective, it is about making revenue, but you can't allow revenue to be the full dictator of what's in the best interest of your clients in the fiduciary capacity," Thompson said. "We have to really start thinking about what's truly happening in our industry."
The ongoing shakeout between large and small firms could also challenge the non-giants to find their footing, according to Ray, whose firm Zenith has set a goal of
"This increased money in the space has made it harder to recruit advisors and also put a premium on the advisor position," Ray said. "That forces us to be better as a firm. Frankly, the competition is probably a healthy thing."
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NAPFA is trying to provide a link between "solo practitioners on one side of the bridge and very, very large firms on the other side of the bridge," Alt said.
"About half of our membership is solo practitioners, and then the other half is large firms and medium-size firms," she said. "You're a fiduciary, regardless of whether you're in a small firm or a large firm, and I think that's what NAPFA stands for, too."
The RIAs trying to figure out exactly where they stand on the many fiduciary quandaries raised by the channel's unprecedented size and consolidation will need to arrive somewhere if they hope to land on the right side of any deal.
And that begins with careful diligence to understand how a smaller RIA founder's role would work under a larger parent or after receiving a direct capital infusion from an investor, according to Mayhue of Merit. The ownership structure of the incoming investor and a sense of whether they plan to "acquire businesses and scale down the human component to get more out of less people" should loom large in the decisions around any deal, she said.
"You have to look at the firm's main motive to understand what the clients' experience is going to be. There are some firms out there that appear from the outside to be really focused on the financials," Mayhue said. "That could definitely hurt the client experience in that scenario."
