“It was like being tossed off a raft and into the rapids…one minute my team and I were paddling along on the river, and the next we’re just trying to keep our heads above water, with no control over our direction.”
Such was the way a recent industry colleague described the weeks and months following the announcement that the firm he’d called home for over a decade had been gobbled up by a large, private equity-controlled aggregator firm.
In recent years, private equity firms have increasingly turned their attention to the financial services sector, acquiring independent broker-dealers and advisory firms at a rapid clip. While these acquisitions can potentially bring benefits such as increased capital and resources, often, the advisors who’ve built their practices on the foundation of an acquired firm find that the values, priorities and culture are significantly impacted because of the acquisition.
When these aggregator firms roll up an IBD or RIA, disruption is a given, though few comprehend the breadth of the ripple effect that’s caused. On the local level, there’s discomfort in the uncertainty as to what’s next. Questions naturally arise: Will technology platforms change? Will local or regional leadership roles be eliminated or shuffled? Which of my colleagues are going to be unsettled enough to leave? Are compensation structures going to change? Lastly – and most importantly – are my clients going to start seeing news articles, receiving correspondence, or have new logos or language showing up on their statements, causing them to question the stability (and reliability) of the firm?
At the firm level, culture and system clashes and incompatibilities are certain to arise as operational and administrative personnel are merged, roles are shifted, and longstanding relationships broken as cuts are made in the name of streamlining and efficiency (PE firms are, after all, focused first and foremost on generating the highest possible return for their investors). When those cuts inevitably happen, the staff-to-advisor ratio goes up, leaving fewer personnel to handle additional advisors, and service levels suffer accordingly. The personalized support that the advisors had grown accustomed to is lost in the process, replaced by standardized, less responsive service models. Advisors then find it increasingly difficult to get timely support for their specific needs, affecting their ability to serve clients effectively. Clients, in turn, may experience delays and a decline in the quality of service, leading to dissatisfaction and potential loss of business.
Another significant consequence of PE acquisitions is the imposition of uniform compliance standards across all advisors within the acquired firms. These compliance structures, for good reason, are designed to mitigate risk and ensure regulatory compliance, but they tend to be based on the lowest common denominator – the least experienced or lowest performing advisors. Many high caliber advisors select a firm in part based on that firm’s compliance structure, which is largely based on the current advisor population’s caliber, sophistication, experience and business mix. When firms are merged together that have differing advisor populations, the acquiring firm has no choice but to implement a lowest common denominator compliance structure, lest they draw the ire of industry regulators, which in turns decreases the value of the entire enterprise. For high-caliber advisors, being held to the same standards as their lower-performing peers can be highly restrictive. These advisors often have more complex client needs and sophisticated strategies that require flexibility and advanced tools. Uniform compliance standards can stifle their ability to provide tailored advice and services, ultimately affecting their business and client satisfaction.
Impacts, however, are not limited solely to the acquired firm; the landscape of the entire financial services industry changes every time these types of transactions are executed. Every time a truly independent BD or RIA is folded into an aggregator, means fewer independent options for financial advisors, who may find themselves with limited choices when seeking a firm that aligns with their business philosophy and client needs. The reduction in competition can also lead to less innovation and lower service levels, as the acquired firms might prioritize the interests of their new owners over those of their advisors and clients.
All of this begs the question: “As an independent advisor, what can I do?”
At the macro level, advisors themselves need to advocate for their needs and push for changes at all levels. By joining industry associations and engaging in dialogue with their firms’ leadership, they can work towards creating an environment that supports their ability to provide high-quality, personalized services.
Most importantly, advisors looking to avoid the pitfalls of PE-owned firms should consider aligning themselves with the remaining independent broker-dealers that have resisted acquisition. These firms often maintain a commitment to personalized service, flexible compliance structures, and innovative solutions tailored to the needs of high-caliber advisors and their clients. By choosing to work with these independent firms, advisors can continue to offer the high level of service their clients expect while maintaining their professional autonomy, and, by extension, the health and integrity of our industry in the eyes of those we serve.
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The Imperity Wealth Alliance is a collaborative network of like-minded firms that are united in their pursuit of excellence. While maintaining operational independence and preserving their brand identities and approaches, each alliance firm leverages and benefits from the synergies created by the collective strength and scale of Imperity and our strategic partners. www.imperitywealthalliance.com
Resource Links:
Advisor Hub Article: The Impact of Private Equity Firm Acquisitions on Financial Advisors