Private equity 'very destabilizing’ to advisory firms?

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Private equity firms' influence on wealth management is undisputed. But is it beneficial?

For some top executives, not at all.

Such investments have proven to be "a very destabilizing thing for advisors," according to Richard Lampen, CEO of Ladenburg Thalmann Financial Services, one of the industry's leading independent broker-dealers.

Lampen, speaking at Fidelity's Inside Track conference on Tuesday, cited the travails of Cetera Financial Group following an ill-fated investment by RCS Capital, adding that it was critical for advisors to know "how long [outside investors] will be committed to the space."

Michael Farr, president of Farr, Miller & Washington, a Washington, D.C.-based RIA, agreed.

"At some point, private equity investors need a sale," Farr said. "They have to monetize their investment, and it will be disruptive."

Not all private equity firms investing in independents should be tarred with the same brush, contended James Poer, CEO of Kestra Financial, formerly NFP Advisor Services.

Private equity can be a "misunderstood category," Poer said. "We've had private equity partners and it's been a fantastic process for us. Good firms have a realistic understanding of how to achieve and can make significant investments. If you're partnered with the right people, it can be a really successful relationship."
Advisor Michael Bapis stressed the importance of working with a private equity firm who understands the RIA business.

He also pointed out that "RIAs need to balance growth and scale, and you can only grow so fast you can grow organically."

"You need funding, and private equity is where you can get it," said Bapis, who is managing director of the Bapis Group, a HighTower Advisors firm in New York City. "The challenge is finding the right partner. Your visions need to be aligned, and you want them to support the business and stay out of the weeds. And you want a PE firm that is in it for the long haul and not just a trade."

For better or worse, private equity — and other outside investors — have discovered the independent advisory space and aren't going away anytime soon, said Shirl Penney, chief executive of Dynasty Financial Partners, the New York-based platform services provider.

"Private equity is coming in full force," says Dynasty's Shirl Penney.

"Private equity is coming in full force," Penney said. "For years, advisory-led firms weren't big enough for the PE business model, but now they are. Private equity can provide growth capital for M&A, take liquidity off the table and make strategic investments in areas like marketing and adding advisors."

Major private equity deals this year include KKR and Stone Point Capital buying a majority stake in Focus Financial Partners and Long Ridge Equity partners taking a stake in Carson Group Holdings.

But Penney cautioned RIAs to seek legal guidance before making a deal with a private equity firms.

"Advisors need to understand all the terms of a PE deal," Penney said. Advisory firm owners unfamiliar with the sometimes arcane conventions of private equity may come to regret their decision, he added.

For example, if a firm isn't growing, "the principal may get less than he thought he would," he warned.

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RIAs M&A Strategic buyers Private equity funds Clearinghouses/custodians Shirl Penney James Poer Richard Lampen Fidelity Clearing & Custody Solutions Dynasty Financial Partners Ladenburg Thalmann Financial Services Hightower KKR