As I worked with senior editor Eric Rasmussen on the annual RIA survey for 2023, it quickly became apparent to me that the overarching matter affecting advisors is the huge investment of private equity capital in their space since 2018. It speaks volumes about how fast the business has been transformed from a cottage industry of mom-and-pop shops into a true profession in just a few decades.

This doesn’t mean there won’t be growing pains galore. In the end, it’s all about fiduciary responsibility.

Just as advisors have a fiduciary responsibility to their clients, mostly the affluent and mass affluent, PE firms also have a similar duty to their clients, typically pension funds and the super-rich.

There are a few ironies here. The modern financial advisory business exists largely because of a provision in the Revenue Act of 1978 that created 401(k) plans. Few knew at that time that these newfangled defined contribution plans would displace traditional pension plans as many Americans’ primary vehicle to fund their retirement.

The sweeping retreat of old-fashioned pensions has exacerbated retirement insecurity for many Americans. In Europe and other developed nations, such plans remain more widely used.

For PE funds, the shrinking pension market represents another threat—the loss of their best institutional investors. That’s one reason private equity doesn’t just want to invest in the RIA business; it also wants clients of RIAs and other investors, like 401(k) plans, to invest in private equity in the worst way.

What could possibly go wrong? A cogent argument can be made that ordinary Americans, now deprived of pensions for the most part, should have access to private equity, an investment that leading thinkers in finance like Nobel laureate Eugene Fama have called a unique asset class.

But the conflicts of interest can easily multiply. Financial advisors’ first fiduciary duty is to their clients, but principals of RIA firms also have a duty to their shareholders, often themselves.

Just imagine for a second that a PE firm owns a big stake in your RIA and several of your competitors and also wants to offer some of its funds to your clients. While there is nothing nefarious about this kind of arrangement, it warrants some serious examination about the ethics and conflicts.

A handful of these conflicts are already starting to appear. That’s one of many reasons I think you’ll find this month’s cover story worth a long summer read.

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