The advisory is being transformed right before our eyes. All year we’ve been covering the changing of the guard in the advisory profession, and this issue’s cover story by Philip Palaveev and Stacey McKinnon continues exploring that topic.

Palaveev, a consultant specializing in generational transfers of responsibility at RIA firms, and McKinnon, a young partner and chief operating officer at Morton Wealth, begin by observing that when younger advisors entered the business 10 or 15 years ago, there was an implicit, unwritten promise that the founders’ successors would enjoy the same perquisites and lifestyle if they worked hard and moved up the ladder. Most of these unwritten agreements were initiated when RIA firms were smaller and before private equity firms took a fancy to the business.

Back in 2010, few advisors imagined that a $1 billion firm would be considered average in size and that PE firms would pay the huge multiples they did during the pandemic. But that’s what happened.

The entry of private equity firms is likely to raise the stakes and change the rules in ways that founders of the profession won't like. Already, the business is seeing a boomlet in lawsuits initiated by PE-backed aggregators against younger advisors who grow dissatisfied with a new regime and leave.

Other factors are cultural and organizational. Most private equity executives come out of  a Wall Street investment banking business. They may understand that RIAs have a fiduciary responsibility to their clients, partly because their PE funds have a similar responsibility to their investors. It shouldn't be a big surprise if these two sets of fiduciary duties could clash and conflict with each other occasionally.

Still, the majority of RIAs out there are the ones that have not been bought by private equity. Younger advisors, once stereotyped as slackers, are running out of patience, and might think of taking a risk on small shops of their own, taking the examples of those who mentored them and concluding, “That doesn’t look so hard.”

Advisor poaching appears is also on the rise in the RIA world. If young advisors don’t want to go out on their own, PE-backed rivals under pressure to grow are willing to pay them to jump ship as the war for talent intensifies.

Some believe this scarcity of advisors may make the RIA industry look more like the wirehouses, where brokers frequently jump from firm to firm for up-front money or “forgivable” loans. In the past, some regulators have frowned upon this practice and called for brokers to be required to disclose these signing bonuses to clients when they switch firms.

Compensation ultimately says a lot about a firm’s priorities. At some RIAs, relationship managers are making $250,000 or $300,000. Would anyone be surprised if a PE-backed RIA firm struggling to hit its growth targets decides to cut the income of these folks and transfer it to the rainmakers who bring in new clients?

Non-compete agreements may or may not dictate what happens next if relationship managers decide to leave and launch their own businesses. Often, the enforceability of these agreements depends on state law, as Jennifer Lea Reed explores on page 25.

But there are many other factors at play here. Do RIA firms ultimately want to engage in the same questionable business practices that prompted their clients to leave big wirehouses and other captive entities for a conflict-free environment?

For those reasons, and the compensation dilemmas that Palaveev and McKinnon, describe, we may yet see another generation of advisors going independent.

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