Over the last two winters, more partners at large RIA firms have found themselves bumping into each other at tony Florida enclaves near Naples and Palm Beach than in previous years. An escape from cold weather and the pandemic was only part of their motivation.

Suddenly, many have experienced the type of liquidity events they once thought were reserved only for their biggest clients. This prompted some advisors with second homes in the Sunshine state to prolong their Florida stays for six months in order to become residents and avoid state income and capital gains taxes on a once-in-a-lifetime windfall.

What's interesting is that many advisors went into the RIA business not to make a fortune but to create a business model they imagined would resonate with clients, often successful people who lacked financial sophistication. In the last five years, Wall Street and the investment world finally fell for the model.

The proliferation of private equity firms allocating “growth capital” to the advisory space has mushroomed, resulting in dramatic consolidation rivaling that of other industries like HMOs and independent pharmacies in previous generations, only at a much faster pace and larger scale. The ramifications of this changing ownership structure of the advisory business have yet to play out.

But whose business is it anyway? Each private equity investor has its own unique investment model and exit strategy. Some demand a controlling interest while others prefer a minority stake.

For the present, a buoyant equity market and unprecedented debt market have combined to produce favorable conditions for both buyers and sellers, creating an environment conducive to friendly transactions and warm relations between RIAs and their new investors—at least for now. To gain a better perspective on what’s taken place in the profession over the last two crazy years, Financial Advisor talked to someone who knows the business as well as anyone, Mark Tibergien, former CEO of Pershing Advisor Solutions.

“Control” can be an elusive concept in a human-capital driven, professional services business, Tibergien explains. Private equity investors understand that an advisory firm “owns” the client relationship, so they tend to be more deferential than they might be with management in other industries.

Sources Of ‘Growth Capital’?
Private equity firms in earlier incarnations earned a reputation as asset strippers. That image may have been justified when they were investing in old smokestack industries, but today they are portraying themselves as sources of growth capital.

Is that justified? Tibergien, who spent two decades as the advisory industry’s leading valuation expert before joining Pershing, thinks it’s partially accurate, but not in the way it is perceived. Most RIAs are “quite profitable” and don’t need growth capital unless they are contemplating an acquisition or buyout of major partners.

Until recently, the financial management of most RIA firms was somewhat primitive. As Tibergien notes, their balance sheets basically served as a “cover page” to their income statements.

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