Since the first registered investment advisors (RIAs) started targeting individual investors in the late 1980s, the profession has been dominated by small independent firms controlled primarily by their founders and other advisor-principals. By 2015, many of those firms were managing more than $1 billion in assets, but the original founders were still in control, even if they shared ownership with more junior partners. In the last five years, however, ownership has transferred to outsiders with a different group of interests.

Whether it’s Focus Financial’s decision to go private or Eric Clarke’s decision to retire or Bain’s investment in CI Financial, which occurred simultaneously with the postponment of its IPO for as long as five years, the makeover of the RIA profession is proceeding full throttle. No one knows exactly how this will end, but it’s clear outside owners, primarily private equity firms, will play an outsized role in determining the business’s direction going forward.

This puts the RIA universe in a very different place than either the accounting or legal profession. Those professions have remained largely owned by their principals for centuries or more and show little sign of changing.

As one of private equity executive who came out of the consulting arm at a major accounting firm said, “We typically viewed private equity firms as a source of business and as possible employers, not as sources of capital. We don’t really need capital.”

To get a perspective on what’s going on below the surface in the restructuring of RIA ownership, Financial Advisor checked in with Mark Tibergien, who served as CEO of Pershing Advisor Solutions and spent 20 years as a leading consultant before that. Here are some of his thoughts.

“First off, why are firms consolidating?  Is it to finance the buy-out of the founder? To create continuity of the practice for the benefit of the clients and employees?  Is it to build a large regional or national brand?  To achieve scale?  If so, how would you measure success in each scenario?” he asks.

In many cases, the answers are some or most of the above. “Clearly there are multiple constituents so one would need to answer this from each perspective—the clients; the owners; the new investors; the employees; perhaps even the regulators and the industry at large?

“Second, why are they seeking outside capital to fund these mergers and acquisitions?  Historically, RIAs have not been balance sheet-heavy enterprises since they’ve been able to fund current operations out of cash flow and haven’t needed to rely on debt and equity,” he continues.

Indeed, legal and accounting firms historically have managed to merge and scale their businesses largely via stock-swap transactions that require them to only assume small amounts of debt that banks have no problem loaning them.

Bringing in private equity creates an opportunity to increase leverage—and returns on equity. But leverage can work against a business in a bear market or if has to refinance debt at higher interest rates.

“Purchases of other businesses that exceed their ability to generate cash flow, or that requires a quicker payment term to the seller causes buyers to seek both debt (for financial leverage) and equity (for financial return),” Tibergien explains. “This is the magic of PE in that they use other people’s money to generate higher returns for their investor clients.

"Third, why is going public even important?  As the experience of the handful of RIAs that did IPOs proves, the markets clearly don’t value these enterprises the same way private investors do. Moreover, “most are at such a small market cap that they are not particularly appealing to institutional investors let alone the public,” Tibergien notes.

That’s not to say being public is not good for shareholders and employees who become owners in the business. It does provide a market for their stock when they are ready to sell and does provide a frame of reference to measure success.

Ultimately the question is whether these consolidated enterprises are continuing to grow at such a pace that new outside capital is required; or if they need to create a more liquid market for existing shareholders who want to cash it in. Private equity firms already are starting to assert their contro.

Cl Financial, for one, has eased a number of CEOs and founders into retirement (some of whom probably were looking to retire) in a very humane manner and promoted the next generation of leaders. Private equity executives know the RIA business is based on personal relationships so they are likely to proceed gingerly as it remains to be seen whether younger leadership can maintain double-digit growth rates for much larger organizations.

Staying out of the spotlight with private owners provides less short-erm pressure to produce results—and try to integrate their diverse operations. “I think one of the patterns you are seeing here is that those who tempted us with an IPO have not yet done anything to create an integrated business. So in some respects, they are just an ETF or mutual fund holding as assets a number of personal service businesses that provide financial offerings and advice to individual clients for the most part,” Tibergien continues. “There are other firms such as Pathstone and Mercer that are attempting to build scale, a brand and focus on integration, but they don’t seem to be exploring an IPO as an option. Perhaps because it’s a superficial exercise at this point.

“As to whether getting sovereign holding companies to buy minority interests in your business instead of going public – it probably was a more appealing way to raise capital without having to over disclose to the public what’s actually happening to the business,” he says. “And it does prove that there still is a lot of smart money that views the wealth management model as represented by RIAs as pretty appealing.”