Most independent RIA firms start with a dream of delivering their definition of ideal service in a truly distinctive way. Quite simply, the initial blood, sweat and tears involved with launching an independent wealth management firm wouldn’t be worthwhile absent the satisfaction of seeing one’s unique vision come to life.
But the reality is that every client service model, however unique, inevitably reaches a stage where additional resources and capital are needed to reinvest in the business and continue to drive the best possible client solutions.
And there’s certainly no shortage of potential capital partners for successful RIA firms, with private equity representing the most visible segment of the M&A landscape right now.
Unfortunately, RIA firm owners may not be fully aware of just what a gamble private equity money represents—and that there are better options.
The Private Equity Gamble
First, let’s look at how most private equity transactions are structured: They tend to be nearly all cash (sometimes 100% cash). Most of it is upfront and the balance takes the form of earnout compensation over two to three years after the transaction is completed.
As such, private equity deals will—and should—tempt any RIA owner with five years or less before his or her targeted retirement timeframe.
But for every RIA owner who has a professional horizon with at least another seven to 10 years left, selling to private equity is a gamble that everything that makes your firm unique can endure.
While private equity is not, contrary to what industry alarmists would have you believe, inherently evil, make no mistake: Portfolio companies of private equity firms are expected, first and foremost, to make their owners money. Lots of it.
And when the primary focus is on hitting quarterly numbers, the elements of what makes an RIA unique—including service culture and client focus—inevitably suffer.
Remaining 100% Employee Owned
If we accept that alignment of interest between the firm and the client is key to RIA success, then it begs this question: What ownership model best guarantees such an outcome? For us, the resounding answer is remaining 100% employee owned.
Not only does this approach allow RIA owners to maintain a robust level of quality control over how client service is delivered, it also ensures quarterly financial performance goals never become the tail that wags the dog.