Different Script


Private equity has dabbled in the Independent Wealth Management (RIA) space over the last few years.  Some of their initial investments are reaching their seven to ten year maturity and private equity investors are following a familiar script.  Their script calls for a sale, but a few investors are doubling down. New investors have arrived with an optimistic outlook for the wealth management business model.  I hope they have learned from the mistakes of their peers and they adjust their script.

Recent large Private Equity investments in RIAs got our attention and caused us to ask why do Private Equity firms think that wealth management is such a great investment?  In our opinion Wealth Management firms might not have the obvious inefficiencies that can be solved and drive Private Equity value. The comparison that helps me is how I buy a suit.  When it’s time to buy a new suit for work, I have two clear choices.  One option is to buy a custom suit from a master tailor near my office in downtown San Francisco.  The other is buying an off-the-rack model from Joseph A. Bank or a department store.  As I was thinking about this recently, I was struck by the similarities between selecting a suit and choosing a wealth advisoreither an RIA or a wirehouse broker.  There actually is a lot more to that decision than meets the eye, so it’s worth comparing the two choices. Both types of suitsas well as both types of wealth managers. The key is ensuring that the client and the private equity investor make an informed decision.


Master of the Universe

An independent advisor is much like the artisan tailor.  When I’m wearing a bespoke suit, I feel like a master of the universe. The suit fits perfectly, looks distinctive and expresses refinement. My name is embroidered on the inside, which dials up the mojo even further.  Like the craftsman, the independent wealth manager might be located in a small office near a client’s office or home.  When clients visit them, they’re greeted and known by name by everyone in the office.  Clients are treated special because everyone knows they actually are importantthat individual or family is helping keep the lights on.  When a client sits down with an independent advisor, the wealth management solutions are always customized. The client gets access to the finest money managers on the planet. The asset allocation is tuned to their specific needs. If the client doesn’t fit into one of the major risk profiles, “conservative,” “moderate,” “aggressive,” the wealth advisor will improve the allocation.  Want to do direct deals in real estate? No problem. The RIA will factor that holding into the client’s overall asset allocation. Many advisors will also conduct the due diligence for that opportunity. Customized solutions work for the clients but they might not work as well for private equity investors looking for scale.  They might need to adjust their script.





Not Driven buy The Comp Plan

Most independent advisors are amenable to assets outside of their direct control. That’s because client-centric RIAs are focused on the long gameand not on commissions.  The freedom of choice RIAs have is quite different from the more restrictive rules at wirehouses, which discourage many outside holdings.  Most RIAs also deliver one of the most important client requests of disclosed and undisclosed fees.  Recent regulations have suggested that wirehouses provide a clear summary of all fees and some firms are complying.  The remaining issue is performance reporting that doesn’t require the detective skills of Sherlock Holmes.  The bottom line is that the custom approachwhether it’s working with an RIA or purchasing a made-to-order suitmay take longer, but the results are superior.  Great for clients - not so much for private equity.



The Off-The Rack Option

If I’m in a rush, and my wallet is a little pinched, I will head to Joseph A. Bank or the mall to buy a suit. The off-the-rack version doesn’t look or feel as good, but the benefit is that I can wear a 42-regular out the door.  Like mass producers of suits, wirehouse brokers try to make their customers feel terrific in a different wayby creating an aura of quality and invincibility.  An expensively produced ad on CNBC or during the Super Bowl helps clients validate their decision to go with a wirehouse. Walking into a gleaming office tower in a financial district equates to big money, which tends to make people feel better.  As for the asset allocation strategy, wirehouse advisors must follow a cookie-cutter off-the-rack approach because of compliance restrictions needed to minimize the risks associated with thousands of advisors giving advice. These solutions works for many, but not for those who truly want something unique.  It’s simply not possible to oversee tens of thousands of advisorsand far more clientswithout clear-cut guidelines that narrow the universe of investment opportunities.  When it comes to the actual investment choices, wirehouse offerings are good. But are they great? In truth, too many name brand name money managers who made their reputation in prior investment cycles are recommended to wirehouse clients.  This is a scalable business that private equity can help and use their current script.

At the end of the day, I have a clear preference for custom suits, especially if the price is in the same zip code as a department story brand. Since there really is no difference if all of fees are disclosed between wirehouse brokers and RIAs, the choice seems obvious.  Wouldn’t we all look better in a custom-made suit, rather than an off-the-rack number that several other people at the meeting are wearing?


Hopefully recent private equity investors in RIAs recognize this difference and look in their closet to see if they have more custom suits than suits from Men’s Warehouse.

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