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
advisor — either 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 suits — as 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 important — that 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 game and 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
approach — whether it’s
working with an RIA or purchasing a made-to-order suit — may 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 way — by 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
advisors — and far more
clients — without 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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