Small RIAs vs. 'Meta-Acquirers': Who Has the Advantage?

Private equity firms' focus on cash flow could have a corrosive impact on client service, Hamburger said.

The negative effects of private equity increase "the further the founders [of an RIA] get from the heart of the company, its sense of allegiance [to clients] and decision making," the attorney said. "All of this can be increasingly adverse for clients." 

While he doesn't want to turn private equity "into a scapegoat" — and believes its push into wealth management has done a lot of good — its role in the RIA business "can't go unchecked," said Hamburger. Otherwise there's a risk that money invested by PE firms in efforts that generally benefit both clients and the business itself might decline.

"Private equity has been positive for the RIA space," argued DeVoe, adding that PE firms have a reputation in some other industries for "gutting companies" via debt and leverage, freeing up cash flow and then selling the acquired firms as "a shell of their former self." 

While PE firms "are no angels, I don't see this [pattern] in our industry," he said. "They are practicing good behavior because this is a growth industry ​— and human capital is central to it. Private equity will not gut RIA firms of their human capital." 

Referring to recent news and academic research that shows the mortality rates at nursing homes owned by PE firms are higher than at other nursing homes, DeVoe stated: "You don't see [such] bad behavior in the RIA/wealth management space. And that should be the case for years to come."

Other Acquirers

When it comes to why asset managers and insurers are active acquirers of RIAs, Hamburger said it's "because "they've lost significant distribution, and this is a way to reacquire distribution to wealthy clients."

DeVoe explained that he's "been impressed with [insurers'] approach to building [out their role] in the RIA business, especially by sharing some cultural elements. They see where the puck of the wealth industry is going and want to be part of it." 

"They're saying all the right things …," Hamburger said, "but wait until their shareholders say, 'What! The RIA margins are less than the insurance margins!" 

Pictured: Brian Hamburger, left, and David DeVoe. (Photo: Janet Levaux)