CEO Exits, Layoffs Signal Private Equity's Growing Impact on Wealth Management

Several high-profile changes in executive leadership highlight how private equity firms made their presence felt beyond investment dollars in 2023.

In November, for instance, Nitrogen (formerly known as Riskalyze) CEO Aaron Klein announced plans to relinquish the leadership role after 12 years. He joins a list of wealth management and technology executives that either left or announced their departure in recent months that includes Orion Advisor Solutions' Eric Clarke and InvestCloud's John Wise.

It wasn't just fintech companies that saw executive turnover. Rudy Adolf stepped down as CEO of aggregator Focus Financial in October after 19 years; he was replaced on an interim basis by Dan Glaser, an operating partner with Clayton, Dubilier & Rice — the private investment firm that bought Focus for $7 billion in August.

Randy Long, who led SageView Advisory Group for 35 years, moved out of the CEO role and became chairman in August; and Evan Rapoport stepped down as CEO of turnkey asset management provider SmartX.

Allworth Financial's co-CEOs Scott Hanson and Pat McClain are no longer leading the firm they founded 1993, and Larry Raffone is not in the CEO role at Edelman Financial Engines (though he will serve as chairman of the board).

The common denominator? Each of these firms has received capital from a private equity firm. Add in the layoffs at Orion, InvestCloud and Hightower Advisors, another RIA aggregator backed by private equity money, and it's impossible to ignore the trend of institutional investors tightening up on the wealth management industry.

Higher-Growth Leadership

The issue is that most companies in the advisor space don't grow at a very fast rate, said Michael Kitces, head of planning strategy at Buckingham Wealth Partners and co-founder of XY Planning Network and AdvicePay. They can grow at healthy, sustainable rates, but private equity firms often want to see their investments grow 30% or 40% each year.

"If your company doubles every two years, it means you are hiring enough people to double your headcount in about 18 months," Kitces told ThinkAdvisor.

"Suddenly you're running an organization where at any time, less than 50% of the company has been there less than 18 months. No one knows what they are doing, and the culture is unstable," he explained.

This can be particularly challenging for executives unaccustomed to managing a high-growth environment, Kitces added.

This dynamic appears to have driven at least some of the year's executive leadership turnover. For example, InvestCloud said it had revenue of $360 million in 2022, up from $80 million in 2021 when it was backed by private equity firm Motive Partners.

However, the company needed a different set of leadership skills in order to keep growing, said Richard Lumb, a partner at Motive and former interim CEO of InvestCloud, in a May interview with InvestmentNews.

"The skills required when you're kicking off a business in a garage are very different from the skills required when you've got a business that's $400 million-plus and growing rapidly," Lumb said.

"When you run a little company as chief executive, you rightly have to be very in control. You're the individual making all the decisions. … As you get bigger, the chief executive has to be the chief team captain," he explained.

Aquiline Capital Partners, ManchesterStory Fund Management, Lightyear Capital and Hellman & Friedman all cited bringing in new leadership skills for future growth as reasons for executive changes at SageView, SmartX, Allworth and Edelman, respectively.

In a statement about his departure from Nitrogen, Klein said the company needed someone with experience in growing a company "to billion-dollar scale and beyond." However, Klein, as well as Orion's departing CEO Clarke, have stressed that the decision was a personal one rather than a strategic move driven by the institutional investors behind the curtain.

At Focus Financial, a press release announcing Adolf's departure and retirement, however, did not include a statement from the longtime CEO and co-founder about his personal plans or about his hopes and expectations for the firm's new leader.

"Look at the way we announced this [leadership change] and the way we systematically worked to find the right CEO," Klein told ThinkAdvisor. "This was a planned process of me talking with the board, not [private equity group] Hg making a snap decision."

Klein also said that it was important for him to find a CEO that wasn't just a company person selected by Hg to enhance profitability, but someone with a history in growing a product and safeguarding the impact it has on customers. (Incoming Nitrogen CEO Dan Zitting, formerly chief product and strategy officer at compliance software firm Diligent, has no previous connection with Hg.)

"There's just no way I would have been comfortable turning over the keys to a financial engineer," Klein said.

But the same can't be said for Natalie Wolfsen, Orion's new CEO, whose connections to private equity firm Genstar Capital run deep.

Wolfsen was tapped by Charles Goldman, executive chair of Orion's board. In 2014, Goldman was named CEO of AssetMark, a TAMP that Genstar had staked in 2013 before cashing out in 2016.

When Genstar invested in Orion in 2020, it merged the company with Brinker Capital, a competitor to AssetMark. Goldman left AssetMark in early 2021 and joined Genstar's strategic advisory board later in the year.

Goldman joined Orion's board in 2022, and on May 15, 2023, Genstar appointed him executive chairman. One week later, Clarke announced his decision to retire and said Goldman would lead the search for a new CEO.

That search concluded after four months, when Goldman named Wolfsen, his successor at AssetMark, to the position.

Doing More With Less Staff

Beyond executive leadership changes, a number of private equity-backed firms also saw layoffs during the year. However, that doesn't necessarily mean wealth management is on the verge of deep cuts that have hit other industries, said Vijay Raghavan, a senior analyst at Forrester.

Private-equity backed companies weren't the only ones in wealth management that cut staff in 2023. Orion, InvestCloud and Hightower have also been active acquirers since receiving funding, and eliminating duplicative roles is a natural part of integrating purchased companies.

Above all else, private equity is concerned with the bottom line and ensuring their funds are being used as efficiently as possible, Raghavan said.

"I do think that private equity firms are very good at finding inefficiencies or areas where they can identify potential value," he explained. "They buy firms, cut costs, cut people and replace them with an investment in technology to attract future customers, future investors and future advisors."

Wealth management firms are likely safe from deeper cuts because most RIAs — and the companies that serve them — already run slim operations, Kitces said.

But if cutting staff isn't the answer, perhaps what's more concerning is other strategies private equity firms will implement to make a wealth management firm meet aggressive growth targets. There are already whispers among advisors at private equity-backed RIAs of being forced to take on more clients in order to increase profitability, Kitces said.

"The cautionary note of concern is, do these firms start to take on volumes of clients that are not healthy for the advisor or not best for client service?" he asked.