Lessons from the US: The unforeseen consequence of PE growth

With the creation of mega advice firms fuelled by private equity, advisers are finding themselves under pressure to hit targets and achieve growth.

Speaking on a Netwealth podcast, Michael Goodman, president of US-based Wealthstream Advisors, shared what trends the US is seeing, which could provide insights for where Australia could find itself in the future.

One of these trends is the greater consolidation into large advice firms, helped by investment from private equity firms, as evidenced by CC Capital acquiring Insignia and Oaktree Capital making an $240 million investment in AZ NGA. 

In particular, AZ NGA has been vocal about how it would like to create ‘super sized firms’, while smaller family-run businesses will fade out, and Escala Partners, which is itself backed by a US player in Focus Financial, recently described how ‘bigger is back’ for wealth management.

However, while private equity can provide a substantial capital injection to help firms grow and innovate, it can come with its own drawbacks.

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Goodman said: “There are things we’ve seen in the States and I believe [Australia] is pretty close behind us on this. 

“Firstly, firms are selling to other firms and they may not share the same investment philosophies or client-centric approach. I’m not saying that’s the case every time but it seems to be occurring more and more. 

“The second thing we are seeing is mega-firms coming about where they have hundreds of millions of dollars under management and then there’s this pressure to have high growth and high margins.

“That puts a lot of pressure on advisers to bring in more assets and I imagine there’s a tendency to challenge your fiduciary views, if you are under pressure from a board.”

Speaking to Money Management earlier this year, private equity commentator Tony Beavan described how private equity firms, especially those from the US, demand a lot of scrutiny from their investment and have regular engagement to ensure they are meeting goals.

With this in mind, two AFSLs have also shared why they would be reluctant to go down the private equity route. Speaking on separate CoreData podcasts, Keith Cullen, managing director at WT Financial, and Lifespan CEO Eugene Ardino discussed the drawbacks of the route.

“There’s a downside to private equity. The traditional PE model of 5–7 years exit, it’s a control model. In professional services, there’s a big risk as an investor in going into that control because if you turn everyone into an employee and there’s a shortage of employees, you risk them going elsewhere if they aren’t satisfied,” said Cullen.

“Even if you fix the adviser inflow, it’s a big stretch to go from a cottage industry like we have now to a mega-firm like PwC with hundreds of partners.”

Ardino added: “We get approached, but we have generally grown organically. That’s not to say we wouldn’t but we’re not terribly keen to have a big partner or to list as our model currently gives us a lot of freedom and autonomy.”