Why Private Equity Loves RIAs
RIA Creative Planning, with about $50 billion in assets under management, has beenon a buying spree in recent months, addingfirms including Thun Financial Advisors,retirement plan provider America’s Best401k and Starfire Investment Advisers.
Here are four main takeaways from anonline chat Peter Mallouk, president andCEO of Creative Planning, had recentlywith Anthony Scaramucci, founder andmanaging partner of SkyBridge Capital.
Scaramucci, dubbed “the Mooch,” is the founder and chairman of the SALT thought leadership forum; SALT is short forSkyBridge Alternatives. He also had a brief stint as WhiteHouse communications director for President Donald Trump.
1. RIAs will remain appealing targets for private equity.
Creative Planning is an example of the appeal that independentRIAs present to private equity firms. After all, global growth equity firm General Atlantic recently bought a minority stake in it.
“Money is moving from the brokerage world to the independent world,” and “we’re seeing market share move over tothe independent world every year,” Mallouk said.
And there are no signs showing the trend won’t continue,he said. One factor is that “there really hasn’t been a spectacular failure in this space” yet, he noted.
However, “the reality is, if this coronavirus crisis had stayedat March levels for nine months, we would have seen severalspectacular blowups in the RIA space from overleveraged,larger RIAs $10 billion and up,” Mallouk said.
If that happened, “The math of the space might havechanged and the attractiveness of it might have changed,”he noted.
2. Use the pandemic to strengthen relationships.
When the pandemic started, despite not knowing how long itwould last, Mallouk said he decided he was not cutting anybody’s pay, and he communicated that to them.
That allowed his advisors to focus onclients and not have to worry about otherissues, the executive explained.
This is also an “opportunity to show yourclients ‘hey I told you this is what we weregoing to do with your portfolio when themarket’s down, and we’re doing it,’” he said.
The firm helped clients figure out the
Coronavirus Aid, Relief and Economic
Security (CARES) Act and Paycheck
Protection Program loans, Mallouk
noted.“We did everything we could to be there for our clients
… For us, from the very beginning to today, it’s been offense,
offense, offense instead of just trying to hold the place together.”
3. There’s no yield without risk.
“I just keep getting this question from clients now: ‘How do Iget more yield without taking additional risk?’” Mallouk said.
But that “simply does not exist,” he explained, adding those
who think otherwise are “someday going to pay a price.”
His advice: Start “accepting you’re not going to get more
yield without taking more risk.”
4. The U.S. debt problem can be solved.
“Deficit spending is a real problem” and the U.S Federal Reserve“has gotten away with it” over the past few years, mainlybecause of the “explosive growth” created by the “tech revolution that allowed us to carry this huge debt,” Mallouk said.
Now, however, “we’re running out of bullets,” he
explained.“There’s no way you can dance around it. And the
problem with our system is that democracy doesn’t lend itself
to fixing a problem like this.”
But it is a “solvable problem” if the president and
Congress can muster “some modicum of political courage”
on both sides of the aisle, combining “some common-sense
tax rates with Social Security reform and spending [cuts]
across the board that really makes both parties mad,”
Mallouk added. —Jeff Berman
It’s important to have a thorough picture of the firm’s clients. What is theage profile? Does the firm have multigenerational relationships? What doesthe client concentration look like from arevenue standpoint? What’s the typicalwallet share per client?
Plus, potential problems in the way
the deal is structured deserve scrutiny.
For example, if two or three clientscontrol 50% or more of the firm’s assetsunder management, can the buyer speakwith them before the deal is done to seeif they plan to stay?
Sizing up a potential practice for
an acquisition demands a serious
commitment of both the purchaser’s
time and their financial resources.
Make sure you’re fully prepared to
do what’s necessary to enhance your
chances of success.
Mark Elzweig is head of Mark Elzweig Company,a New York-based executive recruiting firm.
Creative Planning CEO Peter Mallouk