It would be easy to explain away the slow finish and slow start (2019/2020) in recruiting for independents and RIA’s by citing the explosion in deal size at the wires and firms like First Republic and Rockefeller. But that is only part of the story, and frankly those dynamics generally existed most of last year when large teams trended towards the independent channel and away from ‘full service’ platforms.
So what is really going on here? What is the backdrop giving larger teams pause as they execute their due diligence and plan a move that will set the tone for the next two decades of their career. Why has the ‘hit the bid’ movement towards RIA’s and independent firms slowed waaaay down?
Two words: Private Equity.
In conversations with several notable experts in the RIA space, the private equity creep, and lack of transparency about why, what, and who owns significant pieces of big box RIA’s – it’s clear a conversation needs to be had about the ‘teeth’ private equity has sunk into the RIA movement.
Here is a piece of a conversation we had yesterday about the potential problems that private equity poses in the RIA space:
“It’s unclear how Rockefeller, Steward, Snowden, HighTower and others are going to shake out with professional private equity involved and the cloak and dagger term sheets they will never show recruits or anyone else- that’s what threw HighTower sideways a couple years back – the Preferred A convertible terms of second round of PE that had claws-even the management team was unaware of – it’s a major problem for any Independent firms offering equity – that have professional investors watching the clock and collecting a big coupon. Whereas First Republic and others are throwing around huge amounts of cash- add the big four are all back in the game – and Wells Fargo’s open pocketbook, indies will have a tougher year. Did I mention that the top recruiting firms are getting paid huge retainers and some are being paid 10%. Recently was told RJ has a new deal for recruiters paying them up to 10%.”
“Game is on like never before- LPL- 100%+ cash totally forgivable and now you have the big 3- Fidelity , Schwab and Pershing – actually uttering the words Transition Assistance- code name for forgivable recruiting deals- where just last year it was ‘Working Capital’. It’s extended as a repayable loan, at a fraction of the size. Indies will be and are being hit the hardest and will be forced into ‘rollup’ mode to survive- print that- put it in an envelope and open in 12-18 months – it will be news by then- not a observation or prediction.”
The details there are striking, but most important is the claim of a lack of transparency with recruits. And there’s the rub; recruits don’t want to sign on to a black box having know idea what there equity could be worth or diluted to in a couple years.
Another conversation went even deeper about the role of private equity in the independent space:
”So what’s happening with the term sheets is PE firms put in good lever and bad lever covenants. They miss goals set (higher the goals the higher the valuation, lower equity % at first to PE firm). But by agreeing to “reach goals” to give out less equity, they inevitably miss those lofty goals and pay dearly, bad levers are triggered, more equity, greater PE equity ownership, more control, possible reset higher on convertible note, comp/bonus cuts, additional board seats etc. It’s like the +400% recruiting deals, most firms know on average, with backend hurdles, etc, that they will only pay out 225% over a period of years. That’s how they set it up, knowing most will never see the full amount, Wall Street trick that has been used for decades, perfected by the wires. That same concept is now being used in the indie space, except on the corporate level.”
Read these quotes and do your homework folks. There are no free rides in finance and wealth management. If you take the big check and move to Morgan Stanley, you are making a deal with all manner of compromises. If you make a deal with a big box RIA (Steward Partners, Snowden, Focus, Dynasty, HighTower via merger or acquisition) you are also making some sort of compromise.
The choice is yours, but understand that the ‘purity’ of the indie trade isn’t what it used to be.
