Private equity firms are jonesing for a book.

Last week, Fisher Investments landed an approximate $3 billion PE deal to sell a minority stake to Advent and the Abu Dhabi Investment Authority at a reported mouth-watering multiple of 20-times earnings. The blockbuster agreement valued the Texas-based RIA at almost $13 billion, making it one of the most-talked-about — and lucrative — transactions of the year.

The news shocked analysts and propelled 73-year-old founder Ken Fisher back onto the Bloomberg Billionaires Index — a ranking of the world’s 500 wealthiest people — with an estimated net worth of about $12.2 billion. Fisher launched the RIA in 1979, and now manages over $275 billion for over 150,000 clients in 16 countries and four continents.

“FI has been my life,” Fisher said in a release. “While my health is excellent, this transaction … will ensure FI’s long-term private independence and culture should anything untoward happen to me.” 

It’s also evidence of a super-heated RIA industry and the insatiable appetite PE has for wealth management firms. A Cerulli estimate pegged the opportunity for RIA acquisitions at $3.7 trillion last year. But what does an influx of PE money mean for the industry as a whole — and for the individual clients advisers are trying to serve? 

I Love RIAs

PE has been smitten with wealth management — and its books of business — for the better part of a decade. By the end of 2029, the value of wealth management firms globally is projected to top $2.92 trillion, up from $1.85 trillion in 2023, according to a new report. There’s simply no end in sight.

“Private equity money has been flowing into the wealth management firms rapidly over the past five years,” said industry consultant Carolyn Armitage, who formerly worked with Echelon Partners and as head of large enterprise consulting at LPL Financial. “The impact has created a strategy for consolidating retiring founders’ businesses into a conglomerate with tremendous scale.”

It’s no surprise that PE money is flooding into the wealth management industry:

• PE investments in wealth management firms topped $2 trillion last year, up from just $400 billion in 2022, according to industry data from Echelon Partners. 
• There were 30 direct RIA investments by PE firms last year, compared with 27 in 2022. PE firms participated in nearly two-thirds of all recorded deals in 2023.
• In total, 330 deals for wealth management companies are expected this year alone.

Mouth-Watering Multiples

So, why the fixation on wealth management? RIAs make prime targets for acquisition because the investors can rely on their stable cash flows and predictable revenue streams. While there will always be market highs and lows, fee-based models remain steady from quarter to quarter.

On the other hand, a broker-dealer’s income can fluctuate dramatically, according to Crystal McKeon, CCO at TSA Wealth Management in Houston. “There is something to be said for a predictable income source in a portfolio of companies,” she said.

While a multiple of 20-times EBITDA is certainly newsworthy, there are similar, albeit much smaller, deals happening across the independent investment advisory industry. Since none of them set nearly $13 billion valuations, these often fly under the radar. “For a minority stake in a glacial-type company like Fisher, it’s not surprising at all,” CEO of Crux Wealth Advisors, Travis Alexander, told The Daily Upside.

Awkward Years

The RIA industry is still getting its feet wet in the M&A industry. For Alexander, the influx of funding will put an increased focus on expanding value for companies, and that will mean providing better services to end clients. “Big deals are good. Big deals are positives,” he said.

While Fisher may have one eye toward retirement, he still owns 70% of the company, and said he is maintaining an active role in the company’s future.

“It means we haven’t seen the last of Ken Fisher just yet,” Armitage said.

Finfluencers may be trending on your social media feeds, but the latest viral videos are also getting flagged by industry watchdogs.

Digital influencers are leaning into their social media know-how to breathe new life into wealth management prospecting campaigns. Financial firms now spend significant portions of their marketing budgets on hiring the next wave of financial influencers: Digital-savvy content creators generally have better engagement with young investors, and are often seen as more relatable than traditional financial advisers, according to data from the CFA Institute. But they’re also catching the ire of government watchdogs, which are trying to determine when online advertisements and paid-for reviews cross a murky line into becoming regulated investment advice.

Not So Fast

The Financial Industry Regulatory Authority dinged online brokerage TradeZero $250,000 in June for paying influencers to unfairly promote the firm in social media channels, according to recent filings. The regulator said one influencer told viewers the company was for “people who want to trade and make billies,” and not for “grandmas and grandpas who trade, like, one stock.” The same influencer allegedly said he was up several thousand dollars without “even trying.”

The ploy worked. Customers opened about 575 new accounts using referral links provided by the influencers, including one whose platform had millions of viewers, FINRA said. These links allegedly pushed new clients to a webpage that allowed them to directly open and fund TradeZero brokerage accounts.

We’re Hiring

Financial firms are now in the market for popular finfluencers. Almost four in 10 Gen Z investors in the United States cited finfluencers as a major factor in their investment decisions, according to the data. The report also found that only 20% of finfluencer investment recommendations included any form of disclosure, such as professional qualifications or potential conflicts of interest.

Nevertheless, the global influencer market has doubled since 2019, and continues to evolve:

• Influencer marketing has grown into a $21.1 billion industry, an increase of 29% from $16.4 billion in the previous year, according to recent research. 
• Despite people losing trust in influencers, the market size has continued to grow, according to the study. 

TikTokers Beware

It may be effective, but the influencer realm is also littered with questionable advice and the potential for fraud. FINRA and other watchdogs will need to get a handle on just how impactful these marketing campaigns are becoming to make sure they are staying within regulatory guidelines.

“Social media is designed to bring users from different places together through shared content,” according to the CFA Institute study. “Although this confluence can help foster social connectivity and the transmission of information, it also is a key challenge to effective regulation.”

Vanguard’s more than two-decade-long reign as the only asset manager to offer special share classes of mutual funds may be coming to an end. 

Back in 2001, the investment giant patented the method for creating exchange traded funds as a share class of existing mutual funds. But its patent expired last year. And, last week, Charles Schwab became the latest in a group of more than a dozen financial firms that have filed applications with the Securities and Exchange Commission to create ETF versions of their existing mutual funds. The structure allows asset managers to bring the famous tax efficiency of an ETF into the mutual fund realm. 

It could also have significant impacts on capital gains taxes by taking advantage of the ETFs’ ability to create and redeem shares in kind. Vanguard has now used the structure in 14 stock funds, as of a 2019 report, and while these funds have booked $191 billion in gains, they report $0 to the Internal Revenue Service.

“We believe the multi-class structure provides benefits to all investors,” a Schwab spokesperson wrote in an email to The Daily Upside. “We believe the active ETF industry will continue to evolve, and we are taking a thoughtful approach.”

Advantage, Vanguard

While the new share classes could revolutionize asset management, it’s unclear whether or not the SEC is willing to open up the structures to the entire industry. “Everyone’s moving to an ETF because they’re more tax-efficient,” Aisha Hunt, principal of the law firm Kelley Hunt & Charles, told The Daily Upside. Hunt, who represents some of the applicants, including F/m Investments, said the potential benefits are “massive.”

“If you bolt on the ETF share class on a mutual fund, you’re able to use that ETF wrapper,” Hunt said. These include the capabilities to use advanced portfolio management techniques, like heartbeat trades, to potentially defer capital gains taxes for shareholders, she said, and in some cases eliminate them completely.

Most major fund issuers now offer ETFs, which are popular with investors because they’re cheap and easy to trade. In recent years, billions of dollars of mutual fund assets have been converted into ETFs. A recent BlackRock report documented just how the industry is evolving globally:

• ETFs make up no more than 13% of equities and nearly 3% of fixed income assets by region.
• While global ETF volumes increased in the fourth quarter of 2023, full-year levels were lower than the record-setting 2022.
• Individual investors, particularly in the U.S., continued to participate in the ETF market, including in ETF options.

Pick Your Own Adventure

Schwab is now one of the largest firms to apply for the structure with the SEC, and joins a growing list of competitors, including Morgan Stanley, Dimensional Fund Advisors, Fidelity and First Trust. In total, there are approximately a dozen companies with pending applications with the SEC, according to a news report.

“It seems pretty ripe for consideration and approval,” said Morrison Warren, a partner at law firm Chapman & Cutler’s Investment Management Practice Group. “This is just another option, and there would be quite a few people who would want this.”

Vanguard’s two-decade head-start allowed its funds to hoover up 30% of the total equity ETF market. But that could change in the years to come.

“We’re really talking about a profound change in the asset management industry,” Hunt said. “Every large mutual fund manager will be incentivized to add a share class when that relief becomes more broadly available.”