Is "Fund-and-Fix" the new model for RIA Growth?

It’s no secret that despite doth-protesting-much about the bull market for advice, growth—particularly the organic kind—is plaguing RIAs. As we discussed in our previous edition of Capital Idea, the two big levers for growth over the last decade: consolidation and technology are proving to be imperfect. Particularly as fintech decides to platformize rather than innovate. (A logical but short-sighted decision, but one we’ll have to save for a future Edition.)

With all this change brewing, it should come as no surprise that 2024 has all kinds of new promises brewing, among them a “new” model for firms to grow, what we are oversimplifying into the “Fund-and-Fix” model. 

What is Fund-and-Fix?

F&Fs are first and foremost private equity investors who are taking a minority stake in growing RIAs. Minority investors have been playing a role in our industry for years, so that’s no innovation. In fact, Barron’s argues (rightly) that the field is already crowded with stallwarts like Emigrant, Dynasty, Carlyle, and—of course—Merchant. 

The benefits of a minority investor has come down to three things—

• Cash out for legacy shareholders. Long-time principals, early investors, and founders looking to diversify their portfolio get a pile of cash. Particularly now when cash is expensive again.
• Liquidity infusion for acquisitions (A), tech (T), and talent (T). The ATT Trifecta has—up until recently—been believed to be the missing formula for smid-sized RIAs to grow into enterprise scale operations. A premise that is facing a rise of new doubts. (Stay tuned for more...)
• Retained Autonomy. Most of the founding entrepreneurs who created the RIA class of wealth management firm still want their hand firmly on the wheel. While aggregators give the illusion of control with the benefits of an operational backbone, true independence goes out the door. By contrast, minority investors could take a board seat, make some introductions, and provide help when solicited, but mostly stay out of the way while benefiting from the consistent cash flow.

The perception of the ultimate win-win-win has increased deal-flow for minority investment year-over-year, potentially tripling in 2023. RIAs are reliable cash cows, making them happy investments for funds driven by conservative capital like pensions and endowments.

So what’s changing?

Simply, the minority investors are finding what we’ve found in our years of working with RIAs: The ATT Trifecta (Acquisitions, Talent, and Tech) is not sufficient to produce scalable growth, and in the wrong hands it makes things worse.

Fund-and-Fix adds a whole new dynamic to the formula: A dedicated team of industry experts are going to advise, guide and resource founders in the areas that RIA founders are often difficient, allowing them to retain control by putting big bumpers on the bowling lane.

Why the ATT Trifecta is Insufficient

Having money for (A) acquisitions, (T) talent, and (T) technology does not reliably produce enterprise RIAs. Capital is the smokescreen for bigger problems that fester below, creating challenges for the minority investor model.
Founders can struggle to attract executive leaders smarter than them in key disciplines. Tech platforms will over-promise and underdeliver producing bloat, low adoption, and ballooning overhead. Acquisitions managed from inexperience create integration nightmares that blow up cultures.

The RIA industry notoriously circles the wagons on bad news and the wealth management media is not prone to pointing out the egg on the face of its constituents. So it takes inside experience to realize how often integrations are imploding and tech implementations are blowing budgets (and having net zero effect on client experience). But we all know the stories. Some of us have lived them.

At the core stands a truth that the PE investors know, but have until recently avoided: there is a leadership vacuum on the path from “functioning cash-flow positive smid RIA” to enterprise scalable firm. That leadership may be at the top, where coaching and intervention is required to expand their capacity. Or, as it is often, it is found in the pantheon of lieutenants that rose through the ranks as advisors but lack training in their respective disciplines: marketing, operations, technology, HR, etc. 

Sometimes adding more tech, more AUM, and more payroll to an already maxed out operation makes things worse, not better. 

Enter a new brand (or two) of RIA investor.

Two veterans enter the chat

In the closing months of 2023, two industry veterans announced their new ventures. Karl Heckenberg, the former CEO of Emmigrant Partners and Joe Duran of United Capital fame, both independently launched their versions of what we are call the Fund-and-Fix model of PE investment. “Fix” is probably not the right word, but the alliteration is too unctuous to ignore. Constellation Wealth Capital (CWC) (Heckenberg) and Rise Growth Partners (Duran) enter the fray claiming a new kind of investment relationship. One that brings the business intelligence to overcome what Duran has called RIA’s “impediments to growth.”

Neither investor fund is looking for fixer uppers. They are on the hunt for growth-capable firms that just need a little help from people who have enterprise experience. Duran brings his own bona fides from growing and selling United Capital to Goldman (only to have it boomerang back to Creative Planning). The failure of the Goldman/UC marriage is a small but noticeable stain on an otherwise glowing reputation. Many will want to learn the “Duran way” especially if that way comes with cash.

Constellation, on the other hand, has assembled an elite strike force of proven RIA advisors and consultants, many of them from Pershing’s successful business consulting operation. Lisa Crafford—head of advisory at Constellation—has had her hand in breakthrough growth at dozens of RIAs and knows how to contextualize the principles of success across firms.

Our analysis

While websites are notoriously unreliable predictors, we took a deep dive into the two firm’s positioning to see what we could learn. The potential differences between these two very similar offerings were screaming off the page. 
Rise Growth attempts to promise a reinvention of the category. Their branding position is simply: We are pioneers inventing a new way to build RIAs. Big promise. Low specificity. Not to mention it may not be particularly true, since they weren’t first on the beach.

They are trying to coin the category “Synergistic Financial Partner.” A better name than Fund-and-Fix, you say? How dare you. It begs the question, “What does that mean?” The How We Work page attempts to promise three broad themes: business tech, and growth... with lots of promise and a shortage of specificity. Forcing the Duran personal brand to carry even more water for Rise Growth’s promise.

The website continues on in a similar word salad vein across multiple pages. That may mean nothing about the quality of their outcomes (time will tell). Take the “team” page which is cosplaying as a “pioneers” page. In lieu of roles and descriptions we have pithy phrases like “Golf Addict + Novice Farmer.” Good marketers will tell you that clear wins over cute. 

Constellation takes a different tack. Not claiming to reinvent the RIA or the people who capitalize them, CWC’s website takes a more pragmatic approach promising to be a “solution-oriented partner” addressing a “significant capital need.” Their bios section continues the trend, focusing on the industry experience and bonafides with clear titles letting you know the kind of partners you’re going to get with a Constellation investment. The design of the brand and the site is inspired, drawing you into a “constellation” of value propositions. 
Conclusion?

The demand for the Fund-and-Fix model is real. The RIA space has suffered under the mo’ money, mo’ problemsdilemma for years now, and the list of people that actually can transform an RIA into an enterprise is short. While its not a horse race between these two, should Vegas ask, I’d put our chips on Constellation. 

Duran knows the business. But his first big foray outside running his own shop did not go well. Was that Goldman’s fault? Maybe. Does he have a Midas touch that will build the next generation of national firms? I’m not sure. 

Constellation presents as less dependent on hope and more focused on taactical outcomes across critical business functions. The middle market RIA isn’t short on aspiration, they’re short on operating expertise. Constellation has (at least thus far) done the better job of making the case they know how to fix that.

What we’ve seen

CultreCraft’s experience with firms in both these funds’ target market ($750M-$5B in AUM) exposes the myth that capital is the problem (or the solution). Only in the rare case of a truly unique founder who grows into a true CEO will capital be enough to trigger enterprise growth. Why?

• Merger integrations are hard work. It’s why the big aggregators stay in their “just do your thing and use our services” model. Actually becoming one united firm is not for the faint of heart and many acquisitions drive down free cash flow and EBIDTA, the exact thing that the investors came to the table for. Acquirers HAVE to be skilled culture makers. Great culture in the RIA space is like great driving skill in America. Everybody thinks they have it, but in reality 50% are below average at best.
• Technology implementation is about culture change. You can’t just daisy chain together a bunch of expensive tech, call it a single-source of truth and then go home early. Digital-powered client experiences requires real business transformation, something more money cannot provide. The platforms aren’t going to build an adoption and client experience flight path for you. Leaders are. And you’ve either got to have them in the building or in your consultant queue.
• There is a talent shortage in the RIA business. So much so that it strains the once collegial industry as top firms battle for the short list of executive caliber leaders who know how to run critical divisions of an enterprise. And even if you hire the right talent, firms have to have the right org design to let that talent run. Smart people are churning through the big RIA brands because they’re run like family businesses and there’s no room for non-founder talent.
• Organic growth is stalling everywhere except in the already-large firms. Throwing money at “digital lead gen” is not going to produce outcomes unless there is brand positioning and an operating model to turn interest into AUM. Most firms don’t know how to build that model.

I’m happy to see innovative new models to accelerate the industry’s trek to enterprise. The days of a collegial club of thousands of entrepreneurial small businesses is over. How we traverse this next period will define whether RIA stays synonymous with client-centered. Having some experienced smart people (with deep pockets) entering the chat... gives me hope for what happens next.