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The Next PE Consolidation Battleground? WealthTech

The same private equity players fueling RIA consolidation are likely to next set their sights on the fragmented universe of advisory firm tech vendors, according to a discussion among industry executives at last week’s “Wealthies” Awards' executive forums.

The wealthtech space could soon be hit by the same consolidation crunch RIAs are facing, with one CEO expecting a “sifting of dabblers” in the coming years, as profitability—and competency—become increasingly important.

Uplifting Capital Founder and CEO Toussaint Bailey made the call during a roundtable discussion with technology firm leaders and other industry participants held at the Wealth Management Executive Forum in conjunction with last week’s “Wealthies” awards event in New York. 

During the conversation, Bailey said his investment management firm is based on a foundation of value investing, which grabs easy attention, but was not the strategy that will help the firm in the long run, he said.

“We had to build and emphasize a disciplined management firm underneath that before we have an invitation to talk about the cool stuff on top,” he said. “There’s a very low tolerance for dabbling.”

The roundtable discussion, moderated by T2 Strategy co-founder and CEO Doug Fritz, touched on numerous issues, including whether the industry would face another “mass extinction” of firms akin to the 2009 recession. 

Though Fritz knew there was still “gas in the tank” after private equity’s “huge inflow” of cash into the industry, it was harder to know for how much longer, and suggested that some form of consolidation was inevitable, particularly among the highly fragmented nature of the technology vendors to wealth management firms. Fritz said he doubted all the “Kitces map firms” (created by Michael Kitces to illustrate the plethora of fintech solutions firms) would “remain relevant five years from now.” 

Carrie Nelson, the CEO of the North Carolina-based platform provider Atlas Point, agreed with the sobering assessment.

“Some of them have taken on so much money, (and) you’ve got to do the market sizing; how do you ever pay that back?” she asked.  “I think, at some point, profitability becomes really important again.”

Private equity’s infiltration into the RIA space generated a fresh wave of consolidation and talent moving between firms, and Nelson was seeing the same kind of C-suite hopscotching happening in the fintech space, but there are signals firms are also tightening their spending. 

For smaller companies with a tendency to “incinerate cash,” it will become ever harder to procure funding as consolidation continues, according to Iraklis Kourtidis, the founder of Rowboat Advisors. As the impact of higher interest rates reverberates throughout the industry, the first impact will be cutbacks on partnerships with firms like his, which builds investing software for separately managed accounts with a focus on direct indexing. 

But cutbacks at smaller firms would also reverberate up the food chain, according to Kourtidis, as larger firms don't have to move as fast to counter every competitive threat from the numerous niche tech vendors in the industry.

“The big companies that freak out and say ‘such-and-such company is doing such-and-such, and we’ve got to have our own team doing this,’ they don’t have to freak out as much because there aren’t 10 startups doing this,” he said.

Bailey likened the explosion in the RIA space five years ago to a kind of “cottage industry” that is currently being battered by consolidation, and argued a similar fate awaits the parallel cottage industry of tech vendors that formed to support those RIAs. 

He said the “same private equity firms” involved in RIA consolidation would likely fuel the wave of wealthtech consolidation.

Greg Gates, a managing director and chief technology and information officer for LPL Financial, agreed that the “choppiness” of the tech vendor industry—hundreds of firms focused on a small niches of wealth management, all vying for space on a home office's platform—is "too noisy" and leading many firm executives towards more stable waters with better integrations into an advisor's workflow; that too will add fuel to consolidations.

“You’ve got to make sure you nail the basics,” he said. “And if you can’t nail the basics, it’s worse to have (too many tech vendors) on the platform."

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