Seven 'RIA' chief executives are stepping aside for CEO 'operators' as PE backers get 'trigger' happy in adverse market; here are their stories
Whether it's Edelman Financial Engines, SMArtX, Allworth or InvestCloud, the re-CEO-ing process follows a fat 2020 capital raise and thinner results in stormy financial markets.
11 min read- Seven RIA CEOs are exiting after private equity investments, replaced by 'operator' executives.
- PE firms are prioritizing EBITDA growth and operational efficiency amid economic uncertainty.
- Adverse markets prompt PE to accelerate CEO transitions for improved financial performance.
Brooke's Note: When an RIA accepts a big capital raise, they have, in effect, sold the company in more ways than one. The new buyer desperately wants them to stick around for continuity – and then suddenly, not so much. Or vice-versa. The previous owner/CEO makes the decision that they either don't want to run a company, or they no longer feel the motivation to drive to the contemplated “next level,” at least in a [second-guessed by money men] CEO role. These transitions are happening in the RIA world like crazy right now, with a few eerily similar attributes. Does it suggest a problem? Yes, our analysts point out, in the sense that CEOs don't bolt – or get pushed – from firms with hockey stick growth. But it's also a high class “problem.” I can only dream of the day I fire myself, become chief coffee maker and toss in my lofty, high-level thoughts from my cushioned board seat, and let the professionals take over running day-to-day RIABiz editorial operations.
Private equity investors fell over each other to offer RIA industry CEOs fat deals, and now a slew of executives who took the lucre are falling off their pedestals and heading for the door.
In the last four months, at least seven top industry CEOs – five in August – have stepped down or been ousted.
Taking their place are executives with backgrounds from notably blue-chip corporations like Goldman Sachs, [until recently] Silicon Valley Bank, Accenture and Northern Trust.
A common fact unites each departure: The companies they led all accepted mega-cash injections from private equity or venture capital investors – on average two-and-a-half years ago – often at dizzying multiples of revenues or earnings.
"Patient capital has gotten a lot less patient," says Will Trout, director of wealth management at Javelin Strategy and Research, via email. “They're going to pull the trigger faster,” he adds.
Adversity drives change
Yet, it's hardly a pure case of the financial tail wagging the operational dog.
“Founders and CEOs are [now] being replaced by ‘operator’ CEOs. One of the reasons behind this shift might be the desire by owners to create stable, more predictable, more mature operations that start-up firms are often not,” says Alois Pirker, founder and CEO of Marblehead, Mass. consultancy, Pirker Partners., in an email.
The mood shifts of private equity firms, or the CEOs at RIAs or RIA vendors, are a direct result of economic adversity writ large.
“With the end of the bull market, investors are much more keen on results than promises; private equity firms in particular are facing their own challenges linked to interest rates, economic uncertainty and regulation,” Trout continues.
CEOs are facing a constellation of headwinds, but it boils down to one acronym, says Cecile Munoz, CEO of U.S. Executive Search in Los Angeles.
“Three years into head-spinning M&A by PE firms, large and mid-size acquirers, individual firms and other unexpected entrants into the highly desired RIA space, the question everyone is asking is, where is the EBITDA [earnings before interest, taxes, depreciation and amortization] growth?”
“Growth through acquisition is notable, but expensive. Effectively building scale, successfully managing integration, and building a system to drive organic growth – these are the crucial metrics for executive leadership,” Munoz explains.
“[It] is the difference between single or double digits,” she adds.
PE Hex
The CEOs who departed – or soon will – include founding CEOs, Randy Long (SageView Advisory Group), Evan Rapoport (SMArtX), Eric Clarke (Orion Advisor Solutions), John Wise (InvestCloud), Pat McClain and Scott Hanson (Allworth Financial); and the long-tenured Larry Raffone (Edelman Financial Engines). See: Randy Long offloads CEO duties 'to fully focus on strategy' -- new blueprint and business model needed, experts say
In a variation of the theme, Alan Moore hired his own replacement, at AdvicePay.
Alois Pirker sets up shop in Marblehead by taking a page from the RIAs he advises
All but one of these CEOs signed off on mega funding rounds from, or sales of their firms to leading private equity vendors between June 2020 and May 2022. Morningstar's $30 million 2022 investment in SMArtX is the relative outlier.
Those 2020 mega-rounds happened at the peak of the private equity market when sales and recapitalizations were flying out the door.
All but one of the seven CEOs to recently disclose their departures, or imminent exits, had held power for a time period exceeding seven years – the traditional PE sell-by date. Yet all seven left between 15 months and 34 months after they accepted new investment at the frothiest point of the last bull market.
Virtually none of the departing executives or their firms blamed their financial backers for making the talent moves, but the pattern seems too apparent to ignore.
“After several years of providing the funds for [sizable] M&A, the owners of financial technology firms are expecting … a one-plus-one-equals-three effect, which for many acquisitions has not materialized,” says Pirker.
Differing fundamentals
So far, only SageView, SMArtX, and Edelman have formally announced successors. They include, respectively, Silicon Valley Bank Private President John Longley, ex-Northern Trust executive Jonathan Pincus and former Personal Capital CEO Jay Shah.
Timelines
Footnote: All but Wise have opted to stay on at their firms as board members; as chairmen of the board in the case of Raffone and Long; vice-chairman in the case of Hanson; or in a different executive capacity in McClain's case. |
The remaining firms are currently hunting for replacements, although InvestCloud is doing so without Wise's help.
It is instead relying on its new president, Heather Bellini, once of Goldman, and former Accenture CEO for financial services, Richard Lumb, now an InvestCloud board member, its interim CEO, and a partner at InvestCloud's London VC backer, Motive Partners.
Yet each CEO exit differs on certain fundamentals.
Clarke, for instance, stepped down of his own accord after two decades at Orion, while Wise reportedly left following a disagreement with a major investor, according to a source. See: InvestCloud CEO John Wise and management team
Inflection point
Story Timeline
Yet, each departure may indicate a growing industry paradigm shift from mom-and-pop, to mature going concern, according to several analysts.
“For every organization, there is a ceiling to where the ‘startup culture’ can take them,” says Andrew Besheer, director of wealth management at Datos Insights, via email.
“The traits that make a successful entrepreneur are not [always] aligned with the traits that make a successful executive at a more mature stage of growth, and most of the organizations you’re looking at are at – or nearing – that inflection point,” he adds.
Pirker agrees the industry has hit a tipping point.
“CEOs being changed from founders to ‘operators’, mean[s] moving from creative business building into predictable growth mode,” he explains. See: Alois Pirker sets up shop in Marblehead.
“[Many] have been at the helm since the founding of these firms. They were successful … [so] outside investors acquired a part or all of their respective firms.
Alan Moore is the No. 2 busiest man in the RIA business and he just convinced the No. 1 busiest man to budget $200,000 to hire a 'rockstar' to replace him
"[But they] favor executives with a record of navigating difficult market conditions successfully and … growing market presence.”
Mercenary stability
InvestCloud interim CEO Richard Lumb was blunter when explaining Wise's exit, in comments provided to InvestmentNews, late May. See: InvestCloud hires a Goldman Sachs IPO expert as president.
“The skills required when you’re kicking off a business in a garage are very different from the skills required when you’ve got a business that’s $400 million-plus and growing rapidly,” Lumb explained.
“When you run a little company as chief executive, you rightly have to be very in control. You’re the individual making all the decisions. As you get bigger, the chief executive has to be the chief team captain," he added.
Yet any board decision to install ‘operators’, who some say are better suited to satisfying demanding paymasters, is not without risk.
“I’m not sure if replacing a founder with an operator will make that much difference for any vendor, at least in the short term,” says Trout.
“An operator is a mercenary whose fealty extends to his next paycheck, as a rule. I think the concept is way overvalued."
Perhaps, but managing financial risk is also a major factor in the apparent talent upgrade, according to Pirker.
“I wouldn't say [operators] are better … [and a] firm’s innovation drive and unique culture might get lost … [but] it largely depends on the investor's life stage and risk appetite," he explains.
“Founders create new propositions that could take off or flop, [providing] potentially higher growth that’s volatile in nature. Operators run with an existing proposition and create low risk, stable growth at a typically lower rate,” he adds.
Getting personal
The recent wave of CEO departures may also owe something to two increasingly in-demand software and the impact of developing – or failing to develop -- them on a company's bottom line, its product lines and its M&A spending.
“The economics involved are changing … [and] the pressure is increasing on vendors in the TAMP and investment platform space to reimagine their positioning towards the new market realities," Pirker explains.
This includes the need for a better fitting advisor experience, enabling personalization towards client needs, while at the same time defending or increasing their economic fundamentals to avoid being displaced, he adds.
All-in-one breadth of service from major software vendors is a current industry battleground, too. So much so, Orion, once a portfolio management software company with two TAMP subsidiaries, now sells everything from risk management (HiddenLevers) to CRM (Redtail).
A matter of time
The switch-out of founders for more corporate-minded executives has not always been at the behest of a firm's backers.
Earlier this year, Moore stepped down from AdvicePay, because he and co-founder Michael Kitces believed the growth of the two firms required full-time leaders.
New Jersey politician Alex Sauickie took the AdvicePay job in late July. See: AdvicePay waives key hiring requirement to land its next CEO.
Hanson and McClain also previously stated they stepped down largely because they had little interest in the fine-grain detail of running a corporation on a day-to-day basis. See: Scott Hanson and Pat McClain throw off 'death grip' of ‘cognitive dissonance’.
Clarke claims a hand in his own departure, too.
“In the fast-paced world of wealth technology, I think adaptability is key, and leadership transitions are part and parcel of this evolution … now is the right time for me to make this transition,” he explains, via email.
In fact, stepping back, or stepping down, is often the right choice, according to Besheer.
“It’s very difficult for a leader used to being the biggest fish in their particular corner of the ocean to adapt to a new reality and the rules and strictures that often come along with the investment and infrastructure necessary to achieve that next level of growth,” he explains.
* At larger firms, the CEO spot changes hands roughly every seven years, according to research by Executive Search.
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