The US firm's foray into the listed stock market raises fresh debate on whether this route is optimal for wealth management organizations or not, given that some businesses have chosen to stay or go private. Our US correspondent considers the issues.

Is robo advisor Wealthfront’s $2.7 billion initial public offering a harbinger that RIAs are ready to re-enter the public markets or a fintech outlier?

“It opens the door slightly,” Brandon Kawal, partner at Advisor Growth Strategy, told Family Wealth Report. “Someone will take the plunge because it’s a natural progression for RIAs, but it’s been a really hard path to date and Wall Street needs to see a use case that’s a net positive.”

“A successful Wealthfront IPO could be an early signal that investor appetite for wealth management businesses is strengthening,” said David DeVoe, CEO of his eponymous strategic consulting and investment banking firm.

Despite a selloff in the broader stock market last week, Wealthfront’s shares held steady at just over its $14 a share opening price on Friday, reaching a $2.7 billion valuation. The stock, listed as WLTH, closed at $12.85 on Tuesday.

The case for an RIA going public again rests primarily on the argument that firms will reach a size, most likely ignited by a mega-merger, where only the public markets will be able to provide the pool of capital that a $500 billion-plus RIA will require.

“Firms are getting to the size where private equity can’t write checks for recapitalization and they can’t depend on the next big PE buyer to come along, so going public is the most likely exit thesis,” said a veteran executive and former head of a large RIA. “The public markets will be a more dependable source of currency than having to recapitalize every three to five years. I expect we will see a wave of RIA IPOs.”

The “end of the PE journey,” may be in sight, at least when it comes to extremely large firms, according to consultant Alois Pirker. “At a certain point an IPO becomes the obvious choice to access the capital those firms will need.” 

Private equity still powerful
Not so fast, countered Pathstone CEO Matthew Fleissig. The co-founder of the fast-growing $116 billion wealth management firm doesn’t see an imminent RIA IPO, arguing that there is plenty of private equity money to go around. Even the largest firms can be funded by “multiple PE sponsors” at the same time, Fleissig maintained. Pathstone, for example, will “continue to take minority capital investments for the foreseeable future,” he said.

Private equity has “a continued appetite for both RIA aggregation and consolidation stories as well as ample dry powder to execute on larger deals,” agreed David Goldstone, manager of investment research for Condor Capital Wealth Management. What’s more, private equity firms are “more forgiving” when it comes to RIA debt levels and funding requests, said Pirker.

Poor public market track record
Going public would mean more scrutiny, regulatory obligations, financial disclosure and administrative costs for advisory firms. What’s more, RIAs have had a poor track record in public markets.

Edelman Financial Group spent seven frustrating years as a public company before going private again. Founder Ric Edelman called the experience a “massive distraction” and said the stock price “didn’t reflect the value of the firm.”

Focus Financial, the most recent casualty, was dinged by investors and analysts for its loose, roll-up structure, creative reporting methodology and questionable organic growth. After five years as a public company, Focus was bought by private equity firm Clayton, Dubilier & Rice in 2023 and is now being restructured.

AlTi Global, which went public via a SPAC vehicle in 2023, is widely expected to be taken private early next year. Among other suitors, Corient, the US wealth management subsidiary of Canadian financial services giant CI Financial, was recently reported to be holding talks to acquire the global multifamily office, which has nearly $90 billion in in AuM. (Earlier this year, Corient bought two UK-based MFOs, Stanhope Capital and Stonehage Fleming.)

“So far there haven’t been any pure play RIAs that have gotten to the size it takes to be credible in the public markets,” the former wealth management CEO declared.

What markets want from RIAs
What will it take for an RIA to be successful in the public markets?

For starters, at least a $10 billion market capitalization that will ensure sufficient float, liquidity and analyst coverage, said Pathstone’s Fleissig. In addition to size, scale and efficiency, an RIA will need “seasoned executive management, not an advisor masquerading as an executive, and a tech-enabled fully-integrated platform that generates sustainable organic growth,” said an RIA founder now consulting with private equity firms.

“I think it is generally incorrect to assume an RIA cannot be a viable public company,” said Mark Tibergien, the former CEO of Pershing Advisor Solutions who is now an industry consultant. “It’s a little like saying a woman can never be president because of the two candidates who did not win, yet there were far more men who didn’t get elected president in this country. What conclusion should we draw from that?”

Publicly traded wealth management and asset management companies such as Goldman Sachs, Morgan Stanley, UBS, BlackRock and Schwab have “consistently demonstrated a strong value proposition, earnings growth and an efficient deployment of the capital they raised,” Tibergien noted.

A successful RIA IPO will require firms to demonstrate consistent revenue and customer growth, spurred by pricing, service and product and client mix, he maintained. RIAs will also be expected to demonstrate strong profit margins, both EBITDA and gross profit margin. 

“Most RIAs use financial statements as a score card, not a management tool, Tibergien said. “The best firms should have at least a 60 per cent gross profit margin and EBITDA greater that 30 per cent.”

Will RIAs follow fintech IPOs?
Just under half of the firm’s employees are software engineers, CFO Alan Immerman said in an interview with the Schwab video network.

By building technology internally, Wealthfront has been able to “trade variable costs for fixed costs” and build a scalable platform, Immerman said. “An incremental dollar of assets on our platform doesn’t cost us much to manage.”

Wealthfront has few human advisors, makes most of its money from cash accounts and is positioning itself in its Form S-1 filing as a fintech company whose platform can leverage an anticipated surge in advisory demand from “digital-native generations.” 

Nonetheless, the firm is a bona fide RIA with $88 billion on its platform and a comfortable 40 per cent profit margin, making the 18-year-old company founded by Silicon Valley venture capitalists a potentially viable stalking horse for additional RIA IPOs.

Although Fleissig doesn’t foresee an RIA IPO next year, he does think one is possible within five years, with Creative Planning currently being the most likely candidate. 

“Over time, there will be an RIA that looks more like Charles Schwab than less,” said the former CEO who now sits on several company boards, “and Charles Schwab has done very well in the public markets.”

Non-IPO scenarios include an RIA acquisition by an established US financial services giant or a massive investment from a sovereign wealth fund. “Who saw Robinhood buying Trade PMR?” said Pirker. “The next big deal that isn’t an IPO will probably be a combination we can’t see now.”

If there is an IPO, “the question for most is not whether they go public at a desired valuation,” according to Tibergien, “but how they will deploy the capital and whether the performance will support an increasing valuation in the aftermarket.”

See another article about the IPO, here.