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Private Equity’s Plan to Beat the Low-Cost Investing Robots

Under threat from automated rivals, financial advisers are getting bigger, and guess who’s there to profit from it all.
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Illustration: César Pelizer

Private equity firms smell money in the financial advice business. Last month, Hellman & Friedman LLC paid $3 billion to buy Financial Engines Inc., an online retirement planning service. Thomas H. Lee Partners LP in October took a stake in HighTower, a Chicago-based wealth adviser with $50 billion under management at the time. And in April 2017, private equity giant KKR & Co. and Stone Point Capital LLC bought a majority share of Focus Financial Partners LLC in a deal that valued the wealth manager at $2 billion.

Private equity buyers tend to swoop into industries when they see an opportunity to make changes and then exit at a profit a few years later. So what’s the attraction to this one? Advisers or wealth managers—the terms are used interchangeably—are intermediaries. They take money from individuals and turn around and invest it with money managers. They also offer help with everything from retirement planning to taxes. On the plus side, it’s an industry with solid profits and the potential for recurring fees. But it’s also a highly fragmented one. About 15,000 independent U.S. advisory firms control about $3 trillion in assets, according to Aite Group LLC, a Boston consulting firm. Many of the businesses are one- or two-person shops, and they’re facing increasing pressure as more individual investors embrace low-cost index funds and online advice.