Is the move by the Florida-based firm a switch in strategy or an extension of a business model that it has been working on? We talk to Dynasty and industry figures about its decision to start making minority equity investments in RIAs.

For the first time in its 11-year history, Dynasty Financial Partners will start making minority equity investments in RIAs in its partner network.

Rivals say that it’s a pivot in business strategy for St Petersburg-based Dynasty, which is best known for the platform of middle- and back-office services it sells to advisory firms and its turnkey asset management program. 

But the company already loans money to RIAs and has a liquidity offering that offers advisors cash for between 5 per cent and 10 per cent of the firm’s revenues, with an option to buy it back after a few years, Dynasty CEO Shirl Penney pointed out.

“We’re not pivoting,” Penney said. “This is an extension of capital programs that are already in place.”

Dynasty’s customers, which now total 47 RIAs with around $60 billion on its platform, took the initiative, according to Penney. “Our clients asked for it,” he said. “They’ve seen valuations rise and see a possible rise in long-term capital gains tax and are thinking ‘maybe now is the time to take some chips off the table.’”

Late to the game?
Competitors frame the move differently.

“I think it’s a smart move by Dynasty to do this,” said one executive who asked not be identified. “I just think they are three years too late to the game. What’s interesting about Dynasty is how often they have changed their business model. Pivots are smart, but this is like their sixth pivot.”

Another rival characterized the minority investment play as “a way to get some capital into buying the cash flow streams so the RIAs don’t go someplace else to do a deal and to create some value at the holding company level.”

Dynasty has “zero ambition to be a roll-up,” Penney said. “We are one hundred per cent committed to working with advisors as clients not owners.”

Dynasty’s pitch to become an equity partner is bolstered because it already provides so many services to its clients, and doesn’t have the time constraints of a private equity-backed buyer, Penney said.

"Adding a minority investing capability is a logical extension of Dynasty's model,” said M&A veteran Peter Nesvold, who heads the merchant bank Nesvold Capital Partners. “By owning direct equity stakes in their platform companies, Dynasty offers another means to help those companies grow while also participating in the long-term economics of that growth."

A minority financing option could help Dynasty attract new clients, said Michael Bilotta, president of Gladstone Associates.

“It opens the door to a new audience of potential partners,” Bilotta explained. “Not all RIAs that entertain a transaction are interested in a full sale, and this could be the desired solution for many firms solving for a variety of situations.”
 

Serious competition
Dynasty is entering a very competitive arena replete with big players who have deep pockets, however.

Emigrant Partners and sister firm Fiduciary Network, both backed by New York billionaire investor and banker Howard Milstein and Merchant Investment Advisors, founded by Goldman Sachs veteran Marc Spilker, are among the most prominent. Hightower Advisors, now controlled by private equity firms Thomas H Lee Partners, helped pioneer the concept and is still buying minority shares in firms. 

Newcomers to the model include Kudu Investment Management, backed by White Mountains Insurance Group and Cynosure Group, the investment arm of the billionaire Eccles family of Salt Lake City, which has a minority stake in Savant Capital Management.

Where will Dynasty get the capital to compete with such well-funded rivals?

Even though the company has no debt and access to lines of credit, it plans to fund its purchases entirely from internally generated revenue. “Capital will come from the balance sheet,” Penney said.

What about a potential conflict of interest if Dynasty owns an interest in an RIA that is taking stakes in firms that compete with their clients?

Such a potential conflict already exists if RIAs that are both clients of Dynasty compete against each other, Penney acknowledged. “But that happens almost never,” he said. “And if it does the firms are more likely to partner and split up the revenue share.”

Historical drama
Whether Dynasty’s venture into minority investing is a pivot or a logical evolution, it is the latest chapter in a company with a history of twists and turns.

Penney, along with fellow Smith Barney executive Todd Thompson, launched Dynasty in late 2010 and immediately got embroiled in a lawsuit with Bank of America and Thompson’s former Citigroup nemesis Sallie Krawcheck over a team of departing US Trust brokers.

The Dynasty business model puzzled many in the industry at first, but the company steadily kept adding RIA clients and business lines. The company moved from New York to Florida in 2019, but by the end of year Thompson had given up his day-to-day role as chairman to move to Los Angeles and key executives including Scott Welch and Ed Friedman also departed.

Early in 2020 TAMP giant Envestnet bought a minority stake, becoming Dynasty’s first outside investor. Several months later, Penney teamed up with Marty Bicknell, CEO of Mariner Wealth Advisors, to launch a joint venture, Mariner Platform Solutions, offering desktop software for advisors targeting the 1099 market.

The COVID-19 pandemic may have been a catalyst for its most recent move, said David DeVoe, principal of the eponymous San Francisco-based RIA consultancy and investment bank. 

“COVID drove many advisors to put much needed succession plans in motion,” DeVoe said. “It's hard to keep procrastinating the development of a succession plan when a deadly virus is devastating the country. Now, many advisors are seeing the need for capital.”

Dynasty has 30 different business lines, and equity investments was the last box left to be checked, according to Penney.

“We’re not trying to be something for everyone,” he said. “We’re trying to be everything to someone.”