Wealth Strategies

Perspectives On The US Advisor "Breakaway" Trend - Part 1

Eliane Chavagnon Editor - Family Wealth Report August 21, 2014

Perspectives On The US Advisor

Family Wealth Report speaks to a number of firms targeting the independent channel about their business models and growth story, as well as one advisor who went independent from Wells Fargo this year.

Last year Cerulli Associates projected an overall downward trajectory in US advisor headcount due to retirement and advisor exits outpacing new advisor generation.

Specifically, the research firm predicted that the number of advisors in the wirehouse channel will decline from 47,843 at the end of 2014 to 45,580 at end-2016. It painted a somewhat brighter picture for the RIA channel (including dually-registered) however: that headcount will rise from 54,722 to 60,010.

That said, the report – the second quarter 2013 Cerulli Edge – Advisor Edition – noted that while the independent channel is benefiting “significantly” from advisor movement, it too is suffering as advisors exit the industry and retire.

In recent years a number of firms have cropped up targeting the growing independent space. Here, Family Wealth Report speaks to some of these players about their business models and growth story, as well as one advisor who went independent from Wells Fargo earlier this year.

After spending two and a half years conducting research and talking to various players in the space, Shirl Penney – with the backing of a number of high-profile industry figures – launched Dynasty Financial Partners, which chose to avoid “channel conflict” by being a business-to-business firm with advisors as Dynasty’s clients.

Today Dynasty has 23 partner firms advising on north of $20 billion, and with 2Q14 has just logged its best quarter since launching in 2010.

“Our game plan is to get to 100 firms or brands within the collective community, advising on an aggregate $100 billion or more,” said Penney, founder and chief executive of Dynasty. “This will continue to drive significant access, scale and buying power that benefits all our advisors and their underlying clients.”

Penney’s career background includes helping build Smith Barney’s Private Wealth Management business, while also spending time running wealth management sales initiatives and product areas within the firm.

“Back at the wirehouse, when we looked at asset flows on the business, we were doing fine versus other brokerages,” he said. “But like all the big firms, we were losing to the independent movement.”

Around half of the assets the firm was losing to independents were from so-called “breakaway” advisors taking their clients with them; the other half were clients themselves going independent.

“Clients were choosing to have more of a fiduciary coverage model and opting to get advice separate from where, oftentimes, products were manufactured and sold,” Penney said.

Penney said the firm is seeing a steady flow of opportunity from the wirehouses. “But what I think has changed in the last 18 months or so is that we are now seeing much bigger teams inquiring about the move to independence, and making the move themselves. We expect this to continue, given advancements in technology and platform capabilities being brought to the independent space by firms like Dynasty.”

The second quarter of this year, for example, was “by far our best ever”, he added. “And we currently have a number of businesses signed and in the queue for launch over the next several quarters.”

Penney said Dynasty has so far on-boarded teams from all the major wirehouses, as well as independent broker-dealers that have outgrown their platform, and teams transitioning out of legacy RIAs looking to set up or re-launch their own firm.

On Dynasty’s platform, there are also eight or nine legacy RIAs that have been around for a long time, he said. “They told us they were spending 50 per cent of their work week on back-office related items. This takes a lot of valuable time away from current clients and new potential clients. Partnering with and outsourcing functions to Dynasty has allowed these firms to grow much faster.”

Dynasty’s business model

Dynasty does three main things for its partner firms. First, it quite simply “sets them up”.

Issues such as physical location, as well as marketing materials; websites; PR strategy; office infrastructure, computers and systems; business accounting; practice management; intellectual capital; inclusion in Dynasty-sponsored summits and networking events; a dedicated middle-office support team and relationship managers; and back-office functions (including compliance, custody, trading applications, proposal generators, financial planning applications, CRM, reporting tools) are all taken care of by Dynasty.

Combined into an integrated platform, these services make up what Penney describes as the firm’s “Core Services” offering, for which Dynasty charges basis points on assets that tier down as firms grow.

“That basis point fee includes all of the underlying costs of the services,” Penney said. Based on the size of the firm, it starts at around 13 basis points and goes down 6 basis points, he explained. “It’s tiered based on the total assets on the core service platform.”

The second main thing the firm does is financing, so if an RIA wants to buy another RIA, for instance, Dynasty will help with the basic M&A and financial analysis, and then provide debt capital for the deal with flexible structures.

Other examples include liquidity for succession planning and providing breakaway advisors with growth capital. Dynasty also provides a “tuck-in” program, to help those advisors who want to focus on inorganic growth as part of their overall growth strategy.

The third key service Dynasty provides is an integrated product platform, which includes everything advisors need to execute on behalf of their clients - be it life insurance, long-term care, trust services, access to private bank lending capabilities, capital market trading, hedge funds or access to alternatives.

The firm has also built and runs a turnkey asset management program, which Penney said has raised nearly $6 billion over the last 24 months in various TAMP programs including APM, SMA, UMA and fund strategist portfolios. Led by Dynasty’s investment committee and supported by institutional research partners such as Callan Associates, Wilshire Associates and Guggenheim, Dynasty’s outsourced chief investment officer business is one of its fastest-growing initiatives.

Crucially, each of Dynasty’s partner firms own 100 per cent of their equity, Penney said, adding that this has proven key to their growth success. “I call this positive-selection bias, in that the advisors we work with see their best years in front of them and prefer not to sell that upside today.”

The rest of Dynasty’s pipeline comes from referrals from resources partners including third-party custodians Schwab, Fidelity and Pershing, and other platform resource partners such as Envestnet, PKS and MarketCounsel.


Another player in the space is Focus Financial Partners - the international partnership of independent wealth management firms that launched Focus Connections in 2008 to help former wirehouse advisors on their journey to independence.

Chris Dupuy, president of Focus Connections, believes that movement from this highly talked-about breakaway trend is “only beginning to gain momentum.”

The challenges faced by the industry in 2008/09 prompted many advisors to start thinking about what the next 10-15 years of their career might look like, Dupuy, a long-time Merrill Lynch executive, told this publication.

The issue of succession planning, for example, is extremely topical today as aging advisors plan for their own retirement and work to ensure the continuation of a business embedded with the values and mission upon which it was built. Indeed, Cerulli anticipates that - at an average age of 68 - some 8,600 advisors will reach retirement age each year for the next 13 years.  

Focus Connections invests in and provides breakaway firms with customized technology, operations, marketing and compliance solutions needed to establish their businesses as well as the resources, financial support, continuity planning, deal expertise and other value-added services to support their growth. Importantly, the advisors maintain control of the business as "we do not want to turn entrepreneurs into employees”, Dupuy said.

There is no “cookie cutter” way to describe what a team launching through Focus Connections might look like, although Dupuy said most cases involve a team of advisors managing upwards of $500 million in assets for very complex clients.

Through Connections, Focus has transitioned “billions of client assets” from wirehouses but cannot give an exact figure “as these assets tend to be transferred over time rather than all at once”, the firm said.

So far this year Focus has facilitated six wirehouse lift-out transitions, including: IFM Capital Advisors from UBS; a former Morgan Stanley team joining existing Focus partner firm, Beirne Wealth Consulting; a former RBC advisor joining existing Focus partner firm Sapient Private Wealth Management; Summit Financial from Legg Mason; and Quadrant Private Wealth from Merrill Lynch.

Dupuy joined Focus in June 2014 from Merrill Lynch, where he started his career nearly 30 years ago as an advisor. His most recent role at the firm was as market executive of the Pacific Northwest, as well as head of the wealth management, private wealth and Asia international businesses. He worked across eight states and 67 offices, overseeing 1,400 advisors and 2,000 employees. Meanwhile, earlier this month Focus appointed Dan Sontag, a long-time president of Merrill Lynch’s global wealth management unit, to the company’s board of directors.

“I agree that the [breakaway] trend just now is getting started,” Sontag said.

Earlier this year, Family Wealth Report also spoke to Elliot Weissbluth, chief executive of HighTower, the US financial services firm which a year ago launched the HighTower Network specifically for breakaway advisors.

Weissbluth believes end-clients are now recognizing the value of having a fiduciary and conflict-free financial advisor.

“That used to be a point of anxiety, but today’s it’s becoming a point of confidence,” he said.

However, for advisors giving up the safety net of a large organization and transitioning to independence, the move is “harder than most imagine”, SEI noted in a white paper earlier this year.

John Anderson, head of practice management for the SEI Advisor Network, previously told this publication that he believes advisors “really underestimate” the complexities associated with launching their own business. Meanwhile, it has been argued that the concentration of assets and high productivity of wirehouse broker-dealers means they can still be “very profitable” for asset managers, despite high costs and competition.

But despite various “myths” – such as that transitions to independence will result in a loss of clients and revenue – Weissbluth says there is no data pointing to a shift from the independent world back to the “conflicted world of the banks and brokerages.

Three of the major US wirehouses declined to comment on the breakaway trend for this article. 

Register for FamilyWealthReport today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes