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Dynasty’s 'Freedom Note' Brings a Wirehouse Recruiting Trick to Independents

Dynasty is recreating a wirehouse compensation strategy to lure new advisors—giving them an up-front payment in the form of a forgivable loan—but it comes with a new twist; advisors don’t give up any equity.

For years, wirehouses have attracted and retained advisors by offering them a significant up-front payment (usually a percentage of revenue) in the form of a loan that would be forgiven if an advisor stayed with the firm for a certain amount of time. 

Now, the independent channel is learning to use the same trick. Dynasty Financial Partners this week launched their own version of a forgivable note program for breakaways. Ed Swenson, chief operating officer at Dynasty, said it is like updating the old terminology with a new twist. 

“You’re seeing, as far as advisors and assets, an acceleration to the independent wealth management channel,” Swenson said. “Part of that is you’re seeing the evolution or maturation of capital options for advisors. It’s another option—a different flavor of a capital option out there.”

At Dynasty, an advisor can get up to 100% of their trailing 12-months revenue up front in exchange for a 35% revenue cut over a period of eight years. The advisor gets a 65% payout, while the 35% covers loan interest, serves the principle and covers the cost of Dynasty’s core middle- and back-office services, which typically cost 15% to 20% of revenue.

But unlike a wirehouse, the advisor is not an employee of Dynasty, and once the note expires, they revert to owning 100% of their profitability. Also, contrary to some investment models in the RIA space, the advisor isn't giving up equity in their firm.

“I bet you when [Dynasty is] recruiting firms, some of the pushback they’re getting is, ‘Look, I really like what you’re offering, but I’m getting a nice bonus to move to Morgan or Merrill,’” said Mike McGinley, executive vice president of small business banking at Live Oak Bank. “This is to sort of counteract that, ‘You want a bonus? We’ll give you a bonus; this is how we’ll structure it.’

“It’s a way to take the firms that are moving from wirehouse to wirehouse and accepting a bonus and giving them something that looks and feels a little bit similar.”

“I’m a fan of any type of capital that’s a straight loan without an advisor having to make long-term decisions right at the onset,” said Brian Hamburger, CEO of MarketCounsel. “Compare that to some of the other capital that these guys are taking on, where they’re selling a portion of their business before they even start the business. Here, in three to four years if someone decides that this is not the best arrangement for them, they simply pay off the pro rata portion of the debt, and they’re free and clear.”

Industry observers couldn’t name any similar offering in the independent space, although some independent broker/dealers also offer forgivable loans for advisors who join their platforms. Live Oak provides refinancing for forgivable notes so that a wirehouse advisor has transition capital, but theirs is fully repayable to Live Oak.

Dynasty has two other offerings to provide financing to advisors, including its revenue participation note program and a more traditional loan, where the firm will loan up to 50% of an advisor’s revenue. Under the RPN program, which Dynasty launched two years ago, an advisory firm would sell up to a 10% revenue stake to Dynasty, in exchange for capital, based on a multiple of the advisory firm’s revenue.

Mindy Diamond, president and CEO of Diamond Consultants in Morristown, N.J., said it’s a familiar construct to wirehouse advisors; that’s how they’re used to seeing deals structured, so she doesn’t think what Dynasty is charging for this is “outrageous.”

“I think that this construct will speak to the advisor that's probably generating several million dollars or more in annual revenue, but owes a good amount of money back to his firm,” she said. “There are plenty of people like that. Or for whatever reason, just needs a good amount of liquidity, whether that be for psychological reasons, you know, does he risk it? Or because they don’t have a strong personal balance sheet.

“Every model that's been born in this independent space—all these dots along the continuum of this burgeoning ecosystem—all are born because some smart thought leader looked at the space, and said, ‘We need to solve for that. There's this advisor that wouldn't come or can't go independent because of X, and so let's solve for that. Let's build a model to solve for it.’”

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