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Dynasty founder and CEO Shirl Penney

Q&A: Shirl Penney, Dynasty Financial Partners

Dynasty Financial Partners CEO and founder Shirl Penney on why the pandemic has been a boon to wirehouse breakaways, how his firm is working with Envestnet and Mariner Wealth Advisors, and what it means for the network to reach the $50B AUM mark.

Fresh off Dynasty Financial Partners' announcement last month that it landed Steve Mitchell, a top producer from UBS, with $2 billion in AUM, and the June rollout of Advisor Services Exchange, a financing vehicle for RIAs outside its network, in collaboration with Envestnet, Dynasty CEO Shirl Penney shared his recent experiences with You’ve now been headquartered in St. Petersburg, Fla., for a year after relocating from New York City. What is different about being there?

Shirl Penney: We closed our offices on March 15 after the pandemic hit and all has gone well. New York City is still closed. We reopened the Florida office back up six weeks ago. People have been coming back in waves, but the whole time what we've said to people is, ‘Look, if you're not comfortable, if you have a loved one who may be compromised with exposure to the virus, just work from home, especially people with young kids. If they have a smaller apartment or a smaller home, they need to get out a little bit. You know, to go to work is tough to juggle the kids and everything.

WM: What else has changed since the onset of the pandemic?

SP: We’ve found it tough as a growing company adding new people to drive the culture remotely. We have some people on the team that we've hired who have been with us for four months and have never physically met another person at the company. So it's a little difficult on the cultural front. But for the most part, with people having this level of flexibility and not having to worry about commutes, etc., in some ways, it’s made me think we’ve become more flexible.

WM: Many people in the industry have been talking recently about how they’ve reoriented their approach to bringing on talent. What have you had to change?

SP: We’ve signed significant advisor teams now to join our platforms whom leadership has never met personally. We've spoken to them over video and that’s it. Some of them are people who were in a wire house for 25-30 years. And they're going to take their life's work and bring their book—our brand is pretty well established and people know what we do. All of that helps. But normally, you're spending a bunch of time in person: You're going out to dinner, you're getting to know the person. We're able to conduct business as “usual” but, you know, it’s really been unusual. For instance, now I don't have to look to hire just the best people that are in the Tampa/St. Pete area to work at headquarters or in senior positions. I can look to hire the best person for this specific role anywhere they might be in the country. And then they can travel in to the headquarters office a little bit if need be, while working virtually the rest of the time. There has also been a definite impact on compensation. There's a lot of people, whether it's cost of living, or just the flexibility, who might take lower comp if they didn't have to relocate or could stay working wherever their home might be. So at Dynasty at the holdco level we’ve had an even more open mindset toward finding the absolute best talent wherever they might be located, to take advantage of this new tech-enabled world that we're all finding ourselves in.

WM: You’ve not only recruited advisors during the pandemic but added executives as well?

SP: Yes, we have hired quite a few, eight or nine people who are completely remote, have never been to headquarters and have not met anyone else at the firm at this point except leadership over videoconference. We hired a new senior head of sales, which we call network development, named Ron Lynch, who is based in Northern California. I’ve never met Ron personally. We hired Scott Steel, senior head of network development in Southern California. I’ve never met Scott either. These are senior-level executives responsible for being the face and voice of Dynasty in their territory who work and they've never met me or any of the other senior executives at the company in person. And they're up and running and conducting business as normal.

WM: One of the emerging trends among all of the publicly traded wealth managers we’ve noticed is that everybody's expenses are significantly down.

SP: Yep, that's a great point. We’re seeing it in a number of ways. So you're traveling last year, you’re going out to eat at expensive restaurants, you’re no longer doing that. Then there’s the impact on talent: When your hiring them remote, they tend to be cheaper. And then the other big line item to your point is real estate and how it connects with recruiting: We're getting more and more calls specifically from breakaway advisors who have been working remotely now for four or five months, and they're saying, ‘Why do I pay 60% of my revenue to a wirehouse for a huge, expensive branch office when I no longer need the real estate, the infrastructure and support that they offer? I’ve realized I don't really need it anymore. At Dynasty all I have to do is just get a different custodian and can keep a significantly larger portion of my revenue than I did previously.’ That's a massive savings for an advisor that drops right into her/his pockets directly. And if you think about a wirehouse advisor, they’re giving away an average in the low 40 percent points off their annual gross income to the wirehouse, most of which is in real estate costs. They're looking at like a 50% to 75% raise in making the move to a Dynasty just on their legacy business.

WM: So the pandemic has given wirehouse advisors an even greater incentive to leave?

SP: Yes. In terms of the comparison with the economics of an RIA versus a wirehouse advisor. We do it all the time, we have a ton of data to support it. What is newer would be the real estate, lowering the real estate component, which sweetens the deal even more for the wirehouse advisor thinking of leaving. There’s only been probably a dozen major advisor teams to break away from the wires since the pandemic started. We've done a good portion of it in the industry. And it’s true, breakaway advisors can really lower their real estate footprint and save hundreds of thousands of dollars in real estate costs for the benefit of those principals. It was already a good deal for them economically to make the move to independence. From a cash flow perspective, it's just gotten even better. And then of course, on top of that they own their business—that’s the other really important point. And the other piece is, if you enhance the operating margins on the business because you lowered your real estate footprint, you also just made the business more valuable because those businesses sell as a multiple of free cash flow. So now your free cash flow is higher, and the value of the business is higher as well.

WM: You said early on that the pandemic would hurt everybody. Can we talk about that on a deeper level?

SP: Across the board regardless of where you sit in the value stack, if you're in the front office, middle office, at a platform company like Dynasty, at an asset manager, or in the back office like at a custodian. Everyone took a hit in the second quarter; that’s when it really showed up. The biggest reason for that is the way that most of the wealth management industry works: We all bill a quarter in advance. You saw it at all the publicly traded firms that reported in the last few weeks. So you had a massive sell-off at the end of the first quarter; therefore, in April, you run billing, and the market was off something like 28% in that range. Depending upon how aggressive the advisor is in their client portfolios determines how correlated you were to that level of sell-off. For us on average, we have about a .5 correlation, we have a lot of fixed income, a lot of ultra-high-net-worth clients, some cash, alternative investments, etc. So public equities we are about .5 of correlation, so we billed down about 12.5%, 13% in the second quarter. That digs a big hole. We have some advisors who billed down just a few percent and we had some advisors that billed down 20% because they were more aggressively invested on behalf of their clients. On a blended basis for Dynasty, we billed down about 13%. But everyone in the industry is down, because even the service providers get paid either on a percentage of revenue or basis points on assets. The good news is obviously the snapback has happened quickly. Businesses that are well run can sustain a hit like that, but you know, none of us really feels like we're standing on super-certain ground. There's definitely a feeling of, you know, another potential shoe could drop. So we're being very careful and disciplined with our capital like the best-run firms are in the space.

WM: What can you tell the rest of the industry about your recent deal with Envestnet? Can you reveal more about the strategy behind it and what you’re looking to get out of it?

SP: Well, we just recently went live with the Advisor Services Exchange. We always had a very strong brand in the breakaway space. We have a strong and growing brand in the IBD space with regard to RIAs. And a lot of those advisors really want to affiliate like a 1099 model. And that's really at the heart of the partnership with Mariner. Mariner Platform Solutions is a great home for an advisor who still wants to have control of how they want to manage their clients. They want their own brand, but they want to plug in to the practice management support from a firm like Mariner while getting Dynasty’s integrated technology and preserving their ability to maybe sell down the road. That's why that's worked really well for us. In the legacy space, we had about a third of our current clients came from that arena. But we didn't have as big a footprint there as we did early on when the press would cover us a lot for the big breakaways. So this partnership with Envestnet, which allows us to provide business value-added services to their current clients, allows us to go in in a tech-enabled way off the desktop for all of  these RIA advisory firms. We feel that it will definitely help us build out our footprint in that space. So far, the funnel is filling out. We have lots of conversations going on. We’re also planning to do a big splash at the Envestnet Summit, and kick off on the “mainstage,” even though it’s going to be virtual. Of course we can’t be on a live main stage, but we did the best we could with the virtual setup and there are a lot of calls going on. There’s been a lot of excitement around it.

WM: What does your crystal ball reveal for the near term? The next few years?

SP: Look, we're approaching $50 billion in AUM now. And I've always said, you know, for us to be a huge difference maker in the space, you know, we want to get to significant scale. In my mind, I've always wanted us to run hard to get to $100 billion in AUM. And you get there by growing organically, meaning adding other advisors to our current clients. Inorganic growth through M&A is becoming a much bigger piece of our growth. Now that we have 45 firms, a number of them that want to grow in organically. And by adding big teams—we announced a $2 billion M&A deal earlier this week. It's not just smaller advisors. Bigger advisors still want the benefits of independence, but without having to run their own firm. And then there's real DNA growth, helping our advisors gain new clients and add new partner firms over time. I have a lot of faith in Marty Bicknell and Mariner. I’m very optimistic that their 1099 partnership with us is going to be substantial in terms of adding assets, which are then tied to revenue for us going forward. I have tremendous faith in the teams we continue to add, the large-scale breakaways. And I'm just thrilled with all the work that we're doing on the M&A front. That's accelerating the inorganic piece, other strategic initiatives. We continue to invest heavily in technology, handheld device-integrated apps, for advisors to live in the phones of their clients: That’s a big initiative for us. We're continuing to innovate on the capital front, to allow advisors to have more options on how they want to create liquidity within their business, for succession to fund M&A, etc. So you'll see us continue to innovate on the capital front. And we are always open for business from an M&A standpoint at the home office. So, if you think about Dynasty, we are continuing to add other verticals and other value, like business services to support our RIAs as clients. It's a big ecosystem now, and we're one of the scale players, which presents an opportunity for us to selectively acquire some of the other smaller players in the space and to bring in-house some of those capabilities, to invest in them and to take those capability sets to the next level. So keep your eye out for us, maybe executing a few transactions over the course of the year that bring more talent into the organization, more resources to allow us to better take care of our advisor clients.

WM: There are only a handful of publicly traded firms that specialize in the wealth management arena outside of the four wirehouses, but it seems like there is large group of aggregators who might eventually go that route. Have you ever considered going public?

SP: Look, I'm 43 years old, so I’m still a fairly young CEO and founder of this business. I'm having a lot of fun. And the beauty of our board is its long-term, patient capital. We don't really sit around at board meetings thinking about our exit strategy and how to sell the business. Running a public company has its benefits for sure. But it also has its challenges, and right now we're growing so fast. We've got a great dynamic with our board. That's probably not something I would put on my short-term radar, but it's an obvious option at some point down the road. Right now I’m running a profitable company that kicks off a nice dividend to the owners and does a good job of taking care of the end client. And that's not so bad either.

WM: Finally, how about private equity’s role in the space. At one time, it was unheard of. But now you’re the exception to the rule. Even Rudy Adolf’s Focus Financial, a public company, has private equity giant KKR as a shareholder. How come you haven’t gone that route?

SP: It’s the nature of the beast when it comes to raising capital for entrepreneurs. For us, I would say unless we were partnering with somebody on a substantial acquisition, that probably wouldn't make much sense. We brought in strategic investors, operators in the space who invested minority stakes into Dynasty. Bill Crager, CEO of Envestnet, who is one of the great entrepreneurs in our space, joined our board. Folks brought some capital, but frankly, even more importantly, they brought strategic expertise, strong technology, DNA, and a real great understanding of the overall advisor ecosystem. Marty Bicknell personally, through his family office with Mariner—which Marty founded and runs and is one of the largest RIAs in the country—is one of the very elite, best entrepreneurs in the industry who brings his strategic knowledge as an investor to the business. So it made that made a lot of sense for us to do the Envestnet deal not just for the reasons I mentioned but because they’re now long-term capital partners of ours. Just like a lot of our investors, their stock is owned by their grandkids. These people are playing the long game, and they're excited about the long-term, macro demographic trends in independent wealth management, the separation of where advice is given from where products are manufactured. And I think we all kind of collectively feel that we're still in the early innings and you've got a young management team here, with a brand that's off to a pretty good start. And what most investors realize is, when you take a portfolio approach to investing, occasionally you're lucky enough to find a winner, so you're better off investing in that winner, right, just riding that winner as long as you can. Because lightning doesn't strike that often. And when it does, you want to take full advantage of it. So for now, our focus is on taking full advantage of this great platform and brand and business that we built, and have an impact in a meaningful, positive way on more people's lives. The beauty of what we do is we get to live our American Dream by empowering others to live theirs, which is not lost on our advisor clients or on our partner firms. It’s a pretty special thing that we get to do to help people launch businesses, run better businesses, hire people and grow. In the near term, I think we have plenty of capital. We don't need to raise capital. It probably doesn't make sense to take on private equity capital unless there were a really significant reason to do it, for instance a very, very large acquisition. But for the most part, I'm honored and very pleased with the current group of investors that we have, and I think we're well suited with that team to take the business to the next level.

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