There’s a “perfect storm” brewing for independent wealth managers, according to Dynasty Financial Partners, and some will drown while others will be buoyed by understanding the trends and adapting new capabilities and technologies.
In a recent webinar, CEO Shirl Penney and Tim Oden, Dynasty’s newest executive in residence and a 30-year veteran of Schwab Advisor Services, attributed the gathering storm to mounting levels of personal wealth combined with the decreasing number of advisors, underscored by the accelerating migration of both advisors and clients to the fee-only business model of advice.
Clients are fleeing commission-based firms four times faster than advisors, they noted, leading to continued growing demand for transparency and personalized, fiduciary care. Firms with the resources and networks to capture some of that shifting demand will continue to prevail over those that don’t, they said.
In a study released Wednesday, Dynasty and wealth management consultants F2 Strategy found that having a “platform partner,” like Dynasty, can help advisors, particularly at a certain size, with the resources needed to gather more of the expected rainfall than firms that don’t avail themselves of the shared resources. Notably, the study found firms that are “powered by Dynasty” grew at a compounded 5-year rate of 14.3%, compared with 6.4% among comparably sized firms. Platform firms can consolidate back-office functions, like trading, compliance, marketing, technology support and other operations for their client RIAs.
Even though the research was in part backed by Dynasty, the results were not tilted toward any particular conclusion, the executives said. “I went back to the data a thousand times. I checked for any errors,” said F2 Senior Manager Bryce Carter, lead on the study and the report’s primary author. “I expected Dynasty firms would outpace, but this really supported the hypothesis that leaning on an outsourced partner with a breadth of resources is a significant driving factor for growth.”
“We're here to do the analysis and we’re going to find what we find,” he later added. “But it was fun to be able to share such good, data-supported news.”
The F2 study, carried out in the fall, analyzed data from 38 Dynasty firms and 4,669 unique RIAs to benchmark and compare operational efficiencies, growth rates and valuation metrics. Firms were categorized by AUM; and an evaluation of three different technology models was also conducted to assess how those choices may influence operational and financial performance.
No distinction was drawn between comparable firms on comparable platforms (though that analysis may take place in the future) or between organic growth and growth attributable to mergers, acquisitions and advisor recruitment, but Dynasty Vice Chairman Andrew Marsh said the majority of Dynasty firms are still plotting their inorganic strategies.
"That's where we're spending a lot of our time," he said. "Getting them ready for inorganic growth. But I agree with Tim and Shirl when I say there's too much focus on inorganic growth. I personally believe there's a lot of opportunity for organic growth, because we're at a point in time where I think clients are looking for the next generation of advice. There's a lot of potential money in motion and clients will be looking for an advisor that's having the conversation with them that they want to have."
The research found advisory firms with between $300 million and $1.8 billion in managed assets are likely to see the most benefit from partnering with a platform services provider like Dynasty. Those firms are large enough to require sophisticated operational processes and a broadening array of service capabilities, but often not the resources to build solutions in-house—or hire the requisite talent.
“This research estimates Dynasty partnership for a $450 million firm will result in more than $5 million in revenue over five years compared to the do-it-yourself approach,” according to Carter. “Even more significantly, F2 Strategy’s research estimates that partnership with Dynasty can result in 43% higher firm valuation through accelerated AUM growth.”
More than eight in 10 Dynasty firms managing less than $1.8 billion avoided the compensation costs of bringing those services inside the firm, according to F2, and those savings seem to grow with firm size. Those managing between $1.3 and $1.8 billion are operating with close to half the human capital on non-partnered firms, a metric Carter characterized as “a mark of efficiency,” with 15 average employees versus 27.4.
The delta decreases as firms get smaller; Under $300 million, staffing becomes virtually indistinguishable. Seven Dynasty firms reported more employees than the comparable average, four of which were under the $300 million mark. According to researchers, this is likely attributable to fewer overall employees and “less wiggle room” at that size.
A key characteristic of firms in Dynasty’s “sweet spot” is their need for flexible and compliant technology without onerous and ongoing upkeep. According to F2, the typical cost of weaving together a selection of third-party technology providers and filling any gaps with proprietary tech is $1 million to $5 million for firms under $2 billion AUM. The report also suggests that custodian-based models inherently limit growth potential, optionality and efficiency.
One alternative found to be less costly than Dynasty’s average 15% of revenue was partnering with other “all-in-one" technology platforms such as Envestnet | Tamarac, Orion or Black Diamond, which charge 8% to 13%.
“Beyond technology, Dynasty provides partners with a flexible investment platform, M&A capital strategies, marketing, compliance, operational support and business growth support,” the F2 report found. “RIAs using an all-in-one model must spend time finding and managing internal resources for these extended services as well as external advisors to help navigate broader strategic questions.”
“We’re never going to be the cheapest solution,” said Marsh. “I think this report shows that, while you might save some money going elsewhere, Dynasty's platform, in its fullest sense, is valuable and well worth it.”
For firms moving above $2 billion in AUM, building technology in-house may be the best move, researchers found, provided executives have a clear data strategy and a roadmap for the development and integration of service-enabling tools, the talent needed to support the technology, and the cash to pay for it.
“Firms must use cost, staffing, and growth potential as factors in this decision. Most importantly, they must pinpoint exactly where their long-term strategy aligns with technology to select the ideal operating model,” concluded Carter. “On the journey to independence, advisors must examine the details to see if partnership is best aligned with who they are and what goals they aim to achieve.”