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Schwab’s Investment in Dynasty Could Be the First of Many

Industry observers say signs indicate this was a strategic decision by Schwab to invest in the RIA space, as a way to diversify its revenue amid margin compression.

Dynasty Financial Partners, the St. Petersburg, Fla.–based RIA services provider, announced late Friday that it was pulling its long-anticipated initial public offering and instead taking minority investments from Charles Schwab and private equity firm Abry Partners. Industry observers believe the deal signals a strategic decision by Schwab to invest in the RIA and aggregator space, and that similar deals are likely to occur in the future.

“I’ve always felt that this was the most natural place for a custodian to step in and do a minority-type investment,” said a source close to the RIA M&A community. “We’re talking about thin margins every day; we talk about the race to zero on transactions. If you want to monetize like an RIA aggregator would want to do that’s buying pieces of an RIA, why wouldn’t a custodian do the same thing?”

He's surprised other custodians have not made similar minority investments in RIA firms, given the margin compression they’re experiencing and the fact billions of dollars of revenue disappeared in the transition to zero transaction fees. This is one way Schwab can add more stickiness to the advisor relationship.   

“One way to create stickiness is to equitize it, and with the balance sheet that they have, and the fact that most of these firms provide some level of banking and trust services, it’s not a huge leap for them to go ahead and make this move,” he said.

Charles Schwab serves as the custodian for over half of the $72 billion in assets under advisement in the Dynasty network, according to the announcement.

“This was an opportunity to invest in an RIA services provider that, like Schwab, is committed to helping advisors grow, compete and succeed,” said Joseph A. Giannone, a spokesman for Schwab, in a statement. “We’ve had a decade-long relationship with Dynasty supporting advisors turning independent and growing in the RIA industry. This investment is a continuation of our support for the RIA ecosystem.”

“It used to be that the custodians’ biggest piece of business came from where? It came from direct,” the source added. “But with the birthing of national RIAs and national platforms and things of that nature, custodians get more business outside the direct market than they do from ‘indirect.’ If that’s where your biggest channel is coming from, how do you fortify the strength of it and your revenue line? You buy a piece of it.”

Of course, Dynasty is not an RIA itself; it’s a service provider to a network of independent RIAs. But as part of the announcement, Dynasty said it will take minority investments in many of its RIA clients, in exchange for equity in Dynasty. The firm also started making minority investments in its RIAs in May 2021, as part of its capital solutions business.

“By Dynasty getting capital from Schwab, what is Dynasty going to do with that capital? I don’t think it’s a huge leap to say that they’re going to take that cash to buy into advisors, as they onboard them,” the source said. “And that they will be Schwab teams. So it’s a way for Schwab to ‘use their money’ to buy into RIAs through a platform.”

And while Dynasty and its advisor clients remain multicustodial, the source says Dynasty carries sway and influence over custody choices.

“This all makes sense to me,” said Larry Roth, former CEO of Advisor Group and Cetera Financial and founder and managing partner of RLR Strategic Partners. “To be specific, when Schwab or other custodians invest in firms (like Dynasty) which provide platform services to RIAs, and the platform firms make investments in the RIAs they serve—the custodian is indirectly investing in the RIAs. This ties the RIA to the platform provider and the custodian. In my view, there is no need for the custodians to directly invest in the RIAs.”

David DeVoe, founder and CEO of DeVoe & Company, sees Schwab’s investment more as a play for the breakaway broker market and helping a service provider focused on that channel become stronger.

“A big driver for Schwab’s growth is breakaway brokers that are joining the RIA community,” DeVoe said. “So overall, they’re doing whatever they can to help more breakaways go independent and ideally join their platform. An investment in Dynasty, a service provider platform that will help accelerate that activity—breakaways from wirehouses and other places—is a good thing. I look at it as an investment similar to what they might make in an Envestnet or a technology or operations service platform.”

Mark Tibergien, a consultant and the retired CEO of Pershing Advisor Solutions, said it seems as though this is not just an investment by Schwab to get a return. “Obviously there’s a strategic and business reason that ties it all together,” he said.

“Dynasty has proven to be successful in taking on RIA clients who, particularly break away from the brokerage firms. In many ways it enhances the pipeline of asset opportunities to Schwab from those breakaway teams. Even though the announcement indicated that Dynasty would continue to be multicustodial, it sounds like most of their assets are at Schwab already.”

It also calls into question what Dynasty is going to do with the money, Tibergien added.

“They’re evolving in their business model from service provider to investor in these firms to possibly eventually becoming seen or becoming an RIA consolidator, or a complete RIA firm in its own right,” he said. “I think what Dynasty’s done is taken fragmented elements of the breakaway market, and they have built a platform to serve them, so they’re really focused on the integration. Now the question is, how do they expand that? Being in the middle—just being a custodian, for example, or just being a service provider—is a low margin, highly volatile part of the business because people can pick their providers. The more that you can get closer to the end consumer, the better control you have over the outcome.”

The custodian business has become very competitive; while interest spreads have improved, there are no more trading commissions to speak of, so these firms must find other ways to capture profitability, Tibergien said. The yield to assets in the custody business tends to be between 8 and 12 basis points, compared with 80 basis points in the advisor business.

“It doesn’t make sense that this would be their only investment in the direct RIA business,” Tibergien said. “So I would have to guess that that’s the beginning of something. Part of it is saying, ‘We believe that Dynasty’s business model will allow for further expansion in the RIA market. That helps to cement a channel that we’d like to be stronger and closer to the consumer with, much like we are on the retail brokerage side.’”

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