According to Dynasty Financial Partners, there's a “perfect storm” brewing for independent wealth managers, and some will drown while others will thrive by understanding trends and adapting new skills 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 hoarding storm to rising levels of personal wealth combined with the number of decline in advisors, highlighted by acceleration. the migration of advisors and clients to the fee-only advisory business model.
Clients are fleeing commission-based firms four times faster than advisers, they noted, leading to continued growth in demand for transparency and personalized, loyal care. Firms with the resources and networks to capture some of that changing demand will continue to prevail over those that don't, they said.
In a study published Wednesday, Dynasty and wealth management consultants F2 Strategy found that having a “platform partner,” like Dynasty, can help advisers, especially of a certain size, with the resources needed to raise more more of the expected rainfall than firms that do not benefit from shared resources. Notably, the study found that “dynasty-powered” firms grew at a 5-year compound rate of 14.3%, compared to 6.4% among comparably sized firms. Platform firms can consolidate back-office functions such as trading, compliance, marketing, technology support and other operations for their clients' RIAs.
Although the research was partially supported by Dynasty, the results did not lean toward any particular conclusion, executives said. “I went back to the data a thousand times. I checked for any errors,” said F2 senior manager Bryce Carter, the study leader and lead author of the report. “I expected dynasty firms to pass, but this proved the hypothesis that reliance on an external partner with a breadth of resources is an important driver for growth.”
“We are here to do the analysis and we will find what we find,” he added later. “But it was fun to be able to share such good news, backed by data.”
The F2 study, conducted in the fall, analyzed data from 38 dynasty firms and 4,669 unique RIAs to compare and contrast operational efficiency, growth rates and valuation metrics. Firms were categorized by AUM; and an evaluation of three different technology models was also conducted to assess how these choices might affect operational and financial performance.
No distinction was made between comparable firms on comparable platforms (although that analysis may be done in the future) or between organic growth and growth attributable to mergers, acquisitions and adviser recruitment, but Dynasty vice chairman Andrew Marsh said most of dynasty firms are still designing their inorganic strategies.
“This is where we spend a lot of our time,” he said. “Their preparation for inorganic growth. But I agree with Tim and Shirl when I say there's a lot of 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 customers are looking of the next generation of advice. There's a lot of potential money moving around and clients are going to be looking for an adviser who's going to have the conversation with them that they want to have.”
The research found that advisory firms with between $300 million and $1.8 billion in assets under management are likely to see the greatest benefit from partnering with a platform service provider like Dynasty. These firms are large enough to require sophisticated operational processes and an expanded range of service capabilities, but often not the resources to build solutions in-house—or to hire the necessary talent.
“This research estimates that a dynasty partnership for a $450 million firm will result in more than $5 million in revenue over five years compared to a do-it-yourself approach,” according to Carter. “Even more significantly, F2 Strategy research estimates that partnering with Dynasty could 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 these services in-house, according to F2, and these savings appear to increase with firm size. Those managing between $1.3 billion and $1.8 billion are operating with close to half the human capital of non-partner firms, a metric Carter characterized as “a sign of efficiency,” with an average of 15 employees versus 27.4.
Delta decreases as firms get smaller; Below $300 million, the staff becomes virtually indistinguishable. Seven dynasty firms reported more employees than the comparable average, four of which were under $300 million. According to the researchers, this is likely attributable to fewer employees overall and “less wiggle room” at that size.
A key characteristic of firms in the dynasty “sweet spot” is their need for flexible and compatible technology without heavy, ongoing maintenance. According to F2, the typical cost of integrating a selection of third-party technology providers and filling any gaps with proprietary technology is $1 million to $5 million for firms under $2 billion in AUM. The report also suggests that caregiver-based models inherently limit growth potential, optionality and efficiency.
An alternative found to be less expensive than Dynasty's 15% revenue average was to partner with other all-in-one technology platforms such as Envestnet | Tamarac, Orion or Black Diamond, which charge 8% to 13%.
“Beyond technology, Dynasty offers partners a flexible investment platform, M&A capital strategy, marketing, compliance, operational support and business growth support,” the F2 report said. “RIAs using a comprehensive model should spend time finding and managing internal resources for these extended services, as well as outside counsel to help navigate broader strategic issues.”
“We're never going to be the cheapest solution,” Marsh said. “I think this report shows that, while you might save some money by going elsewhere, Dynasty's platform, in its entirety, is valuable and worth it.”
For firms moving above $2 billion in AUM, building the technology in-house may be the best move, the researchers found, provided executives have a clear data strategy and a roadmap for developing and integrating the tools that enable it. the service, the talent needed to support the technology, and the money to pay for it.
“Firms should use cost, staff and growth potential as factors in this decision. Most importantly, they need to determine exactly where their long-term strategy aligns with technology to choose the ideal operating model,” Carter concluded. “On the journey to independence, advisors must examine the details to see if a partnership is the best fit. with who they are and what goals they aim to achieve.”