So, two years in, is Dynasty Financial Partners on its way to really becoming a dynasty?

So, two years in, is Dynasty Financial Partners on its way to really becoming a dynasty?

By some measures, the answer is a resounding yes. Dynasty is arguably in a class by itself as an innovative services and solutions provider to high-end independent advisory firms and breakaway brokers seeking to join their ranks.

Since launching at the end of 2010, Dynasty has signed up 15 advisory firms who have 40 financial advisors working in 21 offices around the country with $13 billion in assets under advisement.

By other standards, however, New York-based Dynasty appears be very mortal, suffering through sometimes bumpy growing pains, struggling to gain traction with registered independent advisors and appearing to some to be a more puzzling proposition than a profitable one, some industry observers said.

By all accounts, Dynasty’s business model identified an extremely desirable – and under-served - target market: financial advisors with brokerage backgrounds working with wealthy clients in firms that have over $300 million in assets.

To remain competitive with their former employers and other larger bank-owned rivals, these advisors needed state-of-the-art investment and back-office platforms, debt financing and a variety of products and services ranging from technology to reporting, research and insurance.

No one else was offering that kind of package under one umbrella; advisors didn’t have to give up equity to become customers and got the advantage of better prices than if they had bought directly from vendors. As the middleman, Dynasty made its money on the re-sale margin of the services it buys at a bulk rate from vendors like Black Diamond and Envestnet.

Building out

The firm has also built out institutionally-advised asset management programs with nearly $2 billion in assets under advisement, public relations and marketing services for advisors, and a pipeline to private banks and investment banks giving advisors and wealthy clients access to new sources of financing.

“No one has achieved a similar level of success,” said David DeVoe, the former Charles Schwab mergers and acquisitions guru who now heads his own consulting firm in San Francisco. “I don’t believe they have a true peer,” agreed Darien, CT-based industry consultant Jamie McLaughlin, who specializes in firms serving high and ultra-high net worth clients. “They’re in a class of one.”

Next year Dynasty hopes to add 16 new firms to its roster, expand westward with California as a primary target, and hire more service and practice management specialists, as well as a new chief technology officer, according to president and chief executive Shirl Penney.

The firm also plans to launch its own alternative investment platform in 2013, Penney said, with access to popular vehicles like hedge funds and liquid alternatives.

Traction troubles?

However, Dynasty’s history includes lofty projections such as goals of $150 billion in assets and 150 advisors on its platform by 2016.

Signing up RIAs, who are also being wooed by aggressive roll-up firms offering cash for equity and other solutions providers, is easier said than done, industry analysts noted.

Dynasty may not yet have gained “enough traction,” in the super-competitive market to win RIAs' allegiance, said Chip Roame, managing partner of Tiburon Strategic Advisors. “Momentum begets momentum,” Roame said. “[The question is] do they have enough?”

The recent departure of ex-Charles Schwab executive Loren Miller, the firm's director of RIA Services (and a partner), is thought to be an indication of Dynasty’s frustration with the pace that it was bringing new advisory teams on board.

Penney wouldn’t elaborate on the circumstances leading to Miller’s exit, other than to say Dynasty “had a mutual separation” with Miller earlier this year.

Relations with RIAs clearly are a priority, and Dynasty has been adding “lots of” staff to work on advisor on-boarding, transition and services, adding to teams run by Tim Bello, Jason Pinkham, Austin Philbin and John Sullivan, Penney said.

Long-term prospects

Dynasty’s long-term prospects and profitability have also been called into question by some industry observers, given the intense capital needs of the business, the availability of what Dynasty offers from other sources and competitors who may have more experience and resources.

Penney wouldn’t comment on the firm’s profitability, but capitalization doesn’t appear to be a problem given the deep pockets of the company’s owners and board members. They include such Wall Street luminaries as Todd Thomson, who headed wealth management at Citigroup; William Donaldson, former chairman of the Securities and Exchange Commission, the New York Stock Exchange and Donaldson, Lufkin and Jenrette; Harvey Golub, former chairman of American Express, and Michael Brown, who headed a top ultra high net worth team at US Trust.

Because Dynasty has not tapped private equity financing, Penney said, the firm can grow more methodically and not have to worry about a quick exit strategy. “This is a company that’s built to last, not to flip,” Penney said.

More than one industry executive has professed to be puzzled at Dynasty's smorgasbord of offerings available elsewhere, albeit not from the same source.

But the firm’s platform is “very appealing” to advisors facing demands from sophisticated clients but who don’t have the internal capacity to service them, McLaughlin said. “Dynasty can round out their service delivery with a fully vetted, institutionally priced partner who can provide a ‘best in class’ solution. It’s very sound and differentiated.”

Penney and Thompson need to foster a true advisor culture, McLaughlin cautioned. “I’m not convinced they understand the missionary zeal of the RIAs,” he said. “They’re more comfortable in the milieu of former brokers who have converted their commission business to a fee-for-service business, but who are still, principally, transactors and sales people, not disinterested advisors.”

Nonetheless, larger, more sophisticated advisors “that want the benefits of the RIA channel without having to construct their own platform,” do find the value proposition attractive, said John Furey, principal of Advisor Growth, a Phoenix-based consulting firm. However, because Dynasty “leverages solutions of third parties” on its platform, he pointed out, the firm “is not in complete control of the advisor experience.”

But the fact that Dynasty’s clients are neither locked-in nor have been acquired and given up equity “makes the partnership less threatening, and has likely contributed to their aggressive growth,” DeVoe argued.

Jeff Spears, chief executive of Sanctuary Wealth Services, which provides similar platform services to San Francisco Bay Area advisors, agreed. “It’s a business model that’s more attractive to larger advisors who don’t want to give up their equity.”

Leveraging industry trends

Dynasty is also well positioned to take advantage of the industry trend towards more independent advisors and consolidation, Penney said.

He cited First Republic Bank’s recent acquisition of Luminous Capital, the independent advisory firm founded just four years ago by prominent breakaway brokers, for a hefty multiple, as a “huge positive” for the RIA business.

Accelerating consolidation will result in several nationally branded RIA firms within five years, Penney predicted. Smaller firms attempting to compete for clients’ business without a large-scale partner will be “bringing a knife to a gun fight,” he said.

The decision earlier this year by HighTower, the prominent high-end financial services firm that heretofore only worked with firms who gave up equity, to begin offering a Dynasty-like platform of services to advisory firms who don’t want to become equity partners was further “validation” of both the strength of the RIA business and his firm’s business model, Penney said.

Accounting firms that have wealth management practices are also in Dynasty’s cross-hairs.

In April, it signed on HA&W Wealth Management, a $450 million division of the Atlanta-based CPA firm Habif, Arogeti & Wynne. Dynasty will be looking for more such opportunities next year, Penney said, working with Method Holdings, an aggregator of CPA firms and joint owner of HA&W.

What’s more, the high end of the independent advisory industry is expected to be further bolstered in the next several years by an influx of wire-house brokers with large books of business who signed contracts after the 2008 financial crisis.

“We expect our call volume to increase,” Penney said.

Competition and culture

But independent advisors – and Dynasty – can’t afford to be complacent, Penney warned.

Increased competition is “coming into the space faster than ever before,” he said, led by a new wave of aggressive, well-capitalized aggregators entering the market, in addition to wire-houses battling to stay relevant as alternative custodians with broader distribution.

New internet-based firms are also poised to capture a younger clientele who are more comfortable with virtual financial relationships, Penney said. Nonetheless, a “vast majority” of clients will still prefer a personal relationship with a financial advisor who can help them with specialized problems, he predicted.

To that end, Dynasty has begun to focus on working more closely on practice management and cultural issues with advisors in its network and held its first annual advisor summit this summer at a resort near Yellowstone National Park.

“The most valuable thing we have is our network,” Penney said. “By creating a distinctive culture and staying connected we can share best practices and make it an elite network.”