Dynasty Financial Partners is upping the ante in the bruising battle to sign on breakaway brokers and RIA firms.

The industry's leading platform provider, which is locked in fierce competition with industry rivals such as HighTower Advisors, United Capital and Focus Financial Partners to align with advisory firms, is offering RIAs a way to monetize a portion of their firm by purchasing a percentage of their revenue stream.

Dynasty will buy a minimum of 5% and a maximum of 10% of an advisory firms' revenue, paying a multiple of five to six times the firm's revenue, says Dynasty CEO Shirl Penney.

"We're not getting in the business of buying RIAs," Penney says. "There's no management oversight. We want to give firms a first bite of the apple of monetization."

MONETIZATION KEY ISSUE

Dynasty CEO Shirl Penney wants to give RIAs "a first bite of the apple of monetization."

Indeed, the opportunity to monetize equity has been a critical issue for advisers who have signed on with Focus and HighTower. Focus began recapitalizing last month following the purchase of a majority of shares by two powerhouse private equity firms, while HighTower has begun to bulk up its RIA holdings with a new round of bank financing to enhance the company's value.

"It's a smart move by Dynasty," says David DeVoe, is managing partner of DeVoe & Co., a San Francisco-based consulting firm specializing in mergers and acquisitions and transition planning for RIAs. "It will help create new levels of stickiness with partner firms, increase their revenues as their clients acquire new assets and generate an attractive return."

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"We're not getting in the business of buying RIAs," says Dynasty CEO Shirl Penney.

For advisers, selling revenue "is likely to be more expensive than traditional debt," DeVoe says, "but you have the benefit of not having a new shareholder in the company. Some advisors may also appreciate the simplicity of revenue being the metric, as opposed to getting into cash flow and expenses. And [the new program] can be used as a way to monetize ownership, without having to bring on new owners."

Industry consultant Tim Welsh credited Dynasty with innovation, but added that for RIAs, "this seems a very expensive way to get capital."

Larry Miles, principal of one of Dynasty's newest platform rivals, AdvicePeriod, called the revenue purchase program "an interesting option for Dynasty's network." He went on to say: "That said, many advisors are not interested in selling part of their business. If anything, they would like to increase their ownership and control."

OUTGROWTH OF LENDING BUSINESS
Dynasty's new Capital Strategies division will be headed by CFO Amit Grover and is an outgrowth of the platform provider's lending business, known as RIA Financing Services.

RIAs borrow money for startup expenses, ongoing working capital, and acquisitions, and the lending program "typically provides for up to 50% of a firm’s revenue to be made available as a loan for the business and its owners," according to a statement from Dynasty.

In the new revenue purchase program, RIAs can choose to buy back the revenue portion they sold to Dynasty after three years if they want to, Penny explained.

"It gives them another option, another arrow in their quiver," he says. "If they take out a fixed-term loan they have to pay it back. With revenue participation, they can pay Dynasty back or let it roll. For many owners, the firm is their largest asset, and it gives them a chance to have some monetization, which may later turn into succession planning or a sale."

The new program allows Dynasty to achieve "a return on capital over time," Penney says. It is also, he adds, "one more reason [for advisers] to come to Dynasty."
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Charles Paikert

Charles Paikert

Charles Paikert is a senior editor at Financial Planning. Follow him on Twitter at @paikert.