Breakaway from RIAs? Dynasty CEO warns next wave of advisor exits will be from consolidators

For a generation of brokers fleeing Wall Street’s biggest brands, “independence” meant answering to clients instead of shareholders. But as more RIAs are owned by private equity and other outside investors, Dynasty Financial Partners CEO Shirl Penney warns they risk mirroring the wirehouse and broker-dealer firms that advisors thought they’d left behind.

“There's a number of advisors I think that are at various roll-ups, that if they could leave, they would,” Penney told InvestmentNews. “But the handcuffs are on in a material way, so they're, they're not independent. Because the frustration in the space I do think is boiling, I do think that you're going to be covering breakaway from RIA stories.”

More than 70% of all RIA M&A deals in the first quarter of this year were linked to private equity backers, according to last month’s report from Echelon Partners. One of this year’s biggest RIA sales was Carlyle Group’s deal in March to acquire majority control of MAI Capital Management.

“The way private equity executives make money is to make money for their investors, and then they get a percentage of the profits that they make for the investor. So at the end of the day, that's going to be their focus. Their fiduciary duty and obligation is to their investor. It's not necessarily to the underlying investor of the RIA. And that's why I've said quite publicly in the space now for a while,you're not truly independent unless the only person you can be fired by is your client.” said Penney. 

Some of the biggest RIA aggregators who are majority owned by private equity or other outside investor groups include Hightower Advisors, Mercer Advisors, Wealth Enhancement, and Focus Financial Partners. Penney’s Dynasty Financial Partners provides technology, investment, and advisor support services to 58 RIAs spanning over 500 advisors and $125 billion in assets.

“If you're at a roll-up [RIA] that's majority owned by private equity, and you're being the squeaky wheel because you're standing up and saying, look these things that we're doing are not in the best interest of the client—we're not investing in technology, people, infrastructure, all the things that my clients care about,” said Penney. “And they say, you're being too noisy, you're creating too much havoc inside the business, you're fired. Well, you weren't independent, because you just got fired from a firm that you may have thought you were independent at, but you're not.” 

Penney is the founder and CEO of Dynasty, which was founded in 2010. Fortress Investment Group made a minority investment in Dynasty in February, joining Dynasty’s existing minority backers that include Charles Schwab, BlackRock, and J.P. Morgan Asset Management. 

“While advisors are going independent weekly, the next great new wave in wealth management advisor movement won't be breakaways from wirehouses. It'll be breakaways from RIAs,” Penney wrote on LinkedIn. “Don't become the very thing advisors broke away FROM — bloated, defensive, litigious, bureaucratic, and tone-deaf like too many wirehouses, IBDs, and roll-ups have become.”

Penney predicts that advisors who leave the roll-up consolidator RIA firms will be drawn towards launching their own RIA, even if it could result in more short-term challenges.

“Advisors get to a point where they might feel the exchange of value is no longer advantageous to them, especially advisors that are younger and growing disproportionately to the peers around them,” Penney told InvestmentNews. “They might say, I'm going to go through the choppy waters of breaking away and starting my own RIA, own my own equity. Maybe I forfeit the equity that I had here, because that would be a better longer term fit for me versus dealing with some of the misalignment that happens with where I'm sitting today.”