Dynasty Offers Forgivable Recruiting Loan of 100% of Revenue
Dynasty Financial Partners, a service provider for registered investment advisors, is taking a page from broker-dealers’ recruiting playbook with a new offer of an upfront loan that is forgiven over eight years in return for a portion of borrowing firms’ cashflow.The so-called “Dynasty Freedom Note” will give brokers who are transitioning to become independent advisors cash up to 100% of the fees and commissions produced in the previous 12 months, said Shirl Penney, the former Smith Barney executive who is chief executive of Dynasty.
The deal is aimed at big-firm brokers looking to become independent at a time when their brokerage firm mobility has been curbed as wirehouses cut recruiting budgets and drop out of the Protocol for Broker Recruiting. It also could help Dynasty lock in customers for a longer period than the four-year contracts they now sign to use its set-up services and products.
“We have heard advisors say that they need more liquidity,” Penney said. “And I do think it will be helpful for retention that someone doesn’t have to go somewhere else to get the capital.”
Full-service brokerage firms have long used promissory notes that at times have exceeded 200% of trailing-12-month revenue to attract brokers and keep them in their seats for as long as nine years. A cottage industry of small banks such as North Carolina’s Live Oak Bank and RIA “roll-up” companies that buy smaller practices also offer transition loans to breakaway brokers.
In return for its financing, Dynasty will collect 35% of Freedom Note firms’ revenue during the term of the loan, similar to the way that roll-up competitors buy a portion of advisory practices’ cash-flows in return for upfront cash.
Dynasty, which bills the program as “the industry’s first forgivable note program for advisors seeking independence,” will not levy most of its traditional contractual service fees for front-, back- and middle-office services during the loan period. It typically charges between 15% and 20% of revenue for those services on their own.
The program is a further extension of Dynasty’s efforts to use its own founders’ capital to attract and retain customers. In 2017, it offered to buy 5-10% of partner firms’ revenue in exchange for financing as brokers set up their independent practices. More than 10 of Dynasty’s 47 partner firms are using the financing, Penney said.
The new program does not lock in firms’ permanently to a sale of their equity, he said.
“If an advisor does a deal with us and doesn’t like it, they can get out,” Penney said. “With some of these rolle-ups, once you sell, you’re done.”
Dynasty, which recently moved its headquarters to Florida from New York City, is not offering the new financing programs out of a sense of crisis, he said. Despite the short-term contracts its partners sign, only seven have left since first affiliating, and some were asked to leave for compliance or cultural reasons, Penney said.