#FASuccess Ep 124: Insourcing Vs Outsourcing To Manage Overhead Expense Ratios While Scaling An Advisory Firm, with Shirl Penney

What You’ll Learn In This Podcast Episode

• How Dynasty Financial Partners Supports Advisors [07:51]
• The Four Key Service Lines They Offer [16:56]
• How Their Loans And Buy-Backs Work [25:42]
• The Typical Gross Margins Of Firms That Leverage Dynasty’s Core Services [41:28]
• What Dynasty Does For Its Clients [49:07]
• Their Typical Clients [1:00:59]
• Where Their Growth Is Coming From [1:10:02]
• The Path He Took Towards Entrepreneurship [1:21:02]
• What Surprised Him The Most About Becoming An Entrepreneur [1:24:35]
• Their Biggest Competitive Advantage [1:26:56]
• How His Role In The Company Has Changed Over The Years [1:31:27]
• His Low Point [1:36:48]
• How Shirl Defines Success [1:45:57]

Resources Featured In This Episode:

• Shirl Penney
• Dynasty Financial Partners
• FA Success Podcast with Michael Henley
• John Furey of Advisor Growth Strategies
• Aspen Institute

Full Transcript:

Michael: Welcome, Shirl Penney, to the "Financial Advisor Success" podcast.

Shirl: Thank you, Michael. I'm excited to be here and congratulations on your impressive success of the podcast.

Michael: Thank you. It's been a heck of a run now. We're over 120 episodes. We're actually going back and looking at our stats. We've had 2 million downloads of the podcast over the past 2 years, which kind of blows my mind for how many people are listening and listening regularly on an ongoing basis. But it's been a heck of a ride. It's pretty fun just as a medium to, I don't know, I like it. I just get to chit-chat about the business. I love talking about the industry. I'll talk shop until the wee hours of the morning. And I just get to do that with cool people throughout the year. It's been pretty fun running the podcast for a while now.

Shirl: I bet. Like I said, I'm excited to be a part of it. And I'm also kind of a student of the industry, if you will. So I've certainly listened to a number of your podcasts and constantly reading about the industry and trying to apply that on behalf of our business here at Dynasty, but also take a lot of those learnings and apply it with our clients, the RIAs that we cover around the country. So this should be a fun and exciting conversation. So let's get after it.

Michael: Yeah. I've been looking forward to it. We've had a kind of theme over the past couple of episodes in particular of talking about some people who are in or have built larger advisory firms, as well as folks that have built what I would essentially call support platforms for advisors. And to me, it just gets at this choice, this crossroads that I suppose any business has to some extent, of, for any particular thing you're going to do, do you want to do that yourself or in your business or do you want to outsource it. And the rise of platforms like yours, like Dynasty, where, I think we used to think about outsourcing in like particular very finite functions like, okay, I need to do the downloads and reconciliations for my portfolio center, do I want to do that internally or am I going to outsource that? Or like, hey, I need someone to do the occasional logo and graphic design for one of my marketing materials, do I want to hire a marketing graphic designer person or am I just going to outsource that to a freelancer?

But I know what you guys are doing and some of the platforms that have come up over the past 10 years, to me, take this to a whole other level where suddenly the discussions like, "Hey, how do you feel about just outsourcing virtually the entire overhead portion of your business? The whole mid and back office goes back out to a platform while you continue to do most of the client-facing activities." Which to me, well, both ironically and sort of I think to the point of your business model, kind of recreates the captive employee advisor of old. The original wirehouse-style model was we do all the back-office and mid-office stuff, you're the advisor and your role is just to be seeing the clients and seeing the clients and it's all you do. Just go do the clients and we'll do all the back-office and infrastructure. But the caveat in that environment is it was also literally the firm's client and you were, well, legally representing them. That's why we put "registered representative" on our business card.

And so now we have sort of this alternative world where instead of saying it's their firm and their clients and I just fulfill this client-facing role while they do the rest of the mid and back office, now it can be my firm and I own it and I get to control it and set the vision in the future, but I can still basically outsource all of the mid and back office like it was in the, call it the model of old, and do all the client-facing stuff, but the locus of control has shifted that now it's my firm and I'm an independent. And I think part of the way that lines up so well, to me it makes a lot of sense then that firms like yours have had such success in the wirehouse breakout model in particular. They go from a supported model where they're client-facing and a firm does the back-office to a supported model where they're client-facing and the firm does the back office, but the whole ownership and control change in the process. Although now I know you're getting broader than just people breaking out of wirehouses.

So talk to us a little bit about the Dynasty model, what you guys do and how you think about this framework or position yourselves with advisors.

How Dynasty Financial Partners Supports Advisors [07:51]

Shirl: Yeah. No, happy to. And I think you nailed it in terms of where the business has come from in the evolution of the RIA space. And I'll touch on that. The real genesis for the original vision for Dynasty to provide that turnkey middle-office and/or integrated platform support for an RIA started I would say north of 15 years ago back when I was at Smith Barney and I had a number of different roles but helped build and run the Private Wealth business, their ultra-high-net-worth business.

And I remember leading a presentation to senior management of the company about putting together a business unit that would provide services, product and services, to RIAs, because we were watching very closely the asset flows within the business and Smith Barney at the time had a great franchise and we were winning consistently versus the other brokerage firms. And the private bank, Citi Private Bank, which was under the Citi umbrella as well, was doing just fine also, but you saw an acceleration of assets transferring out to the RIA custodians. And there was a little bit of...

Michael: This was early-stage RIA, right? This is early-mid-2000s?

Shirl: Yes, this is back in '04, '05. That's exactly right. But there was enough asset transference that you could see a trend starting to develop. And we went in and presented a business plan that was probably, not probably, it was just too early, kind of ahead of its time, if you will, but said, "Why don't we not think about this RIA space as perhaps competitors, because ultimately what we're starting to hear..." My career I've spent a lot of time with end-clients, with all the advisors that I've been fortunate enough to work with, and I was starting to hear them say things like, "I think I want to get more of my advice separate from where products are manufactured and sold." Right? So again, not necessarily talking about suitability or fiduciary and some of the terms that we use in the industry, but just simply thinking about advice separate from where products are manufactured and sold.

So you could see even back then kind of the writing on the wall in terms of the acceleration of the lifeblood of our industry, which is assets, making that move towards independence. And this is obviously before the financial crisis. And we made that presentation and basically, the firm was afraid of cannibalization, that if we're empowering and providing capital markets support, separate managed account, alternative investments, credit, ultimately custody, etc. to the RIA space then what's going to stop our advisors from walking across the street from the branches of Smith Barney and starting their own RIA? And I think frankly, even 15 years, fast-forward, a lot of the wirehouses and brokerage firms that have considered getting more involved in the RIA space are still struggling with that same issue.

But anyhow, as I started to look more at the RIA space, I went out and interviewed 30, 40 different large-scale RIAs all around the country, and what they said is, and many of them had been early-stage movers to independence, early-stage breakaway, kind of rugged individualists, pioneers of the breakaway movement, they would say things like, "The custodian does an incredible job providing all the back-office services." But I didn't fully appreciate the fact that the skills that make me a great advisor may not be the same skills that now make me a great CEO. And the transition from advisor to CEO has been a challenge because now I have to hire all these people to provide all of the middle-office support for my firm, to your earlier point, Michael, that I used to get back at the brokerage firm, and there's all of these different vendors that are out there and I'm juggling 45 different vendor balls. A lot of it doesn't integrate. I'm spending a lot of money on variable costs within the business with all of these things.

It would be nice if there was a platform out there, an advisor desktop that I could log into and get all the things that I need to run my business but without having to sell my business, right? I don't want to join a roll-up. And the roll-up movement had just started back 15 years ago or so, and a lot of the only ways that somebody could get kind of supported independence, if you will, is to go independent and sell at the most costly time, for people who were growing their business rapidly, at the point of transition and lose a lot of the upside. So the light bulb kind of went off and said, "Look, why don't we start the industry's first truly integrated middle-office platform service company that can allow an advisor to be independent but not alone, to be in a community, to have all the resources that they need."

And if you think about the custodian, the back-office, the advisor in the front office providing the day-to-day client service for their clients, why don't we enter into the market and build this firm, Dynasty, to provide all of the things that connect the back office to the front office, that can provide synthetic scale. Because if we build out an infrastructure and a technology and a team that can spread the cost and spread the need across multiple RIAs, in aggregate $20 billion, $30 billion, $50 million, ultimately $100 billion of aggregate buying power, it'll drive a lot of scale and efficiencies that will benefit those underlying advisors as well as the clients that they serve. And that started the journey to go build Dynasty. So I left Citigroup in April of 2008, sold my Citigroup stock in the low 30s, which was very fortunate because 6 months later it was 80 cents.

And the challenge, though, was, now I'm out raising capital for this new model that no one had ever heard of in the height of the financial crisis. So my wife kept track, she's the real co-founder of the firm, of how long we went without a paycheck, two years, seven months, and four days. So we officially launched the business in December of 2010. And it took a little bit of time. Probably the first couple of years was a lot of education of the marketplace that we're not a roll-up, we're not taking equity from the RIAs that are our clients, but we are a service provider. But once the market figured out what it is that we're doing and the value prop, we were kind of off to the races. And today we have 47 firms that are on the platform, which we can talk a little more about if you like, but in aggregate today north of $32 billion of assets that sit on the platform and a very steady forward growth projection of the business that I think in the next 3 or 4 years should get us pretty close to the $100 billion number.

Michael: You made an interesting point there as you were getting launched and kind of figuring out how to explain your positioning that, as you said, you're not a roll-up. Right. So that starts to distinguish with I guess what at the time would have been firms like United Capital, now some players like Mercer and Focus. You're not taking equity as, at least at the time, as HighTower was, where that was part of the deal.

That you were positioned as a service provider, as, I was going to say simply a service provider. I don't mean that in the belittling way that maybe it sounds to say simply a service provider, but just that there was...your positioning, to me, had sort of a certain simplicity and purity of the relationship of what you were doing that it was just, "Look, you run your firm, we'll be a service provider for you, we'll handle all that whole slew of middle-office functions that you don't necessarily want to do or hire up for. It's a pain in the butt because you need a third of a person to do this, but you can't hire a third of a person, so you have to either hire a freelancer, who's not that focused on your business, so you have to hire one person to do one third of their time in three different jobs, which means you don't get a great person. And we're just here to be that service provider for all that middle-office stuff that it's really hard for firms to deal with until they basically get their own billions of dollars of scale."

Shirl: Yeah, that's exactly right. And look, our business has evolved, like all businesses do. So we're coming up on our ninth year since the launch, and the services that our clients needed when we first launched the business is different than the services that our clients need now because a lot of them are more mature. A lot of our clients now are not breakaways, they were already independent firms that wanted to come in and outsource more of the infrastructure to us so they can focus more time on growth and more time taking care of their clients, etc.

The Four Key Service Lines They Offer [16:56]

But our service platform now can be fairly easily broken up into four buckets. The first is a consulting business. And if you think about all the various life cycles of an RIA, to oversimplify it, we provide consulting to someone who's breaking away and launching a firm. So there's a whole set of project management services that have to be done around launching a firm regardless of where they've come from. And Michael, at this point, we've done breakaways from basically every firm in the industry, every type of firm, whether it be wirehouses, banks, IBDs. We've done breakaways from roll-ups, we've done breakaways from other RIAs that have scaled up and the partners aren't getting along for whatever reason. We pretty much set up an advisory firm with advisors coming from any potential avenue that they could come through in the space. We also within that...

Michael: Sorry, I was just going to ask like, and so in that consulting services, this is just a lot of like, how do you do this transition? Legally, what are the entities? What are the structures? What's your employment agreement? What are you allowed to do? What are you not allowed to do? Just, how would you make the transition? What has to be created on the other side? And then just the project management and, I guess, transition support that goes with executing that and not screwing it up, since most advisors have never actually done that transition until you have to do it the first time, and it's kind of high-stakes at the moment?

Shirl: Yeah, with your life's work on the line. That's right. I describe it as kind of the Staples Easy Button around the transition. We're the general contractor helping you build the new house. And we've created our own proprietary project management software which helps with confidentiality but also helps keep all aspects of the project organized. And we literally do everything from finding the office, negotiating the lease, helping to secure any type of liquidity that they need around the move, the naming, the branding, the logo, the launch videos, the launch letters, the new account paperwork, the LLC, the partnership agreements, setting up board of directors if that's needed, equity splits, on and on and on.

And then we live with the advisors through the transition, helping to make sure that all the paperwork is getting done. Oftentimes with large clients, we might go out and sit with clients, with the advisor to help explain the new model. So we're very, very engaged. So it's not like a traditional consulting firm where it's more just guidance, but we're providing the guidance and then jumping in the trenches with our client and helping them execute.

So the breakaway piece is a big part of the consulting business. As I mentioned earlier, advisor to CEO, so a lot of practice management and coaching around how to grow the business, whether it's inorganic, adding other advisors. A lot of advisors we find say they want to grow inorganically but they're not sure how. So you have to get the right equity structure, comp plan in place. They have to have the right marketing materials, PR strategy. And we help them design those programs.

And then obviously the third life cycle is succession. And we do quite a bit of succession planning for advisors in the network. But given the average age of an advisor in the Dynasty network right now is late 40s, they're still in rapid growth mode, so a lot of the succession work that we do is tied more to advisors that are coming to us looking to sell their firm into one of the underlying firms within the Dynasty network. So that's the consulting piece.

The second business is our, we call our core business. And you really summed it up nicely earlier, that's running all the middle office. So rather than an RIA that might be listening to the podcast, rather than them having to juggle the 45 different vendor balls, they have an integrated experience with us. So they don't have to go contract with a financial planning software provider or a CRM or worry about a proposal generator or think about where they're going to get compliance support from or who's going to do their billing or their reporting, etc., etc. We're providing all of that as a turnkey middle-office service provider for them. So they don't have to hire people to do it, and they don't have to worry about negotiating any of those third-party vendor contracts.

And we were one of the first kind of players, going back nine years ago when we launched the business, to really build an advisor desktop with a focus on open APIs. So we built our chassis to be very flexible so that as a new best-in-class service provider comes along, I think about it as kind of that high-end iPad for the RIA space that allows for us to trade in new apps as they become available and needed by the client RIAs that we serve. So we charge percentage of revenue or basis points for all of that turnkey middle-office support. It typically ends up being around 15%, give or take, as it blends out. The average firm on our platform is about $600 million. So it does scale down. So you get the benefit of scale. As one of our clients grows, they're paying less and less to us on behalf of their variable expense on a percentage of revenue basis.

And then the last business for us that we launched with was our platform service business. And the term you typically hear in the space is a TAMP, turnkey asset management provider. So we have built out a TAMP to provide SMA, UMA, advisor as portfolio manager trading functionality and toolkits, alternative investment with access to various feeder funds, capital markets, investment banking, access for advisors that want to make referrals to invest in banks, etc. So we actually just hit $15 billion on our TAMP, which I think makes us one of the top 5 TAMPs that's in the RIA space. So we've had a lot of success in terms of growing assets with advisors that have a consulting approach that are outsourcing to professional money managers. And the rest of it, to the $32 billion, the rest of it sits in more APM, advisor as portfolio manager programs where we provide a lot of street-wide access to research and trading tools and technologies to help those advisors run scalable and efficient portfolios.

So those were the three businesses we launched with: the consulting, the core business, and platform, but what's happened as our firms have matured, they've needed more access to capital. So a couple of years ago we launched a new capital business, which is now our fourth vertical, where we provide loans to our advisor clients to provide liquidity for principals to fund succession planning or to fund MNA. And we have quite a sizable loan book already that we've deployed for our community.

And then most recently, and I did hear that Michael Henley, when he was on your show, was talking a little bit about this product, but we launched what we call a revenue participation note, an RPN, where we will buy up to 10% of the revenue in an advisor's firm, which provides some very tax advantageous liquidity for those principals if they want to take the money out of the business without having to give up any controls. And that product has really been something that's taken off for us for advisors that say, "Look, I want to sell my business 10 years down the road, but I want to take a few chips off the table now. So let me get some liquidity, sell a piece of my revenue." And then after five years, we allow for flexibility so that if they change their mind and say, "I want to buy it back," they can. So it's only permanent capital for the advisors if they choose, they have a one-way right on their side to have it be permanent capital.

So anyhow, that's the business model now with a community of like-minded principals, a couple hundred advisors across these 47 firms that love to get together, talk about best practices, collaborate. There's some partnering that goes on with different types of businesses. So to provide this supported independent model, as you suggested, I think about it as scaffolding around the firms or providing the synthetic scale that they need that allows them to be very competitive at the ultra-high-end of the market when they're going after an ultra-high-end client.

How Their Loans And Buy-Backs Work [25:42]

Michael: So I'm curious just a little bit more around this lending capital business and particularly the revenue participation note. So can you maybe just, I know it's always hard talking the math on a podcast in audio, but can you walk us through just a little bit of an example of the mechanics and how this works? I'm just trying to wrap my head around quite like, how does the math work and why do I do this and what kind of liquidity do I get from it if I'm doing it?

Shirl: Sure. So if you're an RIA and you're generating $3 million of advisory fees, we are willing to purchase up to 10% of your revenue, right? So pretty simple math is $300,000.

Michael: So you're going to buy $300,000 a year of my top-line revenue. I guess technically, you can draw it on profits, but you're just drawing it straight off the top line. That's the deal. So 10% of my revenue goes to you, I keep the other 90%.

Shirl: Yeah, and because we run all the billing and we take a lot of that middle-office work off the table of the RIA. So we're running the billing, and now we're further incentivized, if you will, to help the firms grow, because the better they do in that scenario, obviously the better that we do. But in this case, $300,000. We pay 6 times the revenue interest. So $300,000 with a 6 multiple is 1.8, right? So we're buying 10% of the revenue in a $3 million revenue RIA for $1.8 million.

Michael: Which is a huge number by traditional advisor multiples of selling for two times revenue. But of course, the reality for most firms, we don't really sell for two times revenue, we sell for, if you're a sizable firm, maybe six to nine times free cash flow. So from your perspective, when you buy the revenue but it comes off the top, it's essentially 10% preferential profits interest for you. So you can pay a normal multiple of cash flow, which is how you get to 6X?

Shirl: That's right. And another way to think about it, too, Michael, is if you're at...the average advisor on our platform, we can talk about gross margins and net income and what we're seeing in the advisory space and some trends and things that might be interesting to your listeners, but the average net income, if you will, of an advisor firm that sits on our platform is about 30%. And that's after all of their fixed cost and variable cost, and it's after advisor comp.

Now, they own the equity, so most of the advisors are paying that out as a dividend to themselves, but if you think about net income at 30% and then Dynasty comes in and buys 10% of the revenue, we're buying about a third of the profits, right? So we never want to turn an entrepreneur into an employee. So the majority of the profits for them is still on the table. So the positive selection bias, which really works in our favor, which is, we want to support advisors that want to own the vast majority of their equity because they see their best growth years in front of them, we can come in, give them a little bit of liquidity, cloud them to get some chips off the table.

Now, follow this case forward, that $1.8 million goes into the business. And if they decide the principal wants to take the money out, they simply put a loan on the books, right? So they borrow the money from the business. They pay a nominal interest on it, which they're paying to themselves, which would be the equivalent, for most high-net-worth advisors are in a tax bracket when you look at state and federal of close to 50%, that would be the equivalent if they took an upfront deal from a roll-up on one of these forgivable loan deals or if they took a deal from another wirehouse of a number that is twice that $1.8 million. That's the equivalent of $3.6 million in a traditional upfront deal because of how it's structured from a loan perspective and the tax advantages around it.

So it's been met with a lot of enthusiasm. We don't take any control. It's a straight revenue interest. It's not tied to us having any managerial oversight. Obviously, we're providing compliance support. We're providing outsourced chief financial officer-type supports. We make sure that they run a good, clean business, but we're not in any way dictating how the advisor does so.

Michael: And so, I'm going to imagine in practice you really get a blend, some people that do the partial liquidity and just literally keep the money and they've taken some profits off the table, they'll grow it further over the next 5 to 10 years and then have their final liquidity event at the end. And I'm presuming some use this as growth capital instead? They take the dollars and they plow it right back into the business like, "Hey, $1.8 million of cash, so I'm going to hire the 3 more people I wanted to hire and I'm going to do a bunch of these other things that I wanted to do now that I've got the opportunity to do so."

Shirl: Yes, although they don't...not so much in terms of hiring people. Occasionally it happens, but a lot of that middle-office service, again, is being outsourced to us. But what more and more people are doing...

Michael: Oh, good point. They don't need the growth capital, they already have. You're scaling it for them.

Shirl: But what they're using it for is M&A capital and really see seeing it as kind of a permanent line where every time they go out, let's say they want to add another $3 million RIA, they know that we'll step in and provide $1.8 million of additional liquidity because we'll continue to buy 10% of all of the revenue of all of the ongoing acquisitions, right? So if you look at that in addition to a traditional two or three-year earnout, which is using in part cash flow from the business that you're acquiring, with Dynasty putting the upfront money, it's pretty easy to see how you have a nice systematic program to fund M&A on a go-forward basis for a lot of our clients.

Michael: Interesting. Interesting. And likewise, I guess that's why you'll only do a revenue anticipation note up to 10% because if you go too much higher than that, either you're chewing up too much of their profits that you can change their mindset or just you get to the point where if there was a significant market downturn or a pullback in revenue, your actual cash flow might be impinged, which is not good for anybody in this deal.

Shirl: That's exactly right. We do not want to even get close to buying even half of the profitability in one of the firms because we really want people to continue to be focused on growth.

Michael: And then you mentioned there's this structure down the road where they can, I guess basically, buy their participation note back, unwind this, say like, "Hey, used the money, got bigger, feel good, want my equity back now." So how does the buyback work on the other end?

Shirl: The buyback works at the same percentage rate. So it's 10% of your then revenue. So if we've grown the revenue together then obviously we'd be a beneficiary. What we don't benefit from, though, is it's the same multiple. So if you're significantly growing your business, the reality is the multiple tends to go up as the businesses get bigger. You're still buying it back from us at the six times multiple. So that's advantageous to the entrepreneur that takes the deal with us, as is the fact that it's flexible to them that they can choose to do it or not.

Most typically what somebody would do is, let's say they decide to sell the business down the road, and we're having some conversations now where our network has gotten so large, and this won't surprise you, is that some firms within our network are now, as part of their succession plan, planning to sell to other advisors within our community. Makes sense. They use the same systems and they've gotten to know each other and built trust over the years. So when that happens, they'll execute the transaction, which we may finance the other side of it, but then they'll close out, they'll buy out our RPN at that point and then transition the business over to the acquiring RIA.

Michael: If they do this, if they do the buyback, sort of imagining the irony here: when I give you 10% for $1.8 million, it's like, "Thanks for the pile of cash" and I go and do it for some M&A and other stuff. But then when I come back to you and hopefully my firm has grown, so now 6 times my profit interest is $2.5 million or $3 million, I don't necessarily have $3 million of cash sitting around to buy it back because I've been deploying that in my business. So I'm sort of imagining the irony like, is there another layer now where I can buy back my revenue participation note but you'll finance that purchase for me or do I have to wait for a final liquidity event so I can actually come to the table with cash?

Shirl: No, we have had scenarios where people have asked us to finance for that need. And I will tell you, we have a number of clients that do both. The loan book, personally guaranteed, and there are some benefits in terms of costs with the loan, but some people just don't want to personally guarantee, especially in some scenarios where there's a group of partners within the firm whereas the RPN is tied straight to the business. And then some people say, "Look, I have...whatever the need is, I've got a couple of million dollars of liquidity need, let me take $1 million in loan and do $1 million in RPN and mix and match it." And we're very flexible in that regard.

Michael: Interesting. So the RPN version is solely tied to the business. You don't even require a personal guarantee because the business cash flows are the collateral when I guess you're basically a 10% loan-to-value, so you've presumably got some good security.

Shirl: That's correct.

Michael: Interesting. And I'm just wondering, from the business end, is this literally Dynasty now keeps its own proprietary loan book of all of these different succession loans and M&A loans and revenue participation notes? Is that actually becoming part of the business itself? You're essentially a portfolio lender to your firms?

Shirl: It is. And we haven't kind of proactively gone out and talked a lot about it in the press because we haven't made the decision to open up, we call it Dynasty Capital Strategies, and it's a subsidiary of the business, which is both the lending business as well as the RPNs. We've only allowed that liquidity in both of those programs to be deployed to our broader clients, right? So somebody who hasn't been able to come to us and say, "I just want a loan."

But the reality is Dynasty actually is one of the largest liquidity providers in the RIA space. When you look at the number of loans that we've put on the books over the last five years and the number of RPNs that we've put on the book over the last couple of years, collectively, we've provided tremendous amount of liquidity. I would tell you that 75%, so the majority of the advisors on our platform have used 1 of those 2 programs. Some people haven't, they've self-financed or they were already independent when they signed up and haven't needed liquidity yet for whatever need they might have. But most of, like I said, 75% have used one of those programs at some point in the life cycle of their business.

Michael: Fascinating.

Shirl: It's very friendly capital, right? It's your service provider that allows you to have capital when and if you need it.

Michael: And you intimately know your firms already because of the function of what you're doing for them. So at worst you have very intimate knowledge to underwrite the risks effectively. And I guess with things like revenue participation notes, when you literally do their fee billing, you're kind of pretty sure you can get paid because you actually handle the money. So you don't have to worry about firms trying to run with their own revenue and not pay on their note because you actually fulfill that function for them with the core business. So just, it aligns very cleanly, right? It's the same reason that custodians can handle those functions.

Shirl: That's true. Look, if you look at our board of directors and people like Harvey Golub in American Express or Todd Thomson, who was the CFO of Citi, and Bill Donaldson obviously, founded DLJ, the SEC, etc., you kind of go down the line, we have run the business in a very professional, tight way ever since I left my garage, literally, in launching the business. So on the credit side, I can tell you our philosophy has been to underwrite the loans, and then on the RPN, to do the work there in a zero-loss-type mentality. And kind of knock on wood, if you will, we've never had any issues with any of the clients. There's not a middle market commercial bank in America that wouldn't want the credit quality of our advisor network and the work that we provide. And that's not lost on us, and that's why we're able to provide pretty cost-effective capital.

You think about a breakaway, this is a new LLC with no revenue history where an advisor is transferring their client relationships from a firm that fundamentally believes that they own those client relationships, yet we're standing behind those people in that new firm to provide liquidity for their staff and for their family in that time of transition. And we've been able to do so now for nine years with no losses. It's to your point, we're very careful. We get behind people we believe in. We run the books and records. We understand the compliance aspect of these businesses, and we've been very successful as a result of that.

Michael: So I'm thinking about Dynasty, as you said, around these four sort of core buckets. So consulting services, as you put it, the core business, which is all those middle-office functions, the platform, which is sort of the...is functionally the investment platform, so TAMP offering, access to SMAs, UMAs, all of these different strategies that become available, and then the Dynasty Capital Strategies, sort of the lending business when you need to get liquidity for your business tied to your business: supporting succession, supporting acquisitions, etc. And so, those are the four buckets: consulting, core, platform, and capital.

Shirl: You nailed it. And I think something that is worth clarifying as well is that pretty much everyone has hired us at some point to do some type of consulting work, but the consulting, the capital, and the platform business, they're all a la carte, and somebody can choose to use them or not, but everyone who's on the platform is a core...to be a client of Dynasty, if you will, that means that at a minimum, you are a core service client. We are running the middle and back office and providing a lot of the scale that we've talked about. And then on top of that, if you need coaching and consulting, if you need various types of capital or if you need access to an investment platform, then on a la carte basis you can opt into that. But everyone is a core client.

The Typical Gross Margins Of Firms That Leverage Dynasty’s Core Services [41:28]

Michael: So now talk to us, we've talked about the services side of the stuff that you do and across the four different service lines, so now bring us back again to the discussion about cost. So you said we can kind of think as maybe at least a rough benchmark. I realize it'll scale up and down inversely with assets and revenue but something in the neighborhood of 15% of revenue for a firm with $600 million of assets is at least a starting point of how I can think about this from a revenue and a P&L perspective.

Shirl: Yeah, that's right, it's in that range. So if you think about the typical firm, and it varies because fixed costs can be different depending upon where the advisor lives and operates the business obviously, but the typical firm on our platform is running in the low to mid-60s in terms of gross income, and the average being actually about 63% right now. Meaning if their fixed cost, which oversimplifying, as you well know for an RIA, typically is their staff and real estate, right, those are biggest items, usually run somewhere around 17.5% to, call it 22.5% type range. Their variable costs, if they're on their own, are those 45 different vendor balls that we discussed earlier, or if they're working with Dynasty, it's just us being because they don't pay an additional fee for reporting or financial planning software, whatever it might be. That's all included in our cost because we've gone out and put in place institutional pricing models with all of those service providers.

And in so far cost is in that 15% range, you add the variable cost, and most typically, as you also know, the custody costs are passed on, the execution costs are passed on to the end client. Although we do negotiate on behalf of our entire network favorable custody pricing and structural relationships with the custodians, but assume that that's passed on. So the fixed cost plus the variable cost is somewhere in that 35% to 37%-type range so that their gross income, the RIAs that we're supporting, is in that 62% to 65% range.

What most of them then do is they set advisor comp at, call it 35%, and then the rest of it comes out as a dividend, because most of the firms, again, larger firms that we support have more than one partner, and then the dividends are paid out on a pro rata basis based upon their equity participation.

What we have found, we actually did a study recently with John Furey, who I'm sure you're familiar to, very respected consultant in the RIA space, and we looked at a lot of his larger client relationships, RIAs that he's working with. We looked at the top advisor studies of some of the RIA custodians. There's some asset managers that have put out top advisor studies. And then we looked at advisors that were coming to us that were already independent before they signed up and we found on average, top RIAs in the space were running at 55% versus our average is 62%. So it's 700 basis-point differential.

And when you peel the onion back, what you find is, while we are saving these RIAs a little bit on third-party vendor cost or what we call resource partners, we don't use the term "vendors" internally because we feel that partnerships are sustainable over a long period of time, and just treating somebody like commoditized vendor relationship is not. But our resource partner cost, we're able to save a little bit, but where the real delta is, is on cost of employees, headcount, where our firms on average have 3 fewer people than comparable $600 million RIAs that are not on our platform. So when you take that delta on cost, let alone the amount of time that it takes to manage those people, the result is 700 basis points of higher income. So the advisors are making more money on our platform. But then if you say the average firm in our network has an 8 multiple, let's say in terms of valuation, times 700 basis points, it's an increase of almost 30% of valuation in the underlying firm, and they're growing faster because they have more time to grow.

So once RIAs that come in and look to outsource to us really dig in and we do a robust P&L analysis to see where we can...we build a gap analysis and say, "Here's where you are, here's where you want to go, here's what it looks with us," we're finding actually some of our happiest clients because they've already seen the movie of what it's like totally on their own, or the ones that were already independent are now outsourcing more to us to free up their time to grow.

Michael: Well, and again, we touched on it earlier but I think it makes the point so powerfully here this challenge that a lot of firms get into. And I find this particularly hits us as you're trying to scale from probably $300 million-plus up until you're well over $1 billion, where you start to need all of these much more specialized roles. The path from a couple hundred million up to $1 billion is the path where your generalists start becoming specialists. You don't have an advisor who's the advisor and the chief investment officer, you get an investment person. You don't have the advisor who also does marketing on the side, you actually get a marketing person. And you don't have one person who does all the technology fixes in their spare time between seeing clients, you get a technology person.

And so the challenge, I think, for so many firms going through that transition is you end out hiring people to fill these roles but you don't necessarily really actually need a full-time person's worth of time in some of them, you just need more than the part-time that the senior advisor has available to give. And so you end out hiring lots of whole people where you probably would have been fine with partial shares of people. But it's really hard to get high-quality part-time freelancers, but it works a lot better when you're getting essentially variable cost, fractional services of a large aggregated platform. Which I think is why offerings like Dynasty and some others that are in the space work well. It becomes a way to partially lease an expert's time as an in-between of just getting a freelancer off the street and hiring a full-time body when you don't necessarily really need a full-time body.

Shirl: I think that's very well said, and that's what we're talking about with synthetic scale. Absolutely. And I think, and you probably would remember who it was, but one of your guests on the show I remember at one point saying, because it really stuck with me similar to what you're describing there is they said they realized they didn't make any more money from when they had $300 million under management to $1 billion. And the reason is all you...what you just described is they had to hire more people, take on more technology and service providers, and the cost infrastructure didn't get to a point for them to where they started to get some leverage back in the model until they got over $1 billion. And by working with a firm, as you say, like Dynasty, you can get that leverage in the business much sooner.

What Dynasty Does For Its Clients [49:07]

Michael: So help me understand in maybe a little bit more detail on the core business of just, what does Dynasty actually do for me in the core business and then what things do I still need to hire? As we've said, your firms are running this 35% to 37% overhead cost before they get to their gross margins. Your cost is about 15% of revenue, so there's still a big chunk in the overhead category that I've got to deal with myself before you get the rest. So can you walk through with me a little bit more like just, what exactly do I get in core business services from Dynasty, and then what things are still ultimately on my plate as the advisor, either because it doesn't fit in your model or just it's something I would probably want to control over anyways? How do I carve up the list in a little more detail of who does what?

Shirl: Yeah, the most interesting part of your question was what you said right at the end, which is what I'm interested in and what I want to do, and that varies from client to client. We have some clients literally that say, "We want you to take everything and all we want to do is talk to the end client," where they hire us as OCIO, so we're doing portfolio construction, asset allocation, manager selection, trading, rebalancing, providing monthly commentary for the advisor, jumping on quarterly calls meetings with the client and then handling all the middle-office infrastructure on top of the investments. And then there are other people who say, "I just want you to handle my middle-office operations. And I actually enjoy the money management aspect and I want to just take your technology and your trading tools and I'll manage it myself."

But the things that are very popular, the things that I would say pretty much every client that we have would say that they really like getting from us would be things like marketing support. To your point, we have a guy who runs marketing for us, Gordy Abel, who was head of industry at Google before we hired him in financial services, brilliant, brilliant marketer. And he has a team under him that help advisors think through things that oftentimes they never thought about before like search optimization, right? Making sure that you're on page one of Google when a client is searching for financial advisor or understanding digital marketing and how to use various tools like LinkedIn and other social media avenues to get your message out, how to use very simplistic AI technology that can really provide a lot of the front-end interaction to help build a scaled digital marketing program. We run all of those programs. So the advisors we support don't have to worry about, "Hey, did I go and post on LinkedIn today or did I follow up on that lead?" So we have a team that's running those programs.

On the compliance support side, somebody, as you know, within the business has to ultimately be responsible on the compliance side, but we make it color by numbers. So we have our own software that provides kind of a turnkey solution to help that person who's responsible for compliance make sure that they're doing all the things that they need to do, including us coming in on an annual basis and doing mock audits. Our general counsel was the GC of Lehman Brothers, general counsel, Barclays. He ran up SEC and FINRA group for a large law firm, and he has a whole compliance team under him that's providing all of that type of support to really make it color by numbers to help design a robust compliance program so that the advisors don't have to, to your point, go out and hire a full-time GC or a full-time head of compliance if they don't need that, given their size and scale,

On the operation side, some advisors enjoy trading portfolios, some don't. So we have a whole trading desk, trade overlay desk here that can take advisor's models and trade them for them or can help, as I said, build portfolios that can be smaller retail portfolios or ultra-high-net-worth proposals, helping with RFPs, designing the allocations, selecting the managers, providing all of that type of investment support.

We have specialists in technology, in CRM. We have a whole CRM team that can help you build out a robust Salesforce instance, where we've invested millions of dollars, frankly, over the years in developing what we think is a really creative advisor-focused set of our own proprietary apps and tools inside of Salesforce that we've fully integrated with the various financial planning apps, whether it's MoneyGuidePro or eMoney, NaviPlan, etc., where you enter in the information and CRM is prepopulating the planning, ties into our proprietary proposal generator. And then we have a wonderful custody relationship with Schwab, Fidelity, Pershing. We work well with all three of them. All of their paperwork is fully integrated into the system as well. So our desktop that the advisors will log into, single sign-on into all the various underlying components that they need to run the business.

A lot of advisors don't oftentimes fully understand the numbers of their business, right? We've been talking about the fixed cost and variable cost. So we spend a lot of time educating around some of those KPIs, key performance indicators. We have our own OCFO toolkit that's also on the desktop that allows the advisors to do business planning. And our consultants do that with them each year. And then we track their performance against their goals from the year. So my goal is to increase my ROA by 2 basis points this year and I want to increase my top-line by 12.5% this year. And then, which is also very important, they can comp themselves to similar-sized businesses in our network to see if they're high on fixed and why that is versus their peers. And then they can reach out and have conversations with their peers and kind of share stories peer-to-peer as well. So that outsourced chief financial officer program is very popular because it's giving the analytics and tools and resources to the advisors to help them think about how they build more valuable businesses over time.

And then lastly I would just say, Michael, whether it's reporting or financial planning, toolkits, etc., we have a service desk of professionals who are available to help build customized reporting programs that can help understand the best ways to optimize various trading tools that we have on the platform, ops people that can troubleshoot issues with custodians as they may come up. So really trying to create an environment where you have a senior relationship manager and a service team behind that relationship manager that you can call that handles the entire ecosystem for you so that you don't have to worry about who to call at all of these various firms that make up the tech stack or the resource platform that you've cobbled together over the years. You now have an integrated partner that can take pretty much all of that off your desk, again, in an effort to free up your time to help you grow your business and spend more time with clients.

Michael: Interesting. And so all of these pieces, marketing support from Gordy's team and the compliance support and ops to the extent you don't want to do your trading and tech specialists and access to all the various toolkits, all of that is bundled under the core business for which I pay my percentage of revenue fee that scales to my assets? That's an all-in-one bundled thing and it's just, it's up to me whether I use every single part or I use a little bit more or I use a little bit less, my mileage may vary depending on how I want to leverage the platform.

Shirl: That's correct. And it also includes access to a practice management team. All of our network events, we have an annual investment forum which we just wrapped up last week down in Dallas. We have an annual advisor summit. We do regional events. We do client events. We have Kentucky Derby coming up as well as the Players Championship on the PGA Tour where we use our scale and size to go out and secure a venue that the advisors on our platform can then bring their clients to. And it's really with the focus that you well-articulated earlier, you may not...if you're a $500 million RIA, it's too expensive, it's cost-prohibitive to go line up tickets at the Kentucky Derby to get in a suite. But because the Dynasty community has multiple advisors that would like to do that for a handful of their best clients, we're able to go out and do that and put that experience together for our community. So you're getting the big-firm advantages while being able to run your half a billion dollar RIA wherever you might be located across the country.

Michael: And so then in terms of the other service lines, so I'm guessing the capital business, just, you make money as a lender, that's that old boring banking model, where you take deposits and lend money and make money on the spread. The investment platform offering I'm just presuming like, you've got a TAMP offering, it's got its own natural cost that's associated with it because you've got to generate some revenue to run a TAMP. And so advisors just pay the TAMP fee if they're using the TAMP, not unlike any other investment offering that's out there?

Shirl: That's correct. Yep. So there's a platform fee for a couple basis points for the integrated trading tools, which includes all of the research support that...we have 10 different research providers that advisors all have access to that integrates into the advisor portal. And then there's platform fees, to your point, on SMAs or UMAs for the feeder funds if they want to use the alts. If they want to leverage our insurance platform or our lending platform, we have a whole host of different banks that we partner with, and we have lending team members that can help shop out more esoteric, large, non-purpose-type structure loans.

And then capital markets, occasionally we have clients that want to shop a transaction, a large single concentrated stock position, hedging, monetization, restricted stock position. Lyft obviously went public recently and Uber is around the corner, we've had an uptick in interest from clients. SpaceX is a name that is interesting to us right now, where clients are coming to us and they want access to those names on a pre-IPO basis. So our desk goes out and helps make that available to our network.

So it's really, and one of the things I learned early on is not to go out and build a lot of capability that I think our clients will want and need. We've been, I think over the last five years at least, fairly smart about putting together an advisory board made up of our clients to tell us what it is that they need as their businesses evolve. So we've expanded those services as we've known that we have demand for within the network.

Their Typical Clients [1:00:59]

Michael: So talk to me about just typical size of firms. I'm presuming for just the sheer depth of the stuff that you do, when you're charging a percentage of revenue, there's some minimum size that a firm has to be at just for it to be economical for you to serve them and give them a slice of all these core services that you're offering. So is there a minimum or a low end of how big does a firm realistically have to be to be a good Dynasty partner?

Shirl: Yeah, it's a great question and in some ways it's more art than science because, depending on where the advisor is located, if somebody is in a market where they've got $250 million in assets and they really want to focus on growing and we really see them as great community members and they really fit the culture of our community and we can have a lot of fun helping them grow both organically and perhaps inorganically, that's an exciting client. In some ways, Michael, we'd rather have that $250 million client today that wants to grow to $1 billion over time by maybe adding an advisor every year or two and growing fairly aggressively organically versus someone who comes in with $500 million today but has no interest in growing. It's a lot more fun for us to kind of get behind someone who wants to grow an enterprise.

But for us in general, it kind of starts at $250 million to be a beachhead, if you will. I think of us as that Intel sticker that's powering the brand. So for us to add a new brand to the platform or a new logo on our wall that we have here, they tend to be $250 million or above. But we have a lot of $100 million wonderful books of business advisors that call and say, "Hey look, I want all the benefits of independence but maybe I don't want to run my own business. Can you introduce me to one of the other RIAs on your platform and maybe I can join them?" And we will do this year more of those types of deals than we will do even of the beachheads. We're going to have a good year.

We have a lot of deals signed. You're going to see us active in the press in the coming months. I bet we'll flow north of $10 billion of net new money this year, which is obviously a big number. And I wouldn't mention it on the podcast if I didn't feel pretty confident in it. It'll be a combination of a dozen to, call it 12 to 14 new RIAs, but we'll probably do somewhere between 15 to 20 M&A transactions that will also add anywhere from $100 million, couple hundred. We've done some 5, 6, we've done a $1 billion M&A transaction last year. So they tend to get larger. And it's really about the personality of the advisor, where they are in their life cycle. And some now would just prefer to join one of our largest scale well-run RIAs versus doing their own thing. So a bit of a longer answer there to say that we don't have a minimum, if you will. It's really if you're coming in at $250 million, you really want to grow, we can have some fun working together, that's a pretty good client for us.

Michael: And then from a practical perspective, is there a typical maximum? Hey, if someone has got $20 billion and they want to come on the platform, I'm sure you're happy to have that conversation. But I'm just assuming realistically at some point the firm is just actually large enough, it has managed to build out enough of its own infrastructure, it's got its economies of scale off of staffing, they no longer have to run three more people than what they would run with you because they've grown into that size at some number of billions under management or maybe just at a certain level of revenue when they're at $15 million or $20 million of revenue, is there some threshold that you're finding on the upper end where it's just less likely that the firms are going to work with the Dynasty-style platform and more likely that either they want to or they just already have built their own version of that infrastructure?

Shirl: Yeah, it's a really interesting question. So I'm a fellow at the Aspen Institute, and we do a lot of study on entrepreneurship and a lot of business model analysis. And what's interesting, I think of companies like Apple and what, $800 billion market cap, give or take, on any given day. They have four products and that's it, right? You talk about incredible focus and you could put their products on one little table that you might have in front of you, and 90% of what goes into those products that they're laser-focused on is outsourced, right? They don't build really any of the components. Their focus is on brand and design. And you think of Uber that I mentioned earlier in terms of their IPO that's coming, 95% of everything they do, as you well know, is outsourced, right?

So I find it really comes down to as much of personality as anything else in terms of what is it...do I want to spend a lot of my time working in my business or do I want to spend more time working on my business? And what are the things that are truly differentiated for me, my business, my clients, and let me hone in on those things that I'm really good that do provide that differentiated experience, the things that I can get paid for that can put margin in my business, and then get rid of everything else, outsource everything else.

So look, we have scenarios where Summit Trail is a wonderful client. We launched them less than four years ago. I think they launched with just under $2 billion, they're already at $6 billion. And we're providing the middle-office support that we've talked about for them. And they're continuing to open offices around...they're a national RIA and growing very, very rapidly organically and doing a great job by adding other like-minded advisors. I think of Geller Family Office here in New York, north of $4 billion RIA, been independent a long time and certainly have resources that they could go hire more people and spend more money on technology and try to put together platform components on their own, but they just found it's a better use of their time and resources to hire us to come in and do that. So we do have some very large RIAs.

We have a separate unit called Dynasties Enterprise Group that focuses on that couple billion dollar-plus RIA, because there are some nuances and multicity, multi-advisor-type firms and having very specific technology and programs that are needed for that type of client segmentation. So we have a separate group, versus the group that focuses on that traditional $500 million, $600 million RIA, which is really, to your earlier point, kind of our bread-and-butter client.

Michael: Yeah. You make such a powerful point to emphasize that Apple at the end of the day basically only makes 4 products and about 90% of the production of those is outsourced. That you can have an extraordinarily large company where you just get hyperfocused at the thing that you create the most unique value on and outsource and let go of the rest. But you do, I think, make an interesting point as well that there's sort of a personality fit. There's a psychographics fit here. It sounds like your ideal advisor really just is, it's that advisor that genuinely wants to be an entrepreneur and grow a substantial enterprise and is simply making a business decision like, "I don't need to scale my middle office to build a successful firm. I'm going to outsource, scaling my middle office to Dynasty who can power this portion, and then I'm going to go spend my time focusing on the parts of my business where we actually add value, where we do our unique layer that can't be outsourced. And we'll hold on to that, but we'll let go of the rest the same way that Apple does."

Shirl: Absolutely. Look, managing your middle office is not going to typically make you more money as an advisor, it's not going to add enterprise value to the business, and it's typically not going to be something that differentiates that client experience. So why spend a disproportionate amount of my time on those middle and back-office things that don't accomplish those core objectives that most every advisor that I ever worked with in my career is focused on?

Where Their Growth Is Coming From [1:10:02]

Michael: So talk to us a little bit about where the growth is coming from for Dynasty and where you're getting traction. You mentioned early on that when you started it was mostly breakaways. I was sort of giggling as you said. I was like, so basically, Smith Barney was right to be afraid of the cannibalization because you launched Dynasty and started cannibalizing wirehouses. Now you said you're finding much more traction with independent RIAs. So who's coming to the table these days? Where are these advisors who are focused on building enterprise and scaling and want to outsource the scaling of the middle office because that's not where they build their value? Who are those advisors? Where are they coming from? Where are you finding these opportunities?

Shirl: Yeah. Look, I would say all roads lead to RIA. All roads are leading to the RIA space. And if you look at asset managers, and I spent a lot of time with the people who run some of the largest asset managers in the world, and the reason they want to hang out with me is they're trying to fine-tune their RIA strategy. You look at the investment and growth of the custodians. You look at all of the new technology firms that are coming online to support RIAs, all the capital that's flooding in. You have sovereign funds now, you have strategics, you have asset managers, you have private equity firms. It seems like there are 20 buyers out there for every seller right now in the space. It's a bit frothy, frankly, but it's an exciting time to be the owner and operator of a well-run RIA.

So the result of that is, to answer your question, the opportunity seems to be coming from everywhere for us. And what we have to do is analyze, as I tell my team, we have to look at what's the grief, the gross for us? Meaning, can we make a fair wage and it's someone that we're going to be proud to be in business with to make sure we can be selective? And that's the benefit of our capital structure, that Dynasty is owned by all the individuals who work here. And by the way, they all wrote a check to buy equity as well as options programs that we have, and our investors. So I do not have a private equity gun to my head, right? So we're building the business. While it's built up fairly rapidly, it has been methodic in how we've built the business out.

So we're now at a point where we're onboarding, yes, those very large breakaways. And there's no one that's done more billion-dollar breakaways in the industry than we have. And that's great. We like that business. We're seeing a lot of breakaways into RIAs, as I talked about earlier. We're now seeing more IBD teams, so the independent broker-dealer channel where, using their language, they're coming to us and saying, "I feel like I've outgrown my current chassis, which is more retail in nature. I think I want to maybe make a move to a more traditional RIA custodian. I want to upgrade some of my technology. I want to own equity in a standalone RIA. Maybe I want some liquidity even around that."

So we're seeing more and more IBD teams that are making...and it's leading and some of them are coming over, and I'm oversimplifying this because I think your listeners would understand this term, but they want to almost migrate the OSJ model into the RIA space. So you're seeing leaders of groups of advisors, whether it's a branch manager at a wirehouse or an OSJ manager in the IBD space now looking to go to the RIA space, but they want supported infrastructure and capability from a firm like Dynasty so they don't have to go out and spend aggressively through their capital to get in the ready position to be able to scale and add more advisors.

And I think you're going to see, Michael, more of these multi-team moves, right? So before, you may have larger individual advisors, but I think you're going to start to see producing branch managers, several advisors, multiple teams, maybe even from multiple firms all making the move to get to scale, create a splash, really looking to build regional strong RIA brands, which is why...I know you're out there doing a great job on the speaking circuit and we run into each other out there from time to time, and what I'm telling advisors is, "Look, 5 years ago if you were a $500 million RIA and you're out there telling the fiduciary story and the independent story, you were feeling pretty good. Five years from now, that's not going to be a differentiator." Because firms like Dynasty, we're literally launching billion-dollar new entrants into this space monthly, right?

So they're going to have the same story, they're going to have scaled access to technology systems, products, services. So the big competitors that you're going to have to worry about as a couple hundred million dollar RIA, going forward it's not going to be kind of shooting the fish in the barrel versus a Merrill Lynch or a Morgan Stanley or UBS because it's such a different model, you're going to have to figure out, "How do I tell my story against some of these large-scale, professionally run, well-capitalized RIAs?" And I don't think a lot of the smaller RIA principals out there really thought that through and what the ramifications could be for them going forward.

Michael: So how do you look at other players now that are trying to enter into this RIA space as well? I was saying the earlier comments of, Smith Barney didn't want to pull the trigger on this because they were afraid of cannibalization, now we've seen the announcements like UBS working on an RIA services platform, Wells Fargo launching one with I think a pilot advisor or two. So do you see this realm where wirehouses now are taking the advice they didn't want to hear from you 10 years ago but now they're actually going to try to do it and, I guess, fight back or at least retain their existing advisors or try to attract advisors in and say, "Oh, you think Dynasty is big? We're going to do it with 10X or 50X to scale," because they're mega-wirehouses?" Do you view that as a shift in the landscape or do you consider this to be something else?

Shirl: Yeah. About six months ago I kind of coined this phrase, "captive independence." And it was a bit tongue-in-cheek when I did it, but it is was my way of kind of describing the banks and the wirehouses now kind of finding religion, if you will, around the RIA space. And I guess I would say it's gotten annoying enough for them. They've lost enough advisors. And the press doesn't talk about what I also describe the breakaway client movement. The press talks about the breakaway advisor movement, but the reality is if you look at the asset migration of the large-scale RIA custodians, the reality is 70% to 80% of any new asset flows in any given year is same-store sales, right? It's the RIAs that are on their platform that are growing disproportionately versus their wirehouse counterparts.

And then you add in the new store sales that doesn't really happen at the wires but is happening at the RIA and it's easy to see that eventually, because these wirehouses are not run by people who are not bright, they get what's going on, and they're looking at and saying, "Look, at the end of the day, what they really care about is product distribution, and there's only so much product I can sell. Even if I have 15,000, 16,000, 18,000 internal advisors, wouldn't it be nice if I could, in a rising rate environment, ultimately be a custodian for RIAs and have the cash there and leverage noncompensatory revenue items like margin lending and things that you don't pay advisors on?" Right? The custodial economics that we all understand.

So you see firms like Goldman Sachs launching product programs and having coverage team and institutional service groups providing services into RIAs. I expect that you will ultimately see more of the banks, more of the wirehouses. And they'll do it, Michael, for two reasons. One is defense, which is a little bit of what you alluded to, which is if I'm going to lose this advisor anyhow then maybe I can move them to captive independence, right? Pseudo in to give them a little more autonomy, right? Someone who wants full independence wouldn't accept it. They'll jump over that and they'll go out and do their own thing, right? But maybe I'll capture some of them and I'll try to scare people into going in that direction versus having the courage to go ahead and do their own thing.

And then the offensive side is where I make most of my money anyhow because I'm low teens on the margin side, on the advisory for the most of these firms, but I'm high 20s in margin on my product manufacturing. So if I can sell more high-margin stuff to more people and I can see my private client division just as my largest client, but then I can have other clients, I can go to Dynasty and provide access to capital markets and lending and services to Dynasty at the HoldCo level to then make available to all of their underlying firms, and then I can go out and cut partnerships with RIA custodians, etc. to provide more service to them. That's where the industry is going. So when I say all roads are leading to RIAs, that means the banks, the wires, the asset managers, the product...everyone is thinking about, "If I'm going to play wealth management, how do I get a strong foothold and have a long-term strategy around what's happening in the RIA space here domestically?"

So it's an exciting time. If you're in the space and you can create time to take a half step back and think about, "What does that mean to me whether I'm an RIA principal, whether I'm a technology service provider, an asset manager that's trying to distribute into the advisory space, whether I'm a custodian and what that means to me in terms of some of these other scaled players potentially entering into the space, what does it mean to a service provider like us?" Everyone should be thinking about that dynamic because it's coming and it's going to come quick.

The Path He Took Towards Entrepreneurship [1:21:02]

Michael: So take us back for a moment to the background that took you down this path. Were you someone that from early on had this vision that, "I want to be an entrepreneurial builder and build a business I guess in financial services or in anything?" Was this always the path that you saw yourself on for building a business?

Shirl: Yes, although if we go back to my roots in Maine, I had kind of a non-traditional route to get into finance. I was raised in the easternmost point in the U.S. A little fishing village called Eastport. Raised by my step-granddad and grew up kind of on the poor side of the tracks, actually homeless even for a couple of years. As you know, went to Bates, which I know is your alma mater as well. Great school in Lewiston, Maine. The Bobcats.

Michael: Yeah, the random history trivia is Shirl and I actually went to college together and overlapped three out of four years at Bates with not really knowing each other. I kind of have a vague memory of overlapping, but I played squash, you played baseball. We were in dorms basically on the opposite sides of the campus from each other, so didn't have too much overlap at the time. Only found out 10 years later crossing paths in the industry like, "Wait, you went to Bates? I went to Bates. When did you go to Bates? That's when I went to Bates." Like, "Oh, okay, small world. How about that?"

Shirl: Well, you were with the cool kids, right? So that's why we didn't hang out.

Michael: Oh God, no. Not me.

Shirl: But anyhow, made my way down from Lewiston to New York and kind of worked my way up at Smith Barney, and was given a lot of responsibility early on in my career and really appreciate a lot of the mentors that I had there and was a great place to grow up in the business. But the most fun that I had was living in the field with all the great advisors at the firm who would frequently put me in front of their top clients. And we would run these meetings, we called them VIP meetings, where we bring $100 million, $500 billion clients in and introduce them to Sandy Weill and the senior executives in the firm and the different product heads in the investment bank, etc.

And I remember after a few hundred of those asking myself, "What do all these...I've had this incredible experience of meeting all these interesting people, what do they all have in common?" And it really struck me that they all took a calculated risk, they bet on themselves, and they all had significant success through equity, right? And it's very difficult to make true, significant wealth in this country as a W-2 earner. And I said, "You know what? When my pitch failed 15 years ago for us to power the early RIA movement," I said, "You know what? This is probably my opportunity to sit on the other side of the table, to go be an entrepreneur, to build a service infrastructure that helps power this whole independent movement." And off I went.

And as we said earlier, obviously, no one could have predicted that from a timing perspective, while it was challenging to leave in the early part of '08 and then to raise capital in the height of the financial crisis, flip side of that was all of those large brands obviously went from being, in a number of cases, an asset to a liability on the business card of advisors, which once I got up and running allowed us to more quickly grow the business by bringing advisors on that wanted a more independent story.

What Surprised Him The Most About Becoming An Entrepreneur [1:24:35]

Michael: As you started down that journey, what's been the biggest surprise to you about this entrepreneur path of trying to build your own business?

Shirl: Well, I've been a big believer in mentorship, and I have a lot of mentors. And mentorship by committee is always an approach that I've taken, and not just in our industry but all different types of mentors.

And I have been surprised, and I tell this to people all the time, even though people told me, "It's going to be really, really hard to get off the ground, to raise the capital in a way that you still have control, that you're not giving away all the firm to the investors, asking your friends," and we mentioned Bates, I have five of my old classmates that are here. And I was captain of the baseball team my senior year, I have a person who was a junior, a sophomore, and a freshman, so three of my old teammates that are here. And I'll tell you, a number of them came in and worked for free for a year, a year and a half. One guy slept on my couch for a year. Working out of an apartment and Starbucks in Manhattan, in my garage in Saratoga Springs, the classic kind of entrepreneurial trials and tribulation and kind of living "Shark Tank" in real time. Meeting with 100 different investors to try to, again, raise capital in a difficult part of the capital market cycle, to say the least.

Michael: Yeah, it's hard at any time, never mind in the middle of the financial crisis when everybody is just trying to make sure they're solvent.

Shirl: Yeah. So look, you want to take the island, burn the boats, right? So my wife and I would chuckle that the boats are long gone and we're all in now. And then you get the funding, you get the business up and running and you feel like you have a half a second to celebrate, and then you realize it's even more difficult at that point to now start executing against the business plan. And so that journey has been harder. It's like a lot of things in life until you're...it's like being a parent, right? Intuitively, you can say, "This is what it must be like to have a child," but until you're a parent, you can't fully appreciate it or have empathy with it.

Their Biggest Competitive Advantage [1:26:56]

If you've never been an entrepreneur and you've never made that leap and that jump, it's tough to describe to someone all the emotions and everything that goes with it. But look, most all of your listeners understand that because they're....and that's frankly, I think, today one of our very biggest, Michael, competitive advantages as a service provider to RIAs is that we are entrepreneurs servicing other entrepreneurs, right? We're not some large company that's trying to sell something to an RIA or a breakaway and saying, "Trust me, you'll be fine." We're saying, "You know what? I've been there and stayed overnight. I've seen the movie, I starred in the movie, I wrote the script. I've done it and I get it."

Just earlier this week, we're getting ready to launch a business, and I sat in the living room with the team and all their spouses in their home for five hours and just talked about all the emotions we're about to go through and make sure they all understood how it's going to work. Overcommunicating at home as an entrepreneur and making sure that your family understands. And I said, "Look, your spouses are going to be working really hard for the next six months. This is a process through this transition, but here's the benefit. Here's what's coming out on the other side of it." So we get to live our American dream by empowering others to live theirs. And it's incredible to be able to experience it and to see all the jobs that are being created and the enterprise value that's getting created from all these firms that we're helping to play our little role and, like I said, be the Intel sticker to help power their independence. It's been an incredible journey over the last 10 years.

Michael: Well, and I love the point that you made there that you can't overcommunicate enough at home about getting buy-in from the family about this as well. Never mind, if you're going to raise capital, getting your investors on board and getting your employees and team on board, particularly the ones who are taking this blind leap risk with you, but that dynamic that look, if you're an entrepreneur, it's really hard for your emotional rollercoaster in and out the business to not come home with you, at least to some extent, particularly early on. And just that importance of having family buy-in and having family support and just preparing them that you may need a little bit of support while you go through the coming rollercoaster is, to me, a really big deal that I don't think it's talked about enough in the industry as people are looking and getting started of how much that family support system really matters, and likewise, how much damage you can do to your relationship with your spouse and family if they don't know what's coming and it makes the situation even more stressful than it already is.

Shirl: Yeah. No, I agree with that. It's getting a little bit easier. I wouldn't say a lot. But we've done this now well north of 50 times, so we've kind of, I wouldn't say...you've never seen everything but you've seen a lot. But I think about just the incredible roster of clients, and we're so appreciative that they've entrusted their life's work. And that's how we see it. A lot of the entrepreneurs that we support, they're 100% levered in terms of their personal net worth to the business that they've built. And the fact that they would trust us to help them protect it, grow it, we see the world through that lens. And if our next transition or setup of a business doesn't go well then those other 50 don't matter.

And that's the focus we have and the fact that all of our original clients, after all this time, we still have them, and we're able to help them be successful. And they've been so loyal and committed to us when it was just the concept, right? It was, "Trust us. Jump out this window, the handshoot is going to go up and it's going to open, and I got you." It's a little easier now for somebody coming in because we've done it so much, but I think back of those first few clients and how incredible and brave and trusting that they were and just will forever be indebted for them to believe in us when they did.

How His Role In The Company Has Changed Over The Years [1:31:27]

Michael: So how has the role changed for you over the years?

Shirl: Yeah, that's a great question. We definitely have professionalized the business. And I tell a lot of entrepreneurs, the most difficult part of leadership, unless you're a jerk, and most people are not, is having tough conversations with your team members, and especially those that you've known for a long time, and realizing that if you really want to build a big business, you want to build a substantial sustained legacy-type business, you have to be willing over time to have those tough conversations. And the people that get you here may not be the ones that get you there. We have had to upgrade talent over time. We recently announced moving our headquarters to Florida, which I think will put us in a position to really scale the business in the future and continue to put more margin in the business and allow us to make more investments in people and technology to take better care of our clients.

But in the early days, Ed Swenson, who's one of the original co-founders of the business, Ed and I have worked together essentially our entire career. He also went to Bates, although he didn't play baseball, he captained the rugby team at Bates. And we were roommates back at Bates. But Ed has very complementary skill sets to mine, but early on we would joke that Ed wore...I was out there driving sales, but Ed wore the hat of every other role and responsibility in the firm. That somebody would call up and you'd press 1 through 5 but no matter what number you pressed, you got Ed.

Michael: Yeah, it was all going to the same person.

Shirl: Yeah. So yeah, early on you do what you...you know this, right? You have to do everything. And over time, as we've grown, we now have professional CFO, we have a general counsel, we have professional operations, etc.

So I spend a lot of time with clients. That's one of the things that I enjoy most. And I feel like it's really dangerous for leaders to not have proximity and to get out there and listen to clients who... I love our model is the alignment in that if our clients don't do a good job for their underlying client, they get fired. Well, it's the same with us, where we have to stand and deliver every day or we get fired. And I love that alignment of interest. It's very pure and, I think, differentiate and frankly, the way the industry should be. And by getting out and talking to advisors and their clients. I meet with probably hundreds of end clients every year with our advisors and I hear from them what they like about our technology and product set that we're providing. I find that to be very useful.

At the high end of the market. I find, and I don't see this changing anytime soon, the really large teams, at the end of the day, they're not going to make a significant buying decision without having a relationship with the CEO. So while our brand now stands on its own and we have a great business development team, I still have to get out and see a lot of the teams at the moment of decision-making to help them and us assess if it's a right fit.

And we're big enough now that one of the things that...I mentioned background and kind of how I grew up, I think that the financial health of this country is not in a good place. Whether you look at governments at the federal or state level, pension funds, various underfunded commitments in that regard. You look at the fact that north of 70% of Americans can't put their hand on $500 in an emergency situation. So the financial health is very sick right now kind of across the board. And as a kind of a proud patriot, if you will, I think that quality financial advice, and I know this is something that's near and dear to your heart and what your whole community and ecosystem is focused on as well, but we have to make the system work for more people.

And now that I have a bit...my microphone is growing with our business here and my work at the Aspen Institute, and it's something that I think about kind of the next phase of my life, I think, is trying to give back and encourage and persuade and be kind of a cheerleader for independent financial advice to be delivered in a way that makes a positive impact on improving the financial health and wellness of various constituents across the country. And I hope that all of your listeners that have the ability to give more and do more and to help not just kind of leave the ladder down but collectively working together build an escalator that more people can come up and participate. It's something that I think is, if not addressed and if not us then who? If we don't focus on it, it's going to become a big problem for this country going forward.

His Low Point [1:36:48]

Michael: So what was the low point for you?

Shirl: I would say that it was probably two and a half years in. I was an okay income earner, but I was young. I was 32 years old when I launched this business, so I hadn't had...and again, homeless as a kid, self-funded my way through Bates working odd jobs, paying back those student loans. We had a little bit of a cushion but not an enormous cushion. And after going two years, seven months and four days, as my wife kept track, without a paycheck, we were running on fumes. And it was time to launch the business. And I remember there were a handful of investors, and I'm sure again, there's a number of entrepreneurs listening to this podcast that can relate, who said, "Okay, I'm in." And we were getting ready to close the round and then the next day the capital didn't show up.

And that is when you're so close and all the pressure because all your best friends are sleeping on your couch and believing in you and working for free, and you've got young kids at home and your wife's believing in you and supporting you and everyone's all in and then it's another...it feels, "Okay, just two more weeks, two more weeks." And I would say that's probably the lowest point. And saying, having that conviction that it's what I wanted to do and getting offered jobs along the way and passing on significant opportunities.

I saw this great interview once with Steve Jobs and some of the clips from it were used in their great ad campaign where the great line about the people who are crazy enough to think they can change the world are ones that actually do. But if you listen to the rest of that interview, he talks about how they're crazy because any sane and rational person who understood the odds and looked at what it's going to take to get there wouldn't do it. So I look back and there was never any...just in my mind, I believed that I would be here. I have north of $30 billion and have 50 of the greatest RIA clients and have created significant wealth for my partners that are here. And I just believed that we were going to do it. Although the odds of us sitting here and having this conversation, if you looked at it, they're north of 10 million to 1. I should have been playing the lottery, right?

And I think if you talk to a lot of successful entrepreneurs, they kind of say the same thing, right? It's they're going to grind it out. They're going to put their head down. They're just going to outwork everyone and do what it takes to be successful. And not all the time. I'm not naive to think that...I'm also very lucky and fortunate that the investors came in when they did. And my partner, Todd Thomson, helped put our board together and Ed hung in there long enough, a year and a half without a paycheck and didn't leave me. And our first clients believed us to come on. It's all those things. You have to be lucky. And the custodians early on got behind us and backed us. And my friends over at Envestnet, early on when we didn't have any assets, willing to believe that we would and buy into the vision.

Like I said, it's been an incredible journey. It's been a lot of work, but there definitely were those low points where...the last thing I'll say on this, and I say this to a lot of entrepreneurs starting a new business, get yourself a buddy, right? Because when those times are really tough, having my buddy, Ed Swenson, having my co-founder, Mary Ann, my wife, was just incredible, lift me up and make sure that I don't stay in a low point for too long is critical when you're trying to do something that's a heavy lift in life, that support mechanism around you is a big, big deal.

Michael: So, as you look back, what do you know now that you wish you'd known then about I guess either building the business or the advisor marketplace you're serving?

Shirl: I think in hindsight, I could have been...we could have been more aggressive. And I guess it's easier to say now because, as they say, hindsight is 20/20. I talked about advisors being levered to the business. I'm 110% levered to Dynasty. I'm long Dynasty stock. And while it's done well for our investors... And I think, and this gets back to the RPN conversation we had earlier, I've had several of our clients come and say, "I feel like I'm a better leader now that I've done this small liquidity event because I have some breathing room. I feel like I can more comfortably take a little more risk." Right? And I tell, "Look, maybe you can risk a finger or a toe, you should never risk an arm, and certainly never risk your head. But when you have a little more capital over time put away, you've taken a few chips off the table, I think ultimately, it changes your perspective, sometimes in a positive way."

And I'm still very, very levered to Dynasty, but knowing what I know now, I could have been more aggressive. We could have been adding more advisors quicker than what we did. We're out on the M&A trail now, Michael. We're looking at opportunities at the HoldCo to buy our supply chain. So whether it's technology service providers or other service providers that can broaden what we provide, we're large enough now that we can buy some of those firms and control the experience. There's probably opportunities that we missed over the last couple of years because we're just too conservative, not willing to risk the capital or our position and we've missed a few things. But you learn from that. But overall, I probably wouldn't trade, in what we do and where we are in the RIA ecosystem, I wouldn't trade our brand, our balance sheet, our client roster, our team, I wouldn't trade where we are with anyone right now.

Michael: So you alluded a little to potentially going out on the M&A path and kind of buying some of your own service or tech providers and integrating more vertically. But beyond that, what comes next for Dynasty? What else are you looking at as the next stage or stages of the business here?

Shirl: So there's that element. There's deploying more capital to help fuel the growth of our firms. I also think, and more and more of our clients have been asking us for this, now we're getting of scale, there's probably an opportunity for us to drive, yeah, I guess what I would call ingredient marketing. And there's some great examples. I guess NutraSweet is an example, Intel, as I mentioned earlier, maybe even a better example, but where an end consumer is making a purchasing decision based upon one of the ingredients.

Right now a lot of the confusion when you sit with clients is while they might get the benefits of working with independent advisor, they say, "Okay, great, how do I pick between all the independent advisors?" And I think that Dynasty is in a unique position to ultimately become the good housekeeper seal of approval for independent advice, right? So to help educate the consumer in why they want to get advice separate from product manufacturing, but then when I'm looking for one of those independent advisors, look for one that's powered by Dynasty because they have great technology and X capital and they're well-run and they're clean, compliant, etc., etc. They have a scale deliverable. So our marketing team, we're doing some work.

And what that does then is it fuels clients. And we've started to have this happen, where clients are now coming in through our website and reaching out and saying, "Can you introduce us to one of your advisors?" And so you'll see us do more in the mainstream media, really being advocates for independence. I almost think about it, Michael, you think about the great job that the dairy industry did with Got Milk? I think us going out and helping to lead kind of a why independence-type movement and driving more consumers this way. And as that happens, I think Dynasty the Dynasty RIA boats, if you will, those waters should rise hopefully in a slightly disproportionate beneficial way because of their affiliation with us.

Michael: Interesting. So, just as the Intel Inside sells a lot of computers because Intel is inside, what can "powered by Dynasty" do to independent advisors who are powered by Dynasty?

Shirl: You nailed it. Absolutely.

How Shirl Defines Success [1:45:57]

Michael: So as we wrap up, this is a podcast about success, and one of the themes that always comes up is just literally that word "success" often means different things to different people, sometimes different things to us in changing stages of our own lives. So you built what I think anyone would objectively call a very successful business, scaling up to 70 employees and tens of billions of dollars on the platform, but I'm wondering just for you at a personal level now, how do you define success for yourself?

Shirl: That's a great question, and I'll be honest, it's not something that I spend a lot of time thinking about. I guess I would say I'm probably...today is the happiest day of my life, and I expect tomorrow to be even better than today. Other than, I think about my grandfather, who's actually my step-granddad and the sacrifices that he made in raising me, I don't spend a lot of time thinking about the past. I'm head-over-heels in love with my wife, blessed that she's in my life. I have two gorgeous, smart young ladies, daughters that are just amazing. This business and the partners and the clients that we have here.

In terms of a dollar and cents, when you're younger you think, "Oh, someday if I can have a net worth of some number," I've blown past that candidly. So now for me, I look at the cap table and I don't look at myself, I look at all of the people who believed in this vision and they've taken what started out as kind of my why and vision and they've evolved it in many better ways to make it their why and their business and where they want to go. And the result of it is we've created on our cap table quite a number of millionaires. And I'm incredibly proud of that. I look at what we're doing with our clients and the impact on their lives and the end client.

And I'm a huge believer that success is best when shared. I have a house up in Maine in my hometown of Eastport, we're going up for the 4th of July this year, we'll take 60 or 70 people with us. It's a huge group of family and friends when we go to other trips. We're blessed to have the friends that we have. I own thoroughbred racehorses. You come to Saratoga Springs, which, my hometown now, for a race, it's not unusual for us to have 100 people with us to watch one of our horses run. So I think, I guess, a great question. I would say that I would measure my level of success based upon hopefully the lives that my wife and I have touched in a positive way with the charities we're involved in, with the business that we've built, the jobs we're creating, the clients, etc. Not so much in terms of dollar and cents.

And look, I'm 42 years old, I'm just getting started. I think there's a much bigger dent that we can make kind of in the industry, if you will, to drive positive change. There's a lot more that I want to do more broadly as a leader in our country to help drive a financial wellness in the country. I think in some ways, my journey from being homeless to buying a $13 suit at the Salvation Army, riding a bus for 18 hours to New York City, knocking on a door and getting hired and building the life that I built here in this company, I hope that people listening to this will hear it and say, "You know what? I can do it. If a hick from the sticks of Maine can come down and create that type of business then I can do it." So I hope more people get inspired. And I'm looking forward to kind of the next chapters of my life, Michael, and giving back and helping to influence and encourage other people to have the same type of incredible opportunities that I've had to build a career in the industry that you and I frankly are blessed to be a part of.

Michael: Well, amen, I love it. And still the forward focus of how much time there still is left and all the things that you're still just getting started on, I love it. I can't wait to see what's next and what you dive into next.

Shirl: I appreciate it. And that feeling is mutual. I can't wait to see what you do next as well, my friend.

Michael: Well, thank you. Well, you graduated, you're ahead of me, so I'm only a year behind you at 41. So I've got a little gas in the tank left as well. We're not quite done. There's a little more left. But thank you, Shirl, so much for joining us on the "Financial Advisor Success" podcast.

Shirl: Thank you, Michael. I've really enjoyed it. Thank you so much.