DPL Financial Partners raises $26 million after explosive growth turned backers into believers in David Lau's promise to create a guaranteed income supermarket
With $1 billion of gross sales for 2021 conceivable after mega-deal with SS&C and macro-factor tailwinds, the Louisville company is ready to slug in the bigger leagues.
Brooke's Note: 'I don't want guaranteed income in my life,' said nobody, ever. Yet, RIAs avoid the only viable products that provide that precious commodity. Annuities have historically been priced too high and too enmeshed in smoke-and-mirrors sales practices to mess with. But the promise of annuities and the credibility of RIAs, together, would surely yield rewards. This latest fund raise by DPL is a sign that private equity types can now sense that syncretism may be in the offing.
DPL Financial Partners just raised $26 million from Atlas Merchant Capital and Eldridge on the back of a near seven-fold increase in advisors -- growth that pushes it close to service and capacity constraints.
"We decided to raise more capital because it was simply imprudent not to. Our growth has been so tremendous we knew we were going to need a bigger boat," says founder David Lau, via email.
Lau is betting that by 2026 every RIA will need to buy and trade insurance without paying fat, conflict-inducing fees to brokers.
"I view [this] investment more as realization of the impact of my vision than vindication," he adds.
The Louisville, Ky., insurance marketplace vendor announced the capital raise, Jan. 13.
DPL plans to invest the proceeds in the development of technology and infrastructure to support its growing advisor base of more than 10,000 advisors and continue to bring commission-free annuity and insurance products to their clients, according to a release.
Cash flow negative
Despite its soaring revenues, DPL is still burning cash, hence the need for funds.
"Yes, we are cash-flow negative. As a start-up establishing market-share, we continue to prioritize growth over profitability, and we're fortunate to have investors in Eldridge and Atlas that support that vision," he explains.
The firm's recent raise converts an early tranche of $3.6 million of Eldridge debt-financing into company shares, and adds a further $11.4 million in equity, part of which Eldridge originally committed as debt investment in 2020.
New York-based Atlas has invested a fresh $11 million, and both firms will take a seat on a newly formed board alongside Lau, and two undisclosed independent directors.
DPL ultimately raised more capital than it needs and it negotiated until investors agreed with Lau's own valuation of the firm.
"This raise was driven both by the tremendous amount of outside interest we had in the business along with the need we had to build faster," he explains.
It's also the reward of making a more bootstrapped pilot program succeed.
"I wanted to prove it in the marketplace before raising meaningful capital, so the company’s value would match where I thought the potential was."
"We have raised enough capital to achieve profitability, but we may look to raise more if it would further accelerate our growth," Lau adds.
Eldridge and Atlas have bet that the RIA insurance market -- and, it follows, DPL -- will continue its explosive growth by every measure, says David Stone, founder and CEO of rival Louisville insurance clearinghouse, RetireOne.
"Private equity [is] moving from buying insurance companies into distribution platforms supporting the carriers. The long-term prospects for fee-based insurance are very strong," he says, via email.
They also recognize the phenomenal opportunity should DPL succeed, says Lau.
"Schwab [OneSource] paved the way for the widespread adoption of no-load mutual funds. We’re doing the same thing for commission-free insurance," he says.
Schwab OneSource was the Charles Schwab & Co innovation in the early 1990s that made it possible for RIAs to buy mutual funds for investors in one account.
It had the added benefit of charging zero transaction fees to the end-consumer and being incredibly profitable for Schwab, which charged 35 basis points to the fund companies.
Insurers pay DPL an administrative fee for access, which Lau describes as a small fraction of a typical commission.
"[We] were attracted to the opportunity to back a firm focused on the fundamental, technology-oriented transformation of commission-driven insurance distribution," says Atlas founder and CEO, Bob Diamond, in the linked release.
Riding the wave
Insurers have begun to accept that RIAs could one day become their principal sales force rather than brokers employing pressure-based sales tactics.
It's a shift that gave insurers a hell of a headache, says a former insurance executive with over two decades of experience, who asked to remain anonymous to comment candidly.
"Stripping out commissions changes the math. Without that incentive, annuity design must focus on delivering real, demonstrable consumer value, and even then, distributors face headwinds. It takes time to build trust with this [RIA] audience," the source states, via email.
Total fee-based variable annuity sales grew 31% from $5.2 billion in 2015 to $6.8 billion in 2018.
They fell back 12% to $6 billion in 2019, and annualized sales from the first half of 2020 show a further decline of $400 million, or 7%, according to Cerulli's US Annuity Markets report, 2020.
That said, overall annuities sales in the second half of 2020 surged to record levels, making up the ground, according to Lau.
Inclusive of the third quarter, 2020, variable annuity sales have topped $4.9 billion, according to Morningstar Data. This entails Q3 sales of $2.1 billion, or 77% of the total sold in the first half year, which supports Lau's market assessment.
DPL's explosive growth in 2020, as well as the potentially imminent trebling of its user-base left it struggling to keep up with demand for its services.
"Our growth in 2020 definitely pushed our limits," Lau admits. "Our operations team was absolutely phenomenal all year, frankly, working ridiculous hours and weekends to support our volume. The whole company loves them."
DPL employs 60 staff, up from 20 in 2019, but it intends to ramp up its headcount to ensure no drop off in its service levels as it grows.
On average, it added approximately two new RIAs to its member-base per day in 2020.
In DPL’s first two years of existence, the firm averaged $18 million a month in sales and by Nov. 2019, its 21 month-total stood at $375 million.
Now, after two quarters of "record" sales, Lau expects 2021 will make such sums look like chicken feed.
"Based on the run rates of those quarters, we are expecting to be flirting with $1 billion in sales in 2021," he says.
Fee-based insurance growth also depends on a shift among RIAs, which are beginning to trust annuities and life insurance after finding their reputation too toxic.
Many RIAs hold a strong bias against annuities because of their traditional high prices, the conflict of interest commissions entail and the fact that as commissioned products they can not be billed upon.
Insurance companies counter that their products really do fill a niche that traditional bond and equity-based draw-downs just can't, says Steven McDonnell, president of Portsmouth, N.H.-based Soleares Research, via email.
"Historically RIAs have not been fans of annuities., Many independent RIAs think their methods are superior, [but] insurers will counter that by saying their products guarantee income for life whereas with other solutions the client will run the risk of exhausting assets," he says.
RIAs are also experiencing a renaissance in offering formal financial plans, which effectively tee up an investor to seek to add a slice of guaranteed income to their portfolio -- especially with bond yields in the cellar. See: RIAs see big revenue windfall as planning fees soar 50%.
"Adding insurance to their practice enables RIAs to fulfil the insurance needs they define in clients’ financial plans, keep[ing] clients from having to go to a competitor, all while increasing revenue, a no-brainer for an RIA firm," says Lau.
"It’s no longer possible to fund retirement spending utilizing bonds when they don’t yield enough to keep up with inflation or even cover advisory fees. Our biggest challenge is getting people over their biases against insurance and annuities," he adds.
Yet laziness among insurers also ensures continued RIA coyness, adds the insurance source.
"[Insurers have shown] an unwillingness to move their focus and resources away from commissioned business and into fee-based business … [they] need to demonstrate commitment by allocating resources to RIAs. That’s where grit comes in."
Although growth among independent RIAs using DPL's insurance shop leapt in 2020, DPL's headline figures soared far higher on the back of a Sept. 2020 partnership with Windsor, Conn., software roll-up SS&C Technologies.
SS&C owns Black Diamond.
Lau declined to discuss the economics of the SS&C deal in detail, but confirmed that it gives gratis access to users of Black Diamond and Advent's portfolio management tools.
The SS&C partnership has opened up DPL's services to 2,500 RIAs and IBDs, with a cumulative $1.5 trillion under their administration.
Lau expects "a large percentage" to use DPL's marketplace.
DPL is far from the only annuities marketplace pitching to RIAs.
Launched in 2017, RetireOne provides a similar insurance clearinghouse. It serves 900 RIAs and fee-based IBD advisors, up from 510 in Nov. 2019. See: How Edelman Financial Engines spin-off deal became a RetireOne engine that's heating up the RIA annuity game again.
RetireOne also provides back-office insurance outsourcing. On Jan. 14, it launched a free desktop tool for RIAs that provides a direct data feed on insurance and annuity policies to improve insurance management, reporting and billing -- a move it says leaps it far ahead of DPL.
RetireOne partnered with FIDx in May 2020, to share data and insurance listings.
"There is a lot of opportunity to build a more efficient and comprehensive insurance analysis and buying experience in the RIA ecosystem. It's a fairly complex technology build... [hence] our recent acquisition of a broker-dealer, [and] the launch of the Advisor Portal," Stone explains.
"We expect DPL to begin investing in some of those areas to try and keep up."
Yet it speaks volumes that SS&C chose to pair up with DPL, Lau counters.
"That partnership would not have been possible without exceptional technology. An early stage company that built a flawed system which threatened its core premise would have an exceptionally difficult time raising additional capital, which we clearly did not."
Chicago-based outsourcing giant Envestnet also competes for the growing RIA fee-based annuities business.
In partnership with Berwyn Pa., insurance technology network, Fiduciary Exchange (FIDx), Envestnet rolled-out its own marketplace in June 2019.
Currently, 11 carriers put their fee-based inventory on the outsourcing giant's shelves, including Transamerica, AIG and Allianz Life.
"We are embarking on a mission to completely revolutionize the industry," FIDx CEO Rich Romano said in a Nov., 2020 release.
At least 27,000 advisors use Envestnet's exchange -- almost treble the count at DPL, according to data provided during Envestnet's Q3 earnings call.
Yet even giants like Envestnet have to contend with the fact that for all the promise executives like Lau, Romano, and Stone extol, fee-based annuity sales remain a drop in the ocean of the $5 trillion-plus domestic insurance market.
Founded in 2014, DPL facilitates the sale to RIAs of 45 fee-based annuity, life, long-term care and disability insurance products from 20 insurers.
Over 10,000 advisors now use DPL's software, a seven-fold increase in 14 months, and RIA adoption of DPL's marketplace grew almost three-fold last year.
The 1,100 RIAs currently using its software manage a cumulative $250 billion. Each pays between $1,000 and $5,000 annually, guaranteeing revenues in the region of $1.1 million to $5.5 million.
In the past 12 months, DPL's user-base leapt from 400 to 1,100 firms. Some 2,500 RIAs using SS&C software are set to gain access.
They'll join 17,107 RIAs that collectively manage $4.8 trillion in assets, according to Cerulli Data.
"Maybe 30% of that [near] $5 trillion could be suitable for some annuity protections; at least half need[s] ongoing insurance guidance," says Stone.
The people behind DPL’s backers include Diamond, a former Barclays CEO and president, who founded Atlas in 2014; his co-founder former J.C. Flowers managing director David Schamis; and Todd Boehly, Eldridge chairman and CEO, also the owner of the Los Angeles Dodgers and the Los Angeles Sparks.