THE GLUCK REPORT, PART II:
A New NFP?

Andrew Gluck
March 2006

After acquiring four small advisors, Focus Financial Partners wants a couple hundred more

Funded with $35 million from a private equity and venture capital firm, Focus Financial Partners LLC recently completed acquisitions of four relatively small independent advisory firms and says it is looking to buy another 200 to 300 independent firms.

Bankrolled by Boston-based VC Summit Partners, which has raised nearly $9 billion since it was founded in 1984, New York-based Focus Financial bought four firms: Capital Advisory Group of Richmond; Founders Financial Network of Cupertino, California; Geller Group Ltd. of New York; and Strategic Point Holdings of Providence, Rhode Island. The four firms manage a total of about $3.5 billion in assets.

Ruediger Adolf, the CEO of Focus Financial, says the venture has some similarities to the consolidation strategy employed since 1998 by National Financial Partners, which invested in 160 small firms and went public in 2003, rewarding many of the owners of the firms it bought with stock (see this month’s planner profile on page 70). However, Adolf says a big difference with NFP is that Focus is not targeting advisory firms specializing in insurance, but instead is targeting investment firms acting as fiduciaries.

Adolf says Focus Financial is looking to buy 40% to 60% of the equity in a firm and, like NFP, leave current management in place. Principals continue to manage as they did before. “In fact, it is important that they retain their culture, their brand, and their employees,” he says.

In the past, other consolidators have said they planned to create economies of scale by purchasing fragmented advisory firms and realizing savings by providing a single technology platform, uniform investment and planning processes, and a centralized back office for trading and servicing accounts. Focus Financial says it is not interested in resorting to such a strategy.

“We are not a traditional roll-up,” says Adolf. Roll-ups, he says, typically buy average or poorly performing assets and put them together to make them work more efficiently by insisting on new processes. “Since we are not insisting on changing the businesses we invest in, we cannot invest in underperformers or merely average firms,” he explains.

“Ultimately, in most roll-ups, the very asset that you acquired is destroyed because the very people who know best how to run the businesses leave the firm,” says Adolf.

Adolf, a former consultant at McKinsey, refuses to provide many specifics about what Focus Financial is looking for in firms in which it is considering an investment. While saying he is looking for strong, sustained growth, a record of client retention, established business processes, and depth of management, he would not provide any additional metrics.

A number of financial advisory firms I’ve talked with say they have been contacted by Adolf over the past year, and they say the firm has been persistent in seeking out partnerships.

Kevin Mohan, a general partner at Summit, says that about 100 of the 275 companies Summit has invested in over the years have gone public. Creating liquidity for independent advisory firms has some allure. But there is no sure thing when it comes to taking a company public, and whether advisors will be willing to sell major stakes in their firms in exchange for the prospect of a public offering remains to be seen.