PRACTICE MANAGEMENT:
Focus Financial Taps Advisor Growth

By Kristen McNamara
May 4, 2006

NEW YORK (Dow Jones) – In the fast-changing financial services industry, Focus Financial Partners is using a novel business model to tap the growth of independent advisory firms.

Backed by a $35 million investment from private equity firm Summit Partners, New York-based Focus is taking 40%-60% stakes in investment advisory firms in exchange for cash and an ownership position in Focus. In February, it unveiled initial deals with four firms that now manage $4 billion in client assets.

Industry consultants say Focus is well-funded with a clear strategy, but the risk is pegging profitability to advisors who remain largely independent. Also, cultural and control issues loom large in deals with small firms. What Focus' plan does do, though, is emphasize the size and growth of assets managed by independent advisors across the U.S.

Advisors at investment advisory firms represent about 13% of the 300,000 advisors in the U.S and manage about $1.6 trillion in assets, according to research firm Cerulli Associates. Celent Communications, another research and consulting firm, puts that figure at $2.2 trillion.

Assets are expected to continue growing due, in part, to market appreciation and the handing over of additional assets from satisfied investors.

Focus founder and Chief Executive Ruediger "Rudy" Adolf says there are many advisors interested in deals. Focus is in final talks with several firms, he said, and wants to buy 30 to 50 firms over the next three to five years, boosting assets under management to $25 billion.

"The Focus model is structured to create a clear alignment of interests among the Focus partners and is particularly attractive for high growth firms," Adolf said.

Focus is interested in independent firms that sell advice rather than products and that are profitable and growing. It targets fee-based firms that provide wealth management and benefit consulting services to affluent and mid-market institutional clients. Focus says its prospective partners generally manage at least $350 million in assets.

Few firms meet Focus' criteria, however.

"There is this nice, mutual convincing that has to go on," Adolf said. "We need to convince each other."

By doing a deal with Focus, small firms gain scale while retaining their names, culture and management of their business. They get access to financial products, such as hedge funds, that they couldn't tap alone. Focus also helps with marketing, recruitment, succession planning, financing, due diligence and gives incentives to meet three- and six-year cash flow targets. In return, Focus demands consistent accounting and compliance practices, supervises the business and must sign off on significant structural or operational changes.

Entrepreneurial advisors may chafe at ceding some control and casting their lot with other advisors and the yet unproven Focus, consultants say.

"You're playing in a bigger sandbox, but there are also a lot of other kids in there," said Mark Tibergien, a principal with accounting and consulting firm Moss Adams. Moss Adams has represented firms in negotiations with Focus, none of which led to deals, he said.

Still, Focus is smart to take a partial, rather than full, stake in advisory firms, said Charles "Chip" Roame, managing principal at Tiburon Strategic Advisors, a financial services consulting firm. Advisors who share in the risks and rewards of a joint venture have a strong incentive to remain profitable and continue growing, he said. Roame says he doesn't have a personal or business relationship with Focus or its executives.

Focus says it scrutinizes potential partners thoroughly, examining their economics, compliance records, breadth of services and relationships with clients, among other criteria.

It requires them to have a transition plan, outlining a firm's growth trajectory and the time frame and economic model for partners handing off their business to successors.

Succession planning is an emotional and financial challenge for advisors, but a pressing one as more and more advisors approach retirement age.

Client-advisor relationships aren't easily transferable and it takes years for an advisor to groom a successor. Yet, the rising value of firms can put the cost of acquiring a business beyond a junior partner's means.

Focus and consultants point to National Financial Partners Corp. (NFP) as an example of a company that has succeeded in acquiring other firms, although its model and target audience differ somewhat from Focus.

NFP buys all the equity of small advisory firms in exchange for cash and NFP stock. It targets distributors specializing in life insurance, executive benefits and financial planning and offers financial incentives to encourage the seller to stay on and continue growing the business. NFP's stock has more than doubled in value since the firm went public in September 2003 at $23 a share. The shares were recently trading at $49.01, up 2.1% on the day.

Summit Partners, which has raised nearly $9 billion in capital and invested in more than 270 businesses, is Focus' primary investor. It isn't involved in the firm's management, but could make additional investments, said Kevin Mohan, a general partner at Summit. Mohan and Adolf worked together at McKinsey & Co. (MCK.XX), the management consulting company.

Focus' current partners are: Capital Advisory Group in Richmond, Va.; Founders Financial Network in Cupertino, Calif.; Geller Group in New York; and StrategicPoint Investment Advisors in Providence, RI.

Kristen McNamara, Dow Jones Newswires; 201-938-5392; kristen.mcnamara@dowjones.com