Focus Financial Partners LLC, the acquirer of registered investment advisory firms, founded in 2006 by Rudy Adolf, a veteran of McKinsey & Company and American Express, filed to go public this week under the ticker FOCS. As such, the company filed Form S-1 with the Securities and Exchange Commission, revealing details of its operation. Here are some of the highlights from that filing:
1. Revenue Grew in 2017, But Expenses Grew More
Focus posted revenue of $663 million in 2017, up 37 percent from the $485 million in 2016. More than 90 cents of every dollar Focus earns (93 percent) are from wealth management fees from its 51 RIAs.
Focus posted a net loss of $48 million in 2017, an almost 400 percent drop from the $16 million in net income it earned in 2016. Why the large swing to a loss in 2017 even though revenue grew 37 percent? Expenses grew even more: Compensation and related expenses were up 49 percent, half of which was related to the 23 business acquisitions closed in 2017, twice as many as the year prior. The balance, according to the filing, was due to the recognition of a full year of salaries from firms acquired in 2016. Management fees Focus pays to the advisors at the acquired firms also increased 42 percent to $164 million.
Also of note: Focus is paying $41 million in interest on nearly $1 billion in debt from its credit facilities, almost twice the interest expense they paid in 2016.
2. The Market Is Fractured, But Growing
Focus’ filing states: “The Financial Planning and Advice market in the United States, as defined by an IBISWorld report, dated December 2017, is estimated to have a total revenue pool of $56.0 billion in 2017, up from $37.9 billion in 2012, and the total revenue pool for the Financial Planning and Advice market is expected to reach $78.5 billion by 2023.”
“In 2016, RIAs grew 6.5 percent to 36,959 total advisors, according to the Cerulli 2017 Advisor Report. In addition, from 2007 to 2016, RIAs increased their share of total advisors across all channels from 7.0 percent to 11.9 percent. The number of advisors in the RIA channel is expected to reach 42,523 advisors with an advisor headcount share of 14.1 percent by 2021, based on estimates from the Cerulli 2017 Advisor Report. In addition to a growing number of advisors, the RIA channel is fragmented with 14,693 RIAs as of December 31, 2016, according to the Cerulli 2017 Advisor Report. As a leading partnership of RIAs, we believe this gives us a competitive advantage for further expansion in this growing, yet fragmented, channel.”
3. Their Partner Firms Are Buyers of RIAs Too
“Our partner firms completed fourteen transactions in 2015, twelve transactions in 2016 and fifteen transactions in 2017. Our partner firms may choose to merge with each other as well. Consolidation of our existing partner firms leads to efficiencies and incremental growth in our cash flows. Since October 2012, five partner firms have consummated mergers with other partner firms … We believe there are currently over 5,000 firms in the United States that are suitable targets for our partner firms.”
4. Executive Salaries
Rudy Adolf, the founder, CEO and chairman, had a base salary of $736,837 in 2017, and with bonus and options awards, a total possible compensation package of $3.9 million. Rajini Kodialam, co-founder and chief operating officer, had a base salary of $482,944 in 2017, and a total compensation package valued at $2.6 million.
5. Other Transactions
Rudy Adolf owns a personal airplane he uses for business and is reimbursed by Focus. In 2017, the firm reimbursed Adolf $800,000 for the travel on his personal plane as well as pilot expenses. Given the Focus firms are sprinkled throughout the country, and often away from major airline hubs, the plane makes sense. “Given the geography of our partner firms and prospects, we believe the use of the private aircraft creates efficiencies to enhance Mr. Adolf’s productivity and the Focus LLC staff who accompany him on business trips.”
The form also notes Focus employs Conrad Adolf, Rudy Adolf’s son, as a business development executive with a total compensation in 2017 of $300,000.
6. They Are Looking to Grow Abroad—Including Asia
Focus has three firms in other countries, including one each in Canada, the U.K. and Australia, which accounts for around 3 percent of its revenue. But it wants to do more. According to the S-1: “We have identified Canada, the United Kingdom, Western Europe and Australia as attractive markets where we expect our philosophy of fiduciary alignment and independence to resonate with potential partner firms … We believe that the rate of wealth creation in Asia will provide opportunities for fiduciary wealth management that aligns with our model. Additionally, jurisdictions across Asia, including China, are increasingly opening up to international ownership and participation in the provision of wealth management advice.”