Focus Financial Partners, the publicly traded consolidator of wealth management firms, says there are 1,000 registered investment advisors it can potentially partner with, and through them, another 5,000 potential mergers or acquisitions.
Since its founding in 2006, the company has taken advantage of a client and advisor shift in preference toward best-interest service and a fragmented RIA market. It currently has stakes in dozens of independent RIAs, which it provides supporting capital and services to in exchange for part of their revenue, but that is a minuscule portion of the market, executives said at the Capital Markets Financial Technology Conference on Thursday.
Focus Financial expects its 62 current partner firms to generate annualized revenue topping $1 billion in 2019. But the company estimates there are 1,000 more potential partners participating in the financial planning and advice market—with a total of $58 billion in revenue—that it can do business with.
Most RIAs are small, one or two-advisor practices that are "excellent at customer service" but lack scale that provides capital and supporting services to help them grow, said Focus Financial co-founder and Chief Operating Officer Rajini Kodialam. For that reason, and others, the company has told investors it expects revenue to grow by 20% year over year. The company has not publicly stated a timeline for reaching as many as 1,000 partners and did not at the conference on Thursday.
Focus also has a "first-mover advantage" and the "lowest cost of capital" in the industry, said James Shanahan, Focus Financial's chief financial officer. He also rejected the notion that the company's model is simply "a rollup, that smashes firms together to eliminate costs."
Shanahan and Kodialam said Focus Financial has more than 70 employees working on technology, operations and regulatory and legal support for its partners. The business model has created 62 "laboratories" where executives, many former management consultants, are testing new ideas and practices that ultimately benefit the group collectively, Kodialam said.
"We don’t have any kind of real competition in the market. When we built this model, it was a model suited to the needs of this industry. And if you are looking for a partner, if you are looking to preserve the entrepreneurial nature of your business, the fiduciary nature of your business, then you do not want to look to a bank,” Kodialam said. “But if you’re also a savvy RIA who is also saying, ‘I don’t just want money, I want smart money, I’m looking for someone who can bring value-added services, who can help me grow ... then you can really take money from private equity because that's not what they bring to the table."
To be sure, many wealth managers have sold stakes to private equity firms. In February, private equity firm Warburg Pincus acquired a majority stake in Kestra Financial, an independent broker/dealer with about $75.5 billion in assets, and Thomas H. Lee Partners acquired a "significant" piece of HighTower Advisors in 2017.
There were 49 mergers and acquisitions involving RIAs in the first quarter, the highest volume in any three-month period since 2013, the first year Echelon Partners, a Los Angeles-based investment bank and consulting firm focused on wealth and investment managers, began keeping track. Focus and its affiliated firms accounted for 11 of those deals, a quarterly high for the firm.