New York-based Focus Financial Partners was the first among dozens of aggregators of Registered Investment Advisors (RIAs) to go public and nearly three years after its July 2018 IPO, the firm has delivered solid first quarter results, besting analyst expectations by 3%. Given the resilience of U.S. markets, and general appreciation in asset values, it’s no surprise that the asset-based fees from its wealth management operations have held up well.
With revenues of $394.2 million in the first quarter of 2021, Focus’s results are up 16.9% uptick year over year. The firm's EBITDA of $101 million beat expectations by 8.2%. In 2020 Focus’ stock climbed 110%, but year-to-date Focus has underperformed the S&P 500.
The New York-based aggregator, with more than $250 billion in client assets and 75 RIAs, had $374.8 million in revenue from wealth management fees, increasing the percentage of firm revenue from that bedrock source to 95.1%.
“This business didn't just survive the crisis, it really prospered in so many ways,” CEO Ruediger Adolf says. “The crisis brought home the importance of this business. Ultimately, we are advising wealthy families and during times of crisis good advice is absolutely essential.”
Before founding the firm in 2004, Adolf spent a decade as a partner at McKinsey & Company and five years as senior vice president and general manager of the global brokerage and banking division at American Express. The firm started at the kitchen tables of Adolf and his cofounders, COO Rajini Kodialam and senior managing director Leonard Chang. He boasts that the company is founded by an Austrian, Indian and Korean. Both Adolf and Kodialam are first-generation immigrants while Chang is second-generation.
While the last year has been good for fee-based advisors, Focus has also pursued growth through new acquisitions. In March, the firm made a splash by partnering with the $14.3 billion Hinduja family, the 133rd richest family in the world according to Forbes, to create multi-family office Beryllus Capital.
Focus’ aggressive policy of consolidating RIAs has drawn skepticism from Wall Street, which tends to value organic growth more highly. The firm originally pledged an even split between organic and inorganic growth but drew mixed reviews from investors when it attempted to classify tuck-ins to its partner firms as organic growth, according to Owen Lau, an analyst at Oppenheimer.
Despite coming off its strong 2020, its stock has been lackluster recently in part because its two biggest shareholders, KKR KKR +4.5% and Stone Point Capital had been selling shares.
Like other firms in the business, Focus has benefited from the current wealth management environment where independent RIAs have attracted ever increasing amounts of private equity investment and it has become an integral revenue stream for the major wirehouses.
Interest from private equity and focus from large brokerages only grew during the pandemic as increased demand for financial advice to help navigate increasingly volatile markets fostered an appreciation for the steady business model offered by asset-based fees that can weather all types of economic headwinds. For PE shops it was one of the few investments that didn’t falter in the face of shutdowns.
The increased revenues from wealth management extend to Wall Street. Morgan Stanley reported record flows of $105 billion in the segment in its first quarter earnings report with net revenues of nearly $6 billion, a massive 47% increase year over year and making up nearly 38% of total net revenues.
While the RIA aggregation model pioneered by Focus and competitors in the early aughts has expanded, so have the various models that are offered to advisors looking to either leave the large brokerage firms for independence or roll up their shops for economies of scale, capitalization and growth opportunities.
Focus acquires the firms that join its partnership but then has a split on cash flows through a non-control agreement. This means that the 75 firms partnered with Focus all have their own names, branding and autonomy.
“Focus built a model and structure well before there was a proliferation of all of these other financing sources,” says Matthew Fleissig, president of Pathstone, an RIA that manages $19.6 billion in assets in Englewood, New Jersey. “They gave people this option to monetize and maintain independence.”
This article originally appeared on Forbes.
