Rolling Up the Firms: Focus Financial's Rudy Adolf
With $65 billion in total assets and 27 advisory firms around the country, Focus Financial Partners has become the largest consolidator in the independent advisory space.
Focus was founded just seven years ago by its chief executive, Austrian-born Rudy Adolf, an irrepressible and outspoken marketer and entrepreneur who cut his teeth in the financial services business at McKinsey. He went on to become a senior executive at American Express, where he managed the companys global brokerage and banking business.
As of October, Focus had added five new firms in 2013 and more than 12 new executives. At his companys gleaming new headquarters in midtown Manhattan, Adolf spoke with Financial Planning about the industry and his firms plans. Below is a condensed version of the conversation.
There have been fewer advisory firm mergers and acquisitions this year compared with last year. Some say there are too few sellers and a surplus of buyers. Do you agree?
No. That has been a theme that has so often been mentioned, but has always been wrong in reality. There are many wannabe buyers, but very few buyers who really have capital.
When youre at so many of these conferences and suddenly somebody asks, OK, so whos a buyer, who is a seller? Guess what? Everybody raises their hand because theyre buyers. Very few raise their hand because they are sellers. So I think its oversimplified and misleading.
Who are the real buyers then?
There are kind of three classes of players in this industry. Of course, the banks have come back, who only two or three years ago were de minimis as an investor and as a buyer because they had no capital. They basically had to clean up their own balance sheets. So theyre back, theyre quite active.
But banks have an almost perfect track record of destroying this type of independent advice business. In virtually every situation, a bank transaction maybe maximizes some value to some of the principals, but it is never in the interest of the clients. Ultimately banks are good product distribution mechanisms, but the traditional banking model culturally, structurally, economically simply does not fit with the independent fiduciary business.
The second class is RIAs merging with other RIAs. This is a phenomenon that has been around for a while. It is viable and we have seen some good transactions; in fact, when youre a Focus partner firm, we actually support this type of transaction.
We probably will see acceleration of [RIAs merging with RIAs] over time, but there is a capital gap. If you dont have capital to support these types of transactions, you are ultimately going to have an adverse selection of targets which basically means if you cannot write a check for this type of a transaction, you will, by definition, end up with an inferior target.
And then there are the consolidators, and we firmly believe Focus is the only consolidator that has the level of profitability, and capital, to really sustain a significant acquisition strategy.
Im sure Joe Duran would take exception to that. What are the primary differences between Focus and his company, United Capital?
Well, first and foremost, track record. We started this business in 06 with $3 billion and we have $65 billion now. We have executed over 60 transactions; we are a very profitable business and, I think, obviously, a very, very successful model.
Second, the essence of our business model couldnt be more different. Focus is all about entrepreneurship. Focus is all about having highly successful independent firms that will remain independent in the way they are executing the business models. We basically help these entrepreneurs to do even better, as a partner in Focus, but to still retain the entrepreneurial culture. And thats very different from the United Capital model.
A third is, of course, access to capital. We have reached a level of profitability, free cash flows and access to all different sources of capital that simply nobody else in this industry has. Theyre not even close.
How far away do you think we are from a true national RIA brand?
I dont think that theres anybody who can credibly claim that they have a national franchise, period. And I think for most firms, such an aspiration, quite frankly, is foolish.
Brand has lots of meaning, but a national brand really first and foremost means that you have a national client experience you know, like Starbucks. Any Starbucks you go to anywhere in the world, your experience of getting your tall latte will be the same.
There is no firm in this industry that we know of that has an ability to deliver this type of a promise, which is at the very essence of a brand. Quite frankly, I would even contest how desirable it is.
Why do you think aspiring to have a national brand is foolish?
What makes our industry so successful the reason its gaining market share against gigantic brands on the brokerage side is because we are so client-focused. The kind of magic that happens between the advisor and the client is the essence of this industry. Its an extremely individualized, extremely personal experience. I am not sure that creating some uniform brand experience in what ultimately is a highly personalized experience is
actually a good thing, from a client perspective.
The second reason why I dont think its very effective is that, if you were to create such a brand, you are dealing with the marketing budgets of the established big wirehouse players in the hundreds and hundreds of millions of dollars. We are by far the largest player in this industry, but clearly these types of budgets are just not available [to independents].
And quite frankly, we think it is better to invest these types of resources into creating, helping and supporting our advisors to provide the best possible advice, rather than running advertising campaigns or other things that a brand needs.
Is there a minimum AUM that youre looking for when youre looking for firms to join?
When we started Focus, we had very specific limits because we ultimately had only one type of transaction that we did: the traditional deals we do through the holding company that are really geared to large firms.
For those deals, $400 million or $500 million would be on the smaller side. Most of our deals are in the billion- or multibillion-dollar range.
But we had many smaller firms over the years that basically said, Oh, you know, we would love to join Focus, too. So we created a second mergers program; for smaller firms that meet the quality criteria and are a cultural fit, we merge them with existing partner firms.
We have also launched a program that we call Focus Successions. Virtually any qualified RIA in this industry can rely on the resources of Focus to ensure succession to protect his clients [following] a life event or in the event they want to retire or to protect their own families.
How important is the succession issue?
We firmly believe there is a succession crisis in our industry. We have this thriving, highly successful, highly profitable industry that is doing the right thing for their clients, and the only real danger that I can see in the industry right now is that so many firms have been built up without really thinking about succession planning.
As a fiduciary, you need to have an answer when your client comes to you and says, You, Mr. or Mrs. Advisor, just in case something were to happen to you, you were hit by the proverbial bus, whos going to take care of me? I know you are a terrific advisor, but whats your solution?
Not having an answer to this most logical question a client asks is not living up to your fiduciary standards. The regulators are increasingly asking these questions, and they should. And not enough firms have a good answer.
Focus did a $216 million private stock buyout deal with Centerbridge Capital Partners this summer. What was the capital used for, and what does it mean for partners in Focus-owned firms?
Focus is very profitable, and Focus has enormous access to capital, so none of this capital is allocated toward Focus. This is a 100% secondary transaction, because Focus doesnt need any money.
What that means is that this capital, this $216 million ultimately, all goes to existing shareholders. The $216 million is for a minority investment into Focus, so Centerbridge will only be a minority shareholder going forward. So basically the way it worked is this money was offered to all existing shareholders.
It was very important to the partners, of course; that was a big reason why we did it. And every shareholder had a choice to tender up to a certain percentage of shares they own. This percentage basically was the same for everybody, except management, who could only tender a smaller level. Personally, I had the lowest limit.
As we expected, many shareholders took advantage of that, but we also had quite a number of shareholders who decided not to sell, or to sell at a lower level than what they could have. So we had an excess pool of capital, and this excess pool of capital we made available to retired partners, who had the opportunity, if they choose to, to basically get more, a higher percentage, than other shareholders.
Meaning retired partners could sell more?
Where is the firms working capital coming from?
As I said, were very profitable. At $65 billion, this is a very profitable franchise, and we generate enormous excess cash flows every year.
Your working capital is all internally generated?
Absolutely, yes. And those excess cash flows really finance many of our transactions. When we need access to additional capital, we have currently a $320 million credit facility that we are only partially using at this point. That gives us enormous financial flexibility when we ever need it.
Is there a timetable for an IPO of Focus stock?
Clearly, not for a number of years. We think a better way to grow for now is with the flexibility and nimbleness that a private company has.
An IPO should never be an end point by itself. It really doesnt improve the business; it is a balance sheet event. An IPO is a financial strategy, not a business strategy.