Ruediger “Rudy” Adolf has been buying into some of the country’s most prestigious independent advisory firms over the past three years as founder and chief executive of Focus Financial Partners LLC in New York.
But no matter the firm’s size, whenever he visits a prospective acquisition for the first time, the Austrian native feels as if he’s walking into his father’s accounting office back in his hometown of Innsbruck.
“It makes me appreciate what makes these firms successful,” Mr. Adolf said. “My father was a very successful entrepreneur. He couldn’t have ever worked for somebody as an employee.”
After moving to the United States in 1990 at age 27 and working for the New York-based consulting firm McKinsey & Co., Mr. Adolf said, he learned the brokerage business “inside out” at American Express Co. in New York in the late 1990s.
“At one point, I thought, ‘There must be a better way to do wealth management,’” he recalled. That better way, he concluded, was the independent-fiduciary-advice model, with many firms under one roof.
Backed by the deep pockets of Boston-based private-equity firm Summit Partners LP, Focus Financial is in fierce competition with other well-funded companies that have a similar vision and also are snapping up advisory firms around the country.
Focus Financial is more than holding its own, boasting as partners 10 firms with a collective $17 billion in assets under management. One big selling point, according to Marty Resnick, partner and managing director at Resnick Investment Advisors LLC, a Westport, Conn., firm that joined Focus Financial last June, has been “the tremendous amount of freedom given to member firms.”
Q. What kind of firms are you looking for?
A. We are really looking for leaders. Focus Financial is not for everybody. We are bringing together a very unique group that is first and foremost a fiduciary model. They have established a strong track record of serving clients, of growing their business and have built some of the leading businesses in the industry.
Q.What minimums in assets under management do you seek?
A. For firms that we would directly invest in as the holding company, typically, we would start at about $300 million in assets. We can do much, much larger transactions, like our Buckingham Family [of Financial Services] transaction, which was an $8 billion [St. Louis-based] firm. But typically, if a firm below $300 million is interested in our model, we would still look at them and suggest that this is maybe a better fit as a potential merger into one of our existing 10 partner firms.
Q. What’s in it for the firms themselves?
A. It is very important in our model that this is not just a financial transaction. We want to really help our partners accelerate their growth and basically keep at least on the trajectory they have been on in the past. The areas where we can help them range from recruiting, people development, sharing of best practices, acquisition of smaller firms and broadening their leadership group.
Q. How do you summarize your business model?
A. Ultimately, what makes the transaction work are three promises. One is, we are providing liquidity and diversification for our partners. We are a way for them to access liquidity, monetize some of the equity they have built and also diversify their net worth, because in the future, they are also shareholders in [our firm]. Second, we help our partners to accelerate or to maintain their very, very attractive growth rate. Third is about financial upside. The Focus [Financial] transaction can create returns for our partners that are very, very attractive.
Q. What percentage of the business do you buy when you do the initial transaction?
A. There is an initial consideration that we are paying for the firm, which is typically a combination of cash and stock. And given the strength and power of our balance sheet, we are quite flexible in how much cash or stock we put on the table, making it easy to accommodate to the needs of a firm. Then there are two earn-outs, one after three years and one after six years, which again are a combination of cash and stock that together can create a very, very attractive financial model for our partners. We are flexible, but we typically have a 40% to 60% stake in the cash flows of a partner firm.
Q. And the original partners have the rest? Is that remaining portion eventually bought by you, as well?
A. At Focus [Financial], we never want to turn successful entrepreneurs into employees: Our model does not envision that we ever own 100% of our partner firms. But depending on the initial percentage in the transaction, [we] can step up and increase ownership.
Q. What’s your ultimate exit strategy?
A. We have lots of options to create liquidity for our initial investors or for partners. Clearly, an initial public offering is one of those options; it can be very attractive. Affiliated Managers Group [Inc. of Prides Crossing, Mass.] or National Financial Partners [Corp. of New York] have demonstrated the power of this type of a model. But clearly, there are lots of other sources of equity that could be attractive, including other private-equity firms.
Q. As you build your network, why not have one name for national branding and marketing purposes?
A. What really drives the business is closeness to clients. The vast majority of business comes through referrals. We want to signal to the local markets that the same team that they trusted and built their relationship with will continue to work with them and advise them.
Q.One criticism of Focus Financial is that it is not a real network but rather a mishmash of firms sort of thrown together. What is your response?
A. Actually, I’ve never heard that criticism before. The power of the network is very, very important in what we’re doing. For example, to prepare for our partners’ meeting, all the partners from our 10 firms are rolling up their sleeves and working on a whole range of joint initiatives and joint opportunities where everyone can leverage the best practices of our partner firms.
Q. Looking ahead, do you see more consolidation in the wealth management industry?
A. Industry consolidation will accelerate, maybe by a little. We do not subscribe to the theory that suddenly, there will be 10, 20 or 30 big firms, and everybody else is a have-not. That’s totally wrong.
The exciting thing about this industry is that there are many different business models that can be very successful while meeting the needs of clients and of the people running the advisory firms. This is not a case where one model fits all.
Q. What can we expect from Focus Financial over the next few years?
A. In many ways, we are ahead of where we thought we would be at this point. We will continue our very deliberate, strategic and systematic approach to encouraging more outstanding partners and their firms to join [us] and continue our very strong organic growth.