Rudy Adolf said he became convinced that RIAs were the future of the investment management business back in the late 1990s, when he was running a traditional brokerage firm.
Back then, the idea was laughable.
“No senior brokerage executive could even spell fiduciary. We didn't recognize them as real competitors,” said Mr. Adolf, who at the time was a senior vice president and general manager of American Express Co.'s global brokerage and banking division.
But registered investment advisory firms “were stunning the industry, growing 15% to 20% a year. They were winning against us with our tens of millions of marketing budget, year after year, no matter what.”
The fact that an RIA is held to a fiduciary standard was one advantage, as was the fact that RIA firms had higher profit margins, fewer regulatory challenges and required less startup capital than brokerage firms, he said.
To Mr. Adolf, 48, a former management consultant at McKinsey & Co., it seemed like a no-brainer. Over discussions with friends at his kitchen table, all he saw was opportunity.
“We saw tens of thousands of independent firms out there, without good succession planning and handicapped by their small size,” he said. “They were doing well, but could do better if they had some of the benefits of a big company behind them.”
Over the past five years, Mr. Adolf's firm, Focus Financial Partners LLC, has through an aggressive partnership strategy assembled a stable of 23 independent RIAs collectively manage $45 billion in assets.
Focus has a unique sales pitch, Mr. Adolf said. Unlike competitors, it allows acquired firms to operate with their own name and management team.
“We give them the ability to take some money off the table and give them access to resources to help them move their business to another level,” he said.
Mr. Adolf said he has studied Warren E. Buffett, whose Berkshire Hathaway Inc. also follows a philosophy of retaining executives at companies it acquires. Focus sponsors partner meetings and encourages collaboration among Focus-owned firms. The goal is to raise overall profits, in which all partners share. He also encourages RIA executives to use Focus' capital to make their own tuck-in acquisitions.
Of course, Focus Financial does not have a monopoly on its business model. Aggregator United Capital Financial Advisers LLC, which has $11 billion in assets, and HighTower Securities LLC, which has $20 billion, compete for some of the same deals. After a slowdown in acquisitions after the 2008 financial crisis, deal activity has increased, which is driving up prices. Nonetheless, Focus is looking actively for more partners, with breakaway wirehouse teams a particular target, Mr. Adolf said.
He believes Focus has an advantage over competitors, and his medium-term goal is to expand into the U.K. and other European countries. The European market is of particular interest to Mr. Adolf, who grew up in Austria and began his career there.
In his first foray into the European market, Focus in 2008 made its first international acquisition, U.K.-based Greystone Financial Services Ltd. Further expansion in Europe could lead to growth in other affluent markets, including Hong Kong, Singapore and Shanghai — but not immediately.
“Our $45 billion in assets is a good number, but it is nothing compared to a $1.3 trillion industry,” he said. “The opportunity is here and will continue for many years to come.”