Focus Financial rides RIA consolidation to 37 percent annual revenue growth

Seven months after taking Focus Financial Partners (FOCS) public, the chairman and chief executive of the RIA aggregator, Rudy Adolf, is singing the praises of the public equity markets.

“The IPO is creating permanent capital to invest in our business,” Mr. Adolf said Thursday morning during an earnings call with analysts.

“Our business has never been stronger,” he said, underscoring the company’s strategy of continued growth through acquisitions, including international expansion.

Focus, which raised $565 million in its July 30 stock sale, reported 2018 wealth management revenues of $910.9 million, a 37.4% increase over the prior year. Adjusted net income for the calendar year was $125.3 million, up 44.6% from 2017.

The success of the company’s strategy has not been lost on investors. This year through Wednesday, Focus shares were up more than 20%, which is more than double the S&P 500 index’s 9.8% gain over the same period.

In Thursday trading through midday, Focus shares were up more than 7%, while the S&P was down slightly for the day.

Focus acquired eight new partner firms in 2018, adding $37.8 million in base earnings. Focus executives said the pace is continuing this year, with seven closed acquisitions and four pending transactions so far in 2019.

While Focus already had partner firms in Australia, Canada and the United Kingdom, and aspirations for continued global expansion, Mr. Adolf said the U.S. market is still ripe for consolidation opportunities.

Registered investment advisers and hybrid RIAs manage $4.7 trillion in client assets, or about a quarter of all managed assets, he said, and that figure is projected to grow to 29%, or $1.4 trillion, by 2022.

“These fiduciary advisers are continually attractive to clients,” Mr. Adolf said.

In terms of growth potential, Focus said it is targeting a 20% growth rate for 2019, which breaks down to 10% organic and 10% through acquisitions, adding to its current list of 58 partner firms.

“We’re very comfortable with that growth guidance,” Mr. Adolf said.

When asked about competition from banks and private-equity investors that might also want a piece of the RIA space, Mr. Adolf argued that they weren’t serious competitors for RIA deals, especially those involving RIAs serving wealthier clients.

“Private equity does show up occasionally, but our differentiation is that we represent permanent capital,” he said. “Our ability to compete with private equity is very high. We are a firm that has a track record of adding value, and high-net-worth individuals don’t like the dynamic of [PE] money moving in and out.”

Mr. Adolf was equally dismissive of banks trying to build up their wealth management businesses by acquiring RIAs.

“Banks do show up and have been in and out of this industry forever and will continue to be,” he said. “The track record of banks investing in this type of asset and then destroying them is quite high. Banks are not good fiduciary advisers, period.”

While Focus refers to most of its deals as mergers, they are technically acquisitions, and usually all-cash deals in which Focus acquires 100% of the RIA.

Becoming a partner firm at Focus, which provides lots of technical and back-office support, in addition to help making sub-acquisitions, means giving up between 40% and 60% of earnings before partner compensation, according to the Focus prospectus.

One recent example of how Focus helps orchestrate acquisitions by its underlying partner firms is the fourth-quarter purchase of Loring Ward Holdings, a $17 billion turnkey asset management platform, by the Buckingham Family of Financial Services.

Focus helped finance the $235 million cash-and-stock deal, which has already started paying off through the slow but steady migration of some of those TAMP assets, which earn about 25 basis points, onto the RIA platform, where fees hover around 70 basis points.

“It was never intended to be an avalanche of movement, but we’ve seen a steady flow of TAMP assets over to the RIA,” Mr. Adolf said.