Our US correspondent, who is reporting from the annual IMPACT conference of Charles Schwab in San Francisco, gets to hear the sort of details on wealth strategy that one usually does not learn about. 

The private equity mastermind behind one of the wealth management industry’s biggest makeovers gave attendees at Charles Schwab’s annual IMPACT conference in San Francisco a rare glimpse into the inner workings of the PE mindset. (See here for a previous report from the same conference.)

Dan Glaser, operating partner at Clayton, Dubilier & Rice, guided the PE firm’s purchase of a majority stake in the RIA behemoth Focus Financial last summer, taking it off the public markets. Glaser, the former CEO of Marsh McLennan, quickly began to overhaul the advisory firm, radically transforming the loosey-goosey “affiliate” model of 90 disparate firms assembled by former Focus co-founder and CEO Rudy Adolf into a more centralized structure.

The Colony Group and Buckingham Strategic Wealth, the most prominent Focus RIAs, merged, becoming a key ‘hub’ of the reorganized firm, along with Kovitz Investment Group and SCS Financial. Colony head Michael Nathanson was installed as Focus CEO, and Buckingham’s Adam Birenbaum was named head of the Colony-Buckingham combination.

In a panel discussion with Nathanson onstage at IMPACT, Glaser said Focus was the “ideal” target  for his private equity firm. “It was an attractive entry point [into the RIA space] for us,” he said. “They were big and doing well but had flaws in their model and were at an inflection point. We thought there was a lot we could do for them.”

Michael Nathanson, Focus Financial CEO left and Dan Glaser, operating partner at Clayton,  Dubilier & Rice.

CD&R found a lot of waste and duplication in the 90 different Focus affiliates, Glaser said. “It wasn’t cohesive,” he added. “It was more like a consortium than a firm.”

After touring a number of the Focus affiliates around the country, CD&R executives saw that the local firms were often far ahead of company management when it came to service innovations. Glaser then appraised the company’s executive talent, organizational structure, position in the market and inefficiencies.

Among other things, he found that Focus didn’t have a chief technology officer, HR head or anyone in charge of shared services. Areas including digital marketing, data, risk management, compliance and cybersecurity also needed shoring up.

After the Colony-Buckingham merger, Glaser levered the talent he had in house with industry stars Nathanson and Birenbaum. “We let people who ran RIAs do it on a bigger scale and are there to help,” he said.

Just over a year into the private equity takeover, Focus has consolidated about one-fifth of its firms into three enterprise units, but still has over 70 partner firms, where Focus owns the assets, but the management teams are independent.

While Focus, touts its “two distinct yet connected business segments” that have a combined $460 billion in assets, Glaser made clear that CD&R’s priority is more consolidation and “company building.” He was encouraged, he said, at how many partner firms have agreed to join the enterprise firms, which are still separately branded, but are expected to have a shared brand by next year.

Nathanson said the goal is to get as many firms to merge with an enterprise firm as possible, but only if they want to be part of “the coalition of the willing.” 

Focus will also start doing more external M&A as well, Glaser said. CD&R believes in offering equity to attract and retain talent, and in the past year the percentage of Focus employees with an equity rose from 1 per cent to 15 per cent, according to Glaser.

CD&R wants to build a “world class” RIA with a platform that includes alternative investments, research capabilities and tech stacks, Glaser said. Private equity is willing to pay up to bring in top talent and improve services to accomplish that, according to Glaser. “Creative people want to be with other creative people to build something great,” he said.

Private equity firms are willing to invest in the companies they buy, while many RIAs still owned by founders are not, according to Glaser. In fact, many RIAs that have done well have become too complacent and are underinvested, he asserted. Founders don’t want to spend money they’ve accumulated, and as a result firms miss out on new developments such as alternatives, cyberspace, artificial intelligence and data analytics.

As the industry continues to consolidate, Glaser sees four or five “very large” RIAs emerging in the next 10 to 20 years. Focus, he declared, “will be one of those.”

When a private equity firm makes an acquisition, it “always  has a plan where the business they buy will go,” Glaser said. 

When Family Wealth Report asked if taking Focus public again was part of CD&R’s plan, Glaser said there was still “ambiguity” around “what the exit plan could be.” CD&R could stay invested for a long time, with monetization events along the way, but a “public exit” could also be viable, he said, “somewhere down the road.”