EXCLUSIVE: Revamped Focus Financial Faces Delicate Balancing Act

Charles Paikert US Correspondent New York February 6, 2024

EXCLUSIVE: Revamped Focus Financial Faces Delicate Balancing Act

The newly-installed president of Focus Financial gives his first interview since being named in the role. The business, now under private equity ownership, has been one of the most high-profile players in the RIA sector.

Focus Financial Partners, newly retooled after being bought by private equity firm Clayton, Dubilier & Rice last year, will be walking a tightrope as it tries to execute a new business model.

The holding company wants to transform from a loosely affiliated network of around 90 advisory firms into a much more integrated model revolving around several big “hub” firms that absorb smaller Focus partners.

The challenge, say industry insiders, is how to balance rolling up as many firms as possible to achieve scale while still accommodating RIAs who signed up with Focus in the first place because they wanted to stay autonomous.

Focus’ priority is to “promote greater interdependence” among partner firms, retain the company’s core fiduciary values and “stimulate progress,” said newly-appointed president Michael Nathanson, in his first interview since being named, while not forcing advisors “to do anything they don’t want to do.”

Easier said than done, according to wealth management consultant Jamie McLaughlin. “The only way to create the expected financial leverage of a roll up of any type is integrating as many shared services across the independent firms as possible,” McLaughlin explained.

One Focus partner firm CEO put it this way: “I mean, we know they want to own every one of us.”

Sell out or hold on?
So what’s the incentive for RIAs to sell their management companies to Focus?

Greater growth, scale, access to more capabilities and the ability to “do more for clients and team members,” said Nathanson, who will remain CEO of The Colony Group.

And money, of course. After valuations are determined, most transactions will be an exchange of sellers’ equity for equity in Focus, Nathanson said. “It’s not about cashing out,” he said. “It’s about believing in the Focus business model and that equity in Focus will grow faster.”

Hub strategy
Focus has established two hubs to date: the holding company bought out the management teams of Kovitz Investment Group, a $7.3 billion Chicago-based RIA and The Colony Group, Nathanson’s $21 billion Boston-based firm. 

Both hubs have begun consolidating other partner firms: Kovitz has agreed to acquire Focus partner firm Telemus Capital and Colony is merging with Connectus Wealth Advisors.

Going forward, Focus may stick with having just two hubs but could also expand to having four or five hubs, Nathanson said. 

M&A and debt
Focus will also “continue to pursue external mergers,” he said, but most likely not under the terms of the company’s previous model of buying an RIA’s assets and a preference in its cash flows, while allowing it to operate independently. “Ideally, we would buy 100 per cent control,” Nathanson said.

Focus’ debt levels were a concern when the company publicly traded, but Nathanson said that he was “not concerned at all” by current debt ratios. Debt remains “a useful tool” for the now private company, he added. “Relative to our peers, we are being very responsible regarding the level of debt we utilize.” 

Existing partner firms will have to decide whether to stay on their own or join a hub. “We’re still figuring it out,” one CEO said. “There may be synergies that make growth faster, but a lot us like running our firms and don’t want to be an employee.”

Can a bifurcated model work?
Can Focus really achieve the goals of its private equity owner with a bifurcated business model spread across so many firms?

It will be a challenge, said consultant John Furey, founder of Advisor Growth Strategies.

“There are the haves and have-nots,” Furey explained. “The question is how much support the have-nots will get. But Focus is smart not to force the issue of selling out. There’s no upside in the negative.”

Veteran industry observer Chip Roame is more optimistic.

“Many firms have multiple affiliation models,” said Roame, managing partner of Tiburon Strategic Advisors. “Think of firms like Wells Fargo or Raymond James that support employee as well as independent financial advisors. I think it is actually quite savvy to have a few models. Synergies will be realized. Focus doesn’t need to consolidate them all to one model to realize the benefits.” 

ECHELON Partners CEO Dan Seivert sees the Focus approach as the “first wave” of its consolidation strategy. Some firms will opt in voluntarily, others will feel some pressure to sell, while undecided firms can wait and see how the hub strategy works.

But consolidation is critical to helping Focus reduce personnel expenses in redundant positions such as investment professionals, compliance and office managers, while also cutting rent expenses by eliminating office spaces, Seivert pointed out.

Changes coming
Whether they join hubs or not, partner firms will see more centralization in the form of “investment offerings,” training and development, recruiting, human resources, marketing and compliance, Nathanson said.

As for branding, firms will retain their own name, but Nathanson said it’s possible that the hub brands could be “related” as a derivation of a similar name in the future.

Nathanson himself is one of the industry’s most highly regarded executives. What will he be bringing to Focus leadership from his successful run at The Colony Group?

Colony emphasizes a firm-wide “shared vision,” but the firm's real superpower is “a culture of super teams versus superstars,” Nathanson said. 

PE end game
Kovitz managing principal Mitch Kovitz is joining Nathanson on the Focus executive leadership team as vice chair; both men report to Focus chairman and interim CEO Dan Glaser, an operating partner at Clayton, Dubilier & Rice and former CEO of professional services firm Marsh McLennan.

Although there is an “open search” to find a permanent CEO, Glaser is enjoying filling the role, Nathanson said, and “there’s no great sense of urgency” to find a replacement.

As for the endgame of Focus’ new majority private equity owners (PE firm Stone Point Capital remains a minority stakeholder), Clayton, Dubilier & Rice has “multiple options,” including an IPO, recapitalization and staying put “for a long-term period of time, Nathanson said.

After all, he added, “Focus is a very profitable firm.”

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