Umbrella group tries to balance firm independence with increased scale. Focus Financial Partners plans to become a major force in an increasingly competitive wealth-management industry. The New York-based holding company for fee-only advisories has acquired four "founding firms" and $35 million in venture capital to fund additional acquisitions in its bid to establish a large national network of firms "that follow a client-centric and fiduciary approach" to managing assets.

Just how large this network eventually becomes remains to be seen, however. "We don't have specific size targets that we are disclosing, but our objectives are clear: to develop the leading independent wealth-management organization in the country," says Focus CEO Ruediger Adolf. "We expect to do transactions for years to come, but our quality criteria are more critical than size objectives."

As it is though, Focus' member firms' combined client assets of $3.5 billion already puts the umbrella group among the 10 largest independent wealth-management organizations in the U.S., according to data compiled by Bloomberg in 2005.

The "quality criteria" Adolf speaks of as requirements for Focus affiliates boil down to two primary characteristics. One is a strict adherence to a fiduciary approach. The other is financial soundness and growth potential. "We are not investing in turnarounds," says Adolf, formerly a partner at McKinsey & Co. "Our due-diligence processes are extremely rigorous and our model only makes sense for firms that are profitable and growing."

That's a point Kevin Mohan of Summit Partners - the $9-billion private-equity firm that just sunk $35 million into Focus - is keen to reiterate. "We're only interested in a small sliver of the [registered investment advisor (RIA)] firms out there - ones that have scale and fully developed business models."

To have and have not

Given the advisory landscape described in Back to the Future, a 2005 study published by JPMorgan Asset Management's Undiscovered Managers, Focus and Summit are wise to be picky about the firms they target. This study, a follow-up to ones published by Undiscovered Managers in 1999 and 2000, sees RIAs facing two major trends through the next 10 or 15 years. One is attrition as an aging population of firm owners sell or shutter their firms as a prelude to retirement. The second trend is widening gulf between "have" and "have not" firms.

Have-not firms may compensate their owners adequately, but they lack the resources to fund growth or to react nimbly to changes in the marketplace. So as the advisory space becomes more rationalized through increased competition born of improved technologies and more robust performance reporting, have-not firm owners will have to run harder just to stay put.

"[The have-not] group includes about 94% of all industry participants and all of those firms [with] less than $25 million [in] assets under management," says the 2005 study. "A majority of the industry's mid-sized participants also fall into the have-not category because they too are unprofitable as businesses despite operating at or near capacity." The have-not category also includes "firms that generate between $1 million and $3 million in annual revenues but have unattractive client bases or are inefficient."

The haves meanwhile are "mid-sized firms with annual revenues of $1 million to $3 million, and a small percentage of organizations that have less than $1 million in annual revenue but more than $25 million of assets under management," according to Back to the Future. "Although not yet large companies, these mid-sized firms have robust client bases, are profitable and have the resources to grow their organizations over time."

In other words - and to bring the retirement-fueled attrition trend back into the mix - the haves' businesses have genuine enterprise value; have-not firms are worth little or nothing in the marketplace.

Another theme of the Undiscovered Managers studies is that the divide between have and have-not firms will widen as the haves, pressured by big-name competitors, coalesce through merger and acquisition into a group of 40 or 50 highly profitable organizations, each with at least $15 billion in assets under management, that look rather like multi-family offices for the mass affluent.

Richard Smith, founder and manager of Focus affiliate Capital Advisory Group, a Richmond, Va.-based investment consultant to middle-market institutions and high-net-worth clients, says that Focus is emerging as an organization of have-category firms. "We're all haves," he says in a conscious reference to the Undiscovered Managers studies.

Partnership with benefits

In fact, Focus' founding affiliates have each seen 20% to 40% revenue growth through the past five years, according to the firms themselves.

"Strategic Point is the dominant firm in Providence," says Smith, speaking of Focus' financial-planning affiliate in Rhode Island. "We're the dominant firm in Richmond; Kresek is on the top of the heap in Silicon Valley" - a reference to Robert Kresek, manager of Focus affiliate Founders Financial Network, a Cupertino, Calif.-based advisory to high-wealth families - "and Geller [Group] is an A-level 401(k) consultant. I did not need a liquidity event; none of us had to sell going into [partnership with Focus]."

Instead, he says he joined Focus to "perpetuate [my] firm and to share the intellectual capital of the other firms. It's like a sophisticated study group that is also a business partnership."

Founders Financial's Kresek also views his firm's partnership with Focus primarily as a way to keep his business model intact. "We built this firm by selling unbiased advice," he says. "The last thing we wanted was to sell out of that." Now though, with Founders Financial a "permanent entity" with a fiduciary model available to the firm's clients "for the long-run," Kresek says it makes sense for him to bring in a junior partner to groom as the firm's next-generation management.

Jill Schlesinger of Strategic Point says she and her business partner David Brochu see their firm's status as a Focus affiliate as a way "to expand our reach." That's likely to come about, she adds, from referrals to and from partner firms with complementary business models - something she says is already taking shape with Focus' founding firms.

"We've got the consummate retail financial-planning business for the semi-affluent," says Schlesinger. "Dick [Smith] is a great mid-level institutional consultant, Bob [Kresek] has this strong family-office-type business, and Geller is a wonderful, really powerful 401(k) consultant. We are all different; we're very different, but we're also similar in ways: we're all in this for you - the client - and we're not product pushers."

Sheldon Geller, co-manager with Manny Erlich of Geller Group, a New York-based retirement- and benefit-plan provider to middle-market firms and their employees, says Focus gave him "an opportunity to monetize my ownership in my firm after working for 20 years, and continue to manage and grow my firm."

But, like Schlesinger, Geller also sees "synergies" with other Focus affiliates. "The other firms can look to us to service 401(k) plans and pension plans and help us grow plan assets under management," he says. "They function almost like an extension of our firm, as we do for them."

Kresek sees additional benefits in being part of Focus, namely in increased purchasing power for technology and marketing initiatives. "Some of the technology we'd like is too expensive for us on our own, but a group of firms like Focus might provide the critical mass to negotiate more favorable contracts," he says.

The hoped-for marketing benefits could come in two forms. First, Kresek sees the possibility of garnering new business as a result of media buzz centered on Focus as a new player in the advisory space. Second, as the Focus network grows to include other firms in the San Francisco Bay area "together we may have better access to advertising and marketing campaigns."

Some skin in the game

Focus typically acquires 40% to 60% of its affiliates, according to Kresek. "The Focus model is to buy a major part of the firm, but we retain control," he says. "Focus can never tell us what to do."

This laissez-faire approach is in keeping with Adolf's view that "we didn't have to invent a new advisory model. There are firms doing it right - and they have been doing it right really since their inceptions. The very essence of our model is that [the affiliates] continue to control their businesses and cultures and we enhance their opportunities to grow."

But in return for that freedom - and participation in an "integrated ownership" model "that gives us all some skin in the game" - Capital Advisory Group's Smith says it's incumbent on affiliates to continue growing. "The earn-outs are based on our ability increase growth at our firms."

Focus' Adolf says his company's model is unique to the advisory business, but he adds that National Financial Partners (NFP) - a New York-based holding company that distributes products and services to private clients through a network of more than 200 affiliates - was one of the firms whose business models he and his colleagues scrutinized in the early stages of Focus' development.

Several of Focus' affiliates seem wary of NFP's model, however. "NFP has a lot of insurance affiliates, a lot of product sellers," says Strategic Point's Schlesinger. "We have no products and no platforms to sell."

Mention of NFP draws a more enigmatic response from Geller: "Well, there's something very wholesome and sincere about a fee-based model like ours; one that is fully disclosed to the client."

Elizabeth Nesvold of New York-based investment bank Berkshire Capital, says that Focus seems to be off to a promising start - especially in pulling off its initial acquisitions. "It's hard enough to get one deal done," she says. "Four at once is quite an accomplishment." -FWR

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