Wealth-firm holding company acquires another third-party plan administrator. RIA aggregator Focus Financial Partners has taken a major stake in Oakland, Calif.-based WESPAC, a third-party administrator (TPA) of pension and benefits plans to small- and medium-size companies and a provider of financial-planning and investment-advisory services to individual clients. The addition of WESPAC gives two-year-old Focus a total of sixteen affiliates with nearly $30 billion in client assets.

The deal also highlights Focus' strategy of leavening its portfolio of pure-play wealth managers with TPAs.

Diversifiers

"There are very strong synergies between RIAs and TPAs," says Focus' CEO Ruediger Adolf. "Often they're focused on the same clients: small- to mid-size businesses and their owners -- and WESPAC has demonstrated how well the two parts of this business can build on each others successes."

And though TPA assets under administration are, generally speaking, "lower margin" than the assets on which wealth managers draw fees, they can provide performance stability across Focus' portfolio of firms -- especially in times, like now, when markets are in disarray.

These days, for instance, Focus affiliates with TPA divisions are among the network's best performers, according to Adolf.

TPAs have been part of the Focus formula since the holding company launched early in 2006 with the acquisition of four firms including Geller Group, a New York-based retirement- and benefit-plan provider to middle-market firms and their employees. In January 2007, Focus acquired Reading, Mass.-based Sentinel Financial Group -- like WESPAC, a hybrid business with private-client and TPA elements.

Adolf reckons that traditional, fee-based fiduciary wealth managers account for 13.5 of its 16-firm portfolio and that 1.5 are hybrids. Irvine, Calif.-based Benefit Funding Services Group stands alone -- so far anyway -- as Focus' sole all-in institutional consultant.

Distribution mindset

Focus' strategy of bringing in the occasional TPA is unusual. A commoner method among wealth-firm holding companies aiming for diversification in related but not overtly correlated business models is to buy institutional assets managers.

But this approach is integral to a "distribution mindset" Focus wants no part of.

"The idea is that you're buying an asset manager to push product through distribution channels," says Adolf. "That may work from the [holding] company's perspective, but we fundamentally believe that the client suffers from it. We provide advice based on providing the best solutions for clients, whether [we're acting] as a wealth manager or a TPA."

When Focus acquired St. Louis, Mo.-based wealth-management boutique Buckingham early in 2007, some industry observers concluded that Buckingham's BAM Advisory Services, a passive-investment platform provider to CPAs, would become the wrap program of choice across the Focus network.

They were wrong. BAM maintains its focus on supporting the client-level investment needs of accounting firms -- and none of Buckingham's fellow Focus affiliates use the platform.

Focus' hard-edge view of its role as a hub for fiduciary firms means it's keen to acquire firms with singular and time-tested approaches to the marketplace and let them keep doing what made them successful in the first place, according to WESPAC's co-president Nelson Chia.

"With Focus, we are able to take our unique service model to the next level, further develop our leadership team, and network with other best-in-class firms, all while maintaining our innovative, independent firm culture," says Chia.

Writ large

New York-based Focus acquires between 40% and 60% of its affiliates in cash-and-stock deals. It looks for established, market-leading firms with managers who plan to keep running their firms for another 10 or 20 twenty years and assets under management of at least $350 million.

Affiliates get help from Focus with marketing, compliance and recruiting. But the firms handle their own approaches to investments, trade execution and custody -- though where economies of scale can be brought to bear, Focus will negotiate with vendors on its affiliates' behalf.

In terms of cross-firm networking, sharing expertise and making referrals, Adolf says Focus is there to foster collaboration between partner firms, but it doesn't force them to dance.

Focus is also ready to help its affiliates with succession and sub-acquisition planning and financing.

As a case in point on the recruiting front, Focus recently helped its San Diego-based affiliate HoyleCohen Wealth Management hire Elisabeth Cullington, formerly principal of Cullington Hill Advisors, and her team.

And Focus just shepherded its first sub-acquisition: the purchase of Leicester, U.K.-based investment advisory Roger Harris & Company by its Manchester, U.K.-based affiliate Greystone Financial Services -- a firm that's been a Focus partner for all of three months.

Fundamentals

Focus is in a better position than its rivals to keep buying firms despite a general slowdown in M&A activity, according to Adolf.

"We really believe that we are the only firm that has the capital right now," says Adolf. "Most of the other buyers are gone."

Focus received a $35-million commitment from the Boston-based venture-capital firm Summit Partners just before it launched. And Summit, which has raised about $11 billion since its inception 24 years ago, has hinted that it's ready to provide additional capital as needed.

But by the time it had made its fourteenth acquisition last fall, Focus had been able to fund most of its growth with traditional-source lending, leaving the Summit bundle pretty much intact.

Still, with markets and economies going through a rough patch of indeterminable length, there is one significant obstacle to acquiring firms at the rapid pace Focus has so far set.

"The firms we're interested in are spending an extraordinary amount of time with their clients right now, so they're not focused on strategy in that sense," says Adolf.

But the fundamentals behind Focus' own strategy -- the attractiveness of fiduciary approaches to wealth management, the benefits of certain economies of scale, and the fact that wealth-firm principals are getting on in years while their successors lack the scratch to buy them out -- are as sound now as ever, according to Adolf. -FWR

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