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RIAs join Focus Financial with their own acquisition plans

Making purchases is much less scary with a big roll-up at your side

Wednesday, December 16, 2009 – 9:47 PM by Brooke Southall
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Jim Pratt-Heaney:[Making acquisitions] would be very difficult [to do] on our own.

A couple of big acquisitions and an infusion of venture capital are helping Focus Financial slowly overcome the doubts about the roll-up model that were raised by last year’s dreadful market and the poor performance of National Financial Partners.

Last week, Focus announced its second major deal in as many months, this one with LLBH Group Private Wealth Management of Westport, Conn.

The major RIAs — Manhattan-based Joel Isaacson & Co joined his firm to Focus Financial last month — are being lured to the aggregator by the promise of a dual benefit. They get folded into a larger organization in relatively smooth fashion and get cashed out of a portion of their firm.

Then, the principals of these RIAs are also well-positioned to begin their own growth campaigns, often of sub-acquisitions.

LLBH, which has about $700 million in AUM, was formed by four breakaway brokers from Merrill Lynch in October 2008. They’d had no regrets about their move to independence: in fact, their phones started ringing soon after their move with calls from former Merrill colleagues — both managers and advisors — who wanted to join the new firm.

Back burner

Reluctantly, Pratt-Heaney and his colleagues, Kevin Burns, Bill Lomas and Bill Loftus, said no. Having just been through the hassle the breakaway, they wanted to get their feet on the ground before adding more partners. “It was on the back burner,” Pratt-Heaney says.

Its deal with Focus will help the partners move such sub-acquisitions to the front burner. “That would be very difficult [to do] on our own,” he adds.

Focus pours a lot of effort into helping RIAs complete sub-acquisitions — Focus has completed six in 2009 so far. Those deals ranged in size from about $40 million to $200 million. Rich Gill, vice president of business development and acquisitions for New York-based Focus, expects more of its 18 partner firms to expand in that manner in 2010.

“Sub-acqusitions is a way we can really help our firms,” he says.

Joel Isaacson, who joined his firm to Focus Financial last month, also believes that he is now much better positioned to execute an aggressive growth strategy.

“I think there’s a huge opportunity in New York” to compete as a wealth manager in a very transactions-oriented environment dominated by banks and brokerages, says the principal of Joel Isaacson & Co. “A lot of high net worth people feel lost there” in seeking a trusted advisor.

“Rudy’s management team helps us to grow” because they are “very smart people,” he adds in an interview last month.

Isaacson has about $1.35 billion of assets under management and an additional $2.15 million that it oversees.

“We’re skeptical.”

Focus and the roll-up model in general still have many doubters. Though acknowledging that Focus has honed its expertise in acquisitions, David Hou, principal with Luminous Capital of Los Angeles, says he and his partners have passed on partnering with aggregators because the structure takes away ownership without replacing it with significant integration. “We’re skeptical,” he says.

Luminous manages more than $2.6 billion of assets.

Still Focus Financial is the only roll-up among a group that includes United Capital and Hightower that’s been able to attract partners from among the biggest RIAs, Gill says.

United Capital’s acquisitions are closer to the size of Focus Financial’s subacqusitions and Hightower brings aboard big brokers, he adds. Focus is also the only consolidator to attract “truly tier-one” venture capital, Gill says.

Polaris Ventures and Summit Partners, both of Boston, invested a combined $50 million last month. Bessemer Ventures invested $15 million in United Capital earlier this fall.

Alan Spoon, the general partner for Polaris Ventures of Boston that put up $35 million of the $50 million that Focus Financial raised last month says the aggregator’s model is time-tested. “The model is quite inspired and it’s proven itself through this terrible tempest,” he says. “It’s got a track record. It isn’t speculative anymore.”

The model is largely one of bringing aboard proven entrepreneurs then providing them with a judicious admixture of autonomy and consultative aid. Focus pays the advisors cash upfront in exchange for receiving a significant portion of the earnings. Despite the downturn, Focus remains highly profitable, Gill says.

What helped to convince Pratt-Heaney that the Focus model works was spending a year as part of Focus Financial’s Connections program as a de facto consulting client. Gill essentially served as his firm’s temporary chief operating officer.

“When we saw how thorough they were, we thought about having the full association with them,” Pratt-Heaney says. “Unless they changed radically, we thought we’d always become one of the partners.”

Primary allegation

Still, Pratt-Heaney allows that he took time to digest the lawsuit filed by Progressive Financial on behalf of David Brochu’s firm, StrategicPoint Investment Advisors of Providence, R.I. on Nov. 17. The suit’s primary allegation is that key information related to ownership is being withheld from partners.

“You can’t ignore it,” Pratt-Heaney says. “I read all the information back and forth. I believe it will be handled. The reason we [became partners with] Focus Financial is the quality of the people.”

Isaacson says he made a similar assessment after considering Focus Financial over the course of a couple of years. “The other partner firms: they’re the best salespeople for Focus,” he said in an interview prior to Brochu’s lawsuit becoming public.

Brochu’s other allegation is that Focus Financial is too closely following the path taken by National Financial Partners, which saw its earnings and stock price go into a tailspin this year.

There is no comparison between NFP and Focus financial, Spoon says in an interview that took place just prior to the lawsuit. “Generalizations here don’t work,” he adds. “Focus is not NFP – different model.”

In an interview subsequent to the StrategicPoint lawsuit becoming public, Spoon says his firm was aware of Brochu’s concerns. “David had views on the strengths of Focus and he had other reservations,” he said in that second interview.

Christopher Dean, managing director of Summit Partners in Boston agrees with Spoon’s assessment that NFP and Focus Financial are dissimilar in an interview that occurred prior to Brochu’s suit became public.

One and two-person businesses

“With NFP, you’re buying one and two-person businesses,” he says. Dean adds: “[Focus Financial] is looking for real franchises in the community. We’ve affiliated ourselves with the best RIAs.”

Summit originally provided venture funding to Focus Financial in 2004 and it provided an additional $15 million in this round. Summit also invested in another RIA, The Mutual Fund Store of Overland Park, Kan.


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