Michael Nathanson's new post as Focus CEO could create an 'apparent conflict' with his duties at Colony Group, which is snapping up billions in Focus RIA assets -- but 'partners' now have one of theirs in the power seat

Michael Nathanson's new job as Focus Financial CEO may pose a potential “conflict” because he's buyer and seller of tens of billions of dollars of Focus RIA assets to Colony Group, the $21.4 billion Boston RIA.

Nathanson, who was already Focus Financial president, was named CEO today (Apr.30), replacing interim CEO Dan Glaser, who filled in after Rudy Adolf's departure last fall. See: Focus Financial makes 'abrupt' CEO call, lets Rudy Adolf go into 'retirement,' with ‘no solution in place’

So far, nobody seems to be complaining that Nathanson still retains his Colony CEO job. 

Yet, the two hats warrant a double-take, says Mike Wunderli, managing director at ECHELON Partners, an RIA investment bank in Manhattan Beach, Calif.

“That is a very odd arrangement,” he explains.  “Given the apparent conflict of interest, you might expect that something else is in the works that will mitigate the issue, or make it a moot point.”

John Furey, CEO of Advisor Growth Strategies in Phoenix, Ariz., says one mitigating factor is that Focus, at least technically, is the owner of all that it surveys and so all transactions are internal.

"Technically, Focus buys all the assets of their partner firms. So Focus does “own” the assets of Colony in partnership with the ownership team.  Michael is taking a broader role within Focus.  So, I think that conflict goes away as he’s no longer leading Colony.

He adds: “I think broadly, there is no pressure, at least not yet, for Focus partner to [join] firms with a Colony or other Focus platform firm.  But the strategy is clear, Focus wants fewer direct-affiliated partners.  I think this is a five-year effort and in the end there will be far less individual Focus firms.”

Focus's outside PR firm, Prosek, did not respond to a request for comment on the CEO appointment and Nathanson did not respond to a LinkedIn query. 

Focus's majority owner, however, may have signed off on the dual role as a part of a plan to drive efficiencies by consolidating autonomous RIAs internally into “hubs.” 

Hubs bub

Colony has been designated as one of three “hub” RIAs in the network.

SCS Financial, also in Boston, and Kovitz Investment Group in Chicago are the other two “hubs.”

“Buckingham,” the $68-billion TAMP and RIA, which was long the internal rollup at Focus, is notably absent from the network. See: Buckingham becomes KKR-fueled, check-listed M&A 'machine' that now feeds on BAM TAMP clients

Buckingham was recently reported to be in potential merger talks with Colony, according to Citywire. But a Focus spokeswoman heatedly denied the report. 

“There is no agreement or even framework for merging them or creating a hub,” she said.

Buckingham CEO Adam Birenbaum is a big fan of the Nathanson hire – not least because “partners” now have a trusted and sympathetic ear in power at headquarters in New York.

“Michael has been a dear friend and collaboration partner of mine since Colony joined with Focus in 2011,” he says. "He is simply one of the most admired operators in our industry, a person of the highest competence and highest character, and I love that he has been directly in our shoes and on the same side of the fence. 

“That’s a vital perspective and lens for executing Focus’ vision and strategy. It really is a brilliant move by Focus – Dan Glaser, David Winokur, Fayez Muhtadie and the rest of the ownership team. There is not a better choice in my humble view and I truly believe Buckingham and the rest of the Focus partnership should be beyond pleased with this news.”

Opportunistic mergers

Focus Financial reported that it was selling $10.4-billion GW & Wade to The Colony Group March 1, and Nathanson served as spokesman for both sides in the release.

He spoke about each employer in the third person. 

“Over the years, Focus has become home to many outstanding wealth management firms, and it is exciting to see two of them joining forces," Nathanson said in the release.

 "We expect that, through opportunistic mergers such as this one, Focus will continue to facilitate the accelerated evolution of firms that choose such a path.”

The terms of the deal were not disclosed.

The press release today did not acknowledge any challenges that Focus might need to negotiate in having Nathanson wear both hats.

Focus calls Colony Group an “operating subsidiary,” so in some sense, they are the same company. Yet Colony, like all Focus RIAs, files its own SEC ADV and runs its own business.

Focus's deals – about 90 RIA purchases to date – are prototypically done with a wrinkle. It buys 100% of an RIA's assets, yet with a claim to only about 50% of its cash flow. 

Inherent conflict? 

Undisclosed variables related to Nathanson, Colony and Focus could make it hard to pin down whether the arrangement is one that could make it hard for Nathanson to do his job, Wunderli says.

“I think this depends on Nathanson’s ownership structure in the entities, how he’s compensated and whether or not there’s a conflict of interest,” he says by email.

"If he stands to benefit more from Colony acquisitions (or Colony’s success in general) more than he would from another Focus firm’s acquisition or success, then that would represent a conflict and would clearly be a cause for concern from other Focus firms. 

“However, if he only stands to benefit from the indiscriminate success of Focus as a firm, then there would be much less concern. 

"With that said, the fact that he will be CEO of both firms at the same time would suggest the former scenario with inherent conflicts.”

Gold plated

If anyone is equipped to assess such conflicts of interest, Nathanson, who is an attorney, might be that person. 

Massachusetts Super Lawyers named him a “Super Lawyer” six times, and he graduated cum laude from Harvard Law School. Nathanson was senior partner of Wilmer Cutler Pickering Hale and Dorr LLP.

His credentials as an RIA fiduciary also run deep. He served on the board of advisors for Boston University’s Program for Financial Planners. 

“Michael has been instrumental in executing our evolved strategy, delivering strong momentum on Focus’ hub expansion, setting our go-forward strategic vision and identifying opportunities for collaboration across our business,” Glaser explained in a release announcing Nathanson's appointment.

Rolling up

Glaser is also an operating partner for Clayton, Dubilier & Rice (CD&R), which led the deal in March a year ago to purchase Focus for $7 billion and will remain as executive chairman.

Having Colony roll up the firm that initially rolled it up could be part of what makes Nathanson effective as CEO of both, Wunderli says.

“CD&R must think that Nathanson is the best person to carry out their vision for the company and/or they believe Colony is best positioned to roll up both Focus firms and outside practices.”