Focus triggers Moody's by fighting debt with debt • Fidelity's new ETF fees work magic • Schwab opens Milwaukee 'flagship' • RIAs may lose billions to 'widowgedden,' says Krawcheck
Focus leverage ratio rose again; Moody's dings • Fidelity shores-up ETF marketplace revenues • Schwab backs brick-and-mortar • Krawcheck claim puts $53 trillion in question
5 min read- Moody's downgrades Focus Financial outlook due to debt-fueled acquisition strategy.
- Fidelity pressures small ETF issuers into revenue sharing with threat of fees.
- Schwab bucks trend, investing in physical 'flagship' office in Milwaukee.
Focus Financial Partners has the Moody's blues because its plan to create three mega RIAs out of 90 smaller ones will come at a cost.
Moody's Ratings went "negative" last month when it discovered Focus plans to solve its high leverage ratio with even more debt.
The New York City bond rater took its outlook from stable to negative on May 1, even as it kept its B1 rating intact for the New York City rollup.
The problem, it notes, is that Focus' long-held 5.1-times debt-to-EBITDA rating leaped another 20% to 6.1-times. Now, its strategy seems bent on borrowing more money to buy more – without a corresponding leap in cash flow.
‘The negative outlook reflects Focus’ high leverage due to its acquisitive strategy, including recent initiatives to establish controlled wealth management firms,’ the Moody's explanation reads.
Indeed, Focus just combined two of its largest RIAs into one, with Buckingham swallowing Colony. See: Adam Birenbaum's calls 'Colony' deal -- to create $100-billion super-RIA -- a 'mandate.
Weak profitability
Focus just continues to pile up, mega-deals, too – even if many of those deals are happening with its own partner firms.
Though other mega-rollups like Corient (formerly CI Financial) are also doing financial gymnastics to stay capitalized, Moody's sees Focus as uniquely challenged.
Focus “is constrained by the company’s aggressive acquisition strategy and weak profitability relative to industry peers,” it notes.
Still, Moody's acknowledges that Focus may still be “meaningful” enough to leverage its way out of debt trouble.
Amid crumbling 'factor' fund pricing power, Fidelity slashes factor ETF fees; low-factor-price Avantis soars to $30 billion in third year, and new study says factors are barely a factor in returns
“While Focus's new strategic initiative to establish controlled wealth management firms is a meaningful shift from its original business model, it aims at addressing the company's weak profitability, as measured by Moody's, relative to peers,” it writes.
The Kroll Bond Rating Agency currently rates Corient with a stable A- rating, and Moody's rates CI Financial a stable Baa3, proving the firms' strong financial positions, according to a company spokesman.
New Mantra
Yesterday, Focus also announced it is merging its in-house RIA, Connectus, with existing partners, Colony and Kovitz. The move is part of a grander plan to put 90 (mostly) RIA firms under three ADVs owned by a partner.
The mega-merger eviscerates the long-held mantra that only small, autonomous units are possessed of the animal energies that make RIAs so competitive.
Fidelity leverages small players to go with play-for-pay rev sharing – or else
Story Timeline
Fidelity Investments just won a game of asset management chicken after its threat of $100 fees per ETF purchase convinced most of a group of small ETF shops to sign-off on a pay-to-play revenue-sharing deal.
"With trading commission gone … most custodians will start implementing these service fees. It's fair that ETFs start paying their way for access to assets," says Manish Khatta, CEO of Potomac Fund Management, via email.
In April, Fidelity warned at least nine ETF issuers they needed to share revenues, or it would hit investors with a $100 charge to buy their funds, effective June 3, Reuters reports. See: Amid crumbling 'factor' fund pricing power, Fidelity slashes ETF fees.
Manish Khatta joins forces with HiddenLevers co-founder Praveen Ghanta to launch GuardRails, a risk analysis play that rejects raw 'risk numbers' -- a 'game-changer' in the scale-minded RIA space, analyst says
Schwab still bets on Brew City brick & mortar with a satellite office
Schwab is still committed to building new retail offices, even as the majority of the industry cuts back on brick-and-mortar in favor of ‘digital experiences’ and ‘AI’ chatbots.
The Westlake, Texas broker-dealer is set to become an anchor tenant of a redeveloped Sheraton Hotel car park in Milwaukee in October next year.
It will make it a “flagship location," employing up to 15 staff, according to the Milwaukee Business Journal. See: A buoyant Schwab CEO Walter Bettinger declares 'darkest' days over.
Schwab, which will share the space with an undisclosed national restaurant chain, closed its long-standing downtown Milwaukee offices last December, directing clients to two suburban offices.
Women will inherit Baby Boomer assets before Millennials – it's in the genes
Sallie Krawcheck says RIAs have made a major miscalculation that could cost advisors millions, or billions of lost AUM.
At issue is the transfer of Baby Boomer assets to Millennials and Gen-Z – generally those born between 1981 and 2017.
The outspoken founder and CEO of “for-women” robo-advisor Ellevest argues in a blog post that advisors have forgotten that females generally outlive males. Men averaged a 73.5-year lifespan, while women averaged 79.3-years.
That means wives and partners will be first to inherit the roughly $53 trillion of assets due for transfer before 2045. Of note, widows and divorcees often dump the financial advisor they shared with their husbands or life partners.
“By 2030, American women will manage at least $30 trillion, more than the GDP of the United States … [so] anyone who thinks women are a ‘niche market,’ think again,” she writes on LinkedIn.
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