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FUNDFIRE | RIA Buyer Grows to $45B, Boosts Product Menu

The independent channel’s largest consolidator of registered investment advisor firms has spent much of 2011 extending its lead and bumping up its product platforms. Focus Financial Partners is not only competing with its RIA aggregator brethren, but also is aiming squarely at the wirehouses in a bid to snare big advisor teams.

The New York-based consolidator has added eight new independent advisor firms to its ranks this year, including four large firms and four “tuck-ins” of smaller RIAs by existing Focus firms. The outfit now has 45 underlying RIA firms in its mix that run an aggregate $45 billion in client assets, says CEO Rudy Adolf.

It also recently partnered with CAIS, an alternative investment platform that uses Mercer Investment Consulting research input and offers access to top-shelf managers with minimums as low as $100,000 – echoing a model available at the wirehouses.

It’s no accident that Focus is making its technology and product platforms competitive with the big brokerages, because that’s where it has found several big teams in recent years. This year alone, it fully acquired Sapient Private Wealth Management, an advisor trio based in Eugene, Ore., that left Morgan Stanley Smith Barney last year after running more than $500 million in assets. It also signed up a team led by Lori Van Dusen, a former Smith Barney advisor located in Rochester, N.Y., who ran nearly $5 billion in assets. Van Dusen left that wirehouse in 2008 for Convergent Wealth Advisors, but this fall decided to go the distance, setting up her own shop, called LVW Advisors, using resources from Focus.

Focus has brought on other big ex-wirehouse teams in the past, including LLBH Group Private Wealth Management, a four-advisor outfit that in 2008 left Merrill Lynch, where the group ranabout $1 billion in assets.

The firm is “very selective with the types of teams we’ll work with,” Adolf says.

Indeed, one of the main criteria is finding advisors likely to retain clients and who have already built an independent identity in their brokerage practices, says Rich Gill, v.p. and head of the Focus Connections division, which forms partnerships with high-end breakaway advisors as a first step toward a full acquisition. Gill says Focus firms average 95% client retention.

“We’re very deliberately picking those advisors who operated as their own little business for years,” he adds.

While going independent isn’t for everyone, the lure of owning a stake in their practices is a big draw for some high-end advisors to join firms like Focus, says Andrew Klausner, principal of AK Advisory, a strategic consulting firm. Other outfits offering similar options include United Capital Partners, which is also an aggregator, and HighTower Advisors, a boutique brokerage that offers equity shares to its advisors.

“These firms will not only stay competitive with the wirehouses, but they have a good chance to grow,” Klausner says. “I think there is still room for other players to get in.”

United Capital and HighTower have both been growing rapidly in the past few years as well. United Capital has expanded to nearly three dozen RIAs with $16 billion in assets, while HighTower has more than two dozen advisor teams and recently topped $20 billion in assets.

Focus doesn’t aim solely at the wirehouse market, with some of its acquisitions coming from the RIA world as well. These include the Colony Group, an independent firm with $1.3 billion that joined earlier this year, and the Buckingham Family of Financial Services, which signed on in 2007 and now has a $14 billion portfolio. Focus also works with several of the major custodians, including Charles Schwab and Fidelity Investments, giving it a wider prospect list among RIAs.

Still, it’s the big teams at the wirehouses that offer the most promising targets, partly because, in Klausner’s view, the major brokerages tend to weigh down their star advisors with burdensome compliance requirements and thick bureaucracies.

Bulking up product menus is a great way that Focus and its peers can make a pitch for established brokerage advisors, Klausner adds. He says the smart play for these firms is not to mimic the wirehouse model of building those menus themselves, but rather to partner with turnkey asset management programs that can offer wide access to products.

“It’s easier to buy it than to build it,” he adds. “That’s something that they have to offer to compete against the wirehouses.”

Focus has several product platform options for its advisors, many who use external managers, Gill says. For traditional investments, the firm has partnerships to offer manager research from institutional consultants such as Callan Associates and FEG, while offering access to products through Envestnet’s turnkey platforms.

Signing up with CAIS, previously known as Capital Integration Systems, brings Focus up a notch in its ability to offer alternative investments from big-name hedge funds at accessible minimums. Their recent agreement opens the entire alternative products lineup to all Focus member firms, says Matt Brown, CEO of CAIS.

“Focus has negotiated best pricing and terms on behalf of all of their firms,” Brown says.

Gill says the access that CAIS offers to managers is attractive, but points to pricing simplicity as a prime advantage that wirehouse advisors would see if they compared the platform with what they have in their own shops. “CAIS is not taking a spread – it’s a simple platform fee,” he says. “Any advisor looking at a single-strategy hedge fund won’t have to go through the complex calculations that you do at the wirehouses.”

Focus also offers that type of pricing advantage on separately managed account products, with the firm “not taking a spread” in the way that wirehouses grab a cut of an SMA program fee, Gill adds.

Platforms such as CAIS may also get preferred pricing from the asset managers comparable to the wirehouses because of the growing scale of the independent firms, such as Focus, that they serve, Adolf says. Managers can see that asset flows, in a broad sense, are heading to the independent advisory world – making them more likely to offer competitive pricing to those firms, he adds.