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Focus Financial out to woo elite brokerage teams

Thomas Coyle

3 December 2008

Investment-advisory holding company sets up transition consulting service. Wealth-firm aggregator Focus Financial Partners has new consulting program aimed at helping top-producing "breakaway" brokerage teams establish RIAs. Focus selects former brokerage teams with sufficient scale and growth potential as well as compatible cultures, walks them through the entire RIA set-up -- a process that can include working with a Focus-appointed COO on a temporary basis -- and, in time, makes them into full-fledged Focus affiliates.

Focus' "Connections" program is meant to "help elite brokerage teams in their first steps toward independence" by providing them with "an unprecedented support system and economic model that gives them liquidity based on their newly created equity," says the firm's CEO Ruediger Adolf. "Even the most entrepreneurially-minded broker can be sidelined by the fear of the unknown on the road to independence."

Billion-dollar team

To qualify for Focus' new "Connections" programs, teams have to be coming out of fee-based, brokerage practices with at least $400 million in assets under management and have histories behaving like fiduciaries in terms at least of putting their clients' interests first. In other words, except for the fact that they aren't RIAs out of the gate, they have to resemble the kind of established wealth-management firms Focus is in the business of acquiring.

Focus' first Connections client is a case in point. Westport, Conn.-based LLBH Group Private Wealth Management is a six-week-old RIA whose principals had been affiliated with Merrill Lynch, where they managed about $1 billion in client assets.

Having decided that going independent was vital to their clients' interests, LLBH's principals spent months assessing ways of getting there. Among the options they weighed were looser-than-captive affiliations with big-name firms and striking off entirely on their own. They turned to Focus because its Connections program offered comprehensive support from "a high-quality organization" and an opportunity to become part of Focus' network of successful wealth-management firms, says LLBH partner Jim Pratt-Heaney.

"Focus' partners are what we are," adds Pratt-Heaney. "We were just on parallel tracks."

Tottering titans

In most years in the past decade, a few hundred ex-wirehouse brokers would set up or join RIAs. Recently though, RIA custodians like Schwab and Fidelity have been touting an increase in new investment advisories. That's an outcome, in part anyway, of a severe and long-lasting financial crisis that has resulted in several firms going under and several more changing hands. This upheaval has left a lot of clients wondering how safe their diminishing portfolios are in the hands of Wall Street's tottering titans. Because it takes months to go from deciding to leave to actually making a move, and because Wall Street's troubles went from bad to really bad only about 10 weeks ago, it seems reasonable to expect the pace to wirehouse defections to increase significantly in 2009.

RIAs are the most formidable asset gatherers in the private-client space. In the 18 months through June 2008, the three biggest RIA custodians -- Schwab, Fidelity and TD Ameritrade -- hauled in $215 billion in new assets, according to a recent Citigroup equity-research report. In the same period, the top full-service brokerages -- Merrill, Smith Barney, Morgan Stanley and UBS -- brought in $168 billion.

The big custodians offer transition advice to former brokers setting up their own RIAs, but Focus provides a level of detailed support and guidance -- around things like office space, technologies, human resources and compliance -- that surpasses custodial offerings, according Pratt-Heaney. In addition, the prospect of permanent partnership with Focus fosters an atmosphere of closeness and collaboration that makes the Connections program additionally attractive.

Adolf agrees. "The custodians have terrific services," he says. "But there's a night-and-day difference between how you work with a vendor versus a potential partner."

Aggregation, Inc.

In the main stream of its business, 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.

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 work together.

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

In an example of a sub-acquisition, Focus recently facilitated the purchase of the Leicester, U.K.-based investment advisory Roger Harris & Company by Manchester, U.K.-based Greystone Financial Services, a firm that became a Focus affiliate this past spring.

In addition to its new U.K. offices, New York-based Focus has offices on both U.S. coasts and in the Midwest. The company and its affiliates have 650 employees and -- as of last spring -- about $30 billion in client assets, making it the biggest RIA aggregator out there.

Focus, which has been in business since late 2005, has financial backing from Summit Partners, a Boston-based venture-capital firm. -FWR

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