(Illustration by RIA Intel)
Thousands of independent RIAs are benefiting from “a sort of renaissance of new platforms” and bundling of services that are catering to their varied needs, according to Alois Pirker, a director at research and consulting firm Aite Group.
That trend intensified Tuesday when Focus Financial Partners, a publicly traded company that owns 70 RIAs managing an aggregate of more than $200 billion, said it plans to create its own RIA called Connectus Wealth Advisers, “for founders and teams who want to continue managing their client relationships and maintaining their boutique cultures while gaining the operational efficiencies of shared services.”
Since it was founded in 2004, Focus Financial has offered capital and consulting to wholly owned, subsidiary RIAs. Those firms, now 69 in total, have autonomy and choose how they service clients and invest, and they maintain all the software and services they use. Partner firms are also responsible for their own compliance, accounting, operations, and more.
But many RIA owners are interested in outsourcing some of those responsibilities, so Focus Financial is creating Connectus. It plans to register the RIA in the U.S. in the near future and abroad as necessary.
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Like other partner firms, Connectus will complete tuck-in acquisitions and the sellers and their staff will become employees of Focus Financial’s RIA. In exchange, those employees gain access to its centralized technology, investment support, marketing and lead generation services, and more. But unlike most RIAs, those practices can keep their name and way of doing business.
“Think of Connectus as a firm with several arms who each do business under their own names, maintain the boutique nature, ethos, culture of the firm, continue to take care of the clients, but now have ability to leverage the scale of a much larger organization, which is taking care of a good chunk of the back and the middle office for them,” Rajini Kodialam, co-founder and chief operating officer at Focus Financial, told RIA Intel.
Other wealth management companies are similar to Connectus in essence, but each have their own nuances.
Dynasty Financial Partners offers a platform and services to 50 independent RIAs for a fee. Hightower, an RIA with $61.6 billion under management and 300 financial advisors, began as a service provider and investor in independent RIAs. Now, it acquires advisory practices outright, accumulating employees and assets under primarily a unified brand.
CI Financial, a publicly traded wealth and asset manager in Toronto with $202 billion in assets, has acquired part or all of 13 RIAs in the U.S. managing an aggregate of more than $21 billion. CEO Kurt MacAlpine told RIA Intel in November that he plans to keep buying them to achieve scale and invest in a proprietary suite of services. “My goal is to have the leading, independent private wealth platform in the U.S,” he said.
Like others before have done, Connectus is aiming to leverage its heft so that advisors can thrive — not merely survive.
Focus Financial has 80 employees who will work with Connectus and continue to support other partner firms. Including employees of its partner firms, the holding company supports over 4,000 workers.
There aren’t many more details available about Connectus — many decisions haven’t been made yet. But the new RIA will be multi-custodial and there is currently a bake off underway to determine the “best in class” software and services the RIA will use, Kodialam said.
Limiting the different software solutions available for each need (such as portfolio management, reporting, and client relationship management) reduces the integrations Connectus must make. It also gives the RIA better leverage against third parties that could result in more favorable pricing or, perhaps more importantly, enable it to ask for favors like certain customizations.
“It gives us the ability to have a more robust conversation with the tech providers and maybe influence some of their future developments in a way that is conducive to us. That's very important. That's the most important,” Kodialam said.
Those benefits would make Connectus even more attractive and there is a short list of companies in wealth management with the scale to make those demands. Even RIAs managing $1 billion or more don’t have the leverage that multi-billion-dollar RIAs do, Ed Louis, a senior analyst at Cerulli Associates, said.
Connectus will provide employees services and support akin to competing RIAs and platforms, but it has no intention of becoming a vendor. Connectus and its benefits will only be available to the practices that join it, Kodialam said.
RIAs that lack internal succession plans — either because employees don’t want the responsibilities of being owners or they can’t afford to buy the RIA — sparked the inspiration for Connectus. Selling an RIA to Connectus can provide the liquidity event owners are seeking and the business support employees want while Focus Financial gets more assets under management.
“Primarily, it gives Focus the opportunity to more fully integrate the processes of its affiliates. The more integration, the more easily Focus is able to realize enterprise value and create efficiencies across the organization,” Marina Shtyrkov, a senior analyst at Cerulli Associates, said in an email.
“But, there can be downsides too — Advisors are drawn to the RIA channel, in part, because of a desire to build value in an independent business, which can be diminished as an employee of an RIA. Also, independent advisors — as entrepreneurs and business owners — can be reluctant to relinquish the level of autonomy needed to leverage shared infrastructure. Of course, it depends on the level of operational centralization and which business management decisions are impacted.”
John Heinlein is the owner, CEO and Senior Portfolio Manager at Horan Capital Management, an RIA in Hunt Valley, Md. that manages $830 million. Focus Financial approached him about joining the company in some fashion and he ultimately sold the RIA to Connectus, partly because it offered him the most money, much of which it paid upfront, and they could do the deal before year-end (an advantageous tax move, Heinlein said).
“I had always planned to transition my business internally but my asset size — it’s at a size right now that that would be quite difficult to do what with my employees,” he said.
But Heinlein also wouldn’t sell the RIA unless he felt his employees had opportunities after the fact. He made that promise to them when he hired them, he said. It was also important that the group could continue to work with clients the same way. Part of Horan’s value proposition to clients is the RIA’s investment management. Selling to a buyer that assumed that role wouldn’t have worked.
“You’re always nervous when the model isn’t really built yet,” Heinlein said about Connectus. But he’s eager to help build something new and any help with middle and back office tasks would help his group.
The headaches of running a wealth manager are not unique to the U.S. and the expectation is that Connectus will appeal globally. Domestic companies are creating different models to service RIAs, but Focus Financial believes Connectus will stand out and that the company’s international presence gives it scale and abilities competitors can’t match.
“We are elevating it to what ultimately is going to be a global solution for firms who really want to have a very robust infrastructure and capability that, quite frankly, in this form, was simply not available in the industry before,” Rudy Adolf, co-founder, CEO and chairman at Focus Financial, said.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.
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