Focus Financial Partners (FOCS +0.00%) is a wealth management firm taking on the big boys at traditional brokerage firms. The company is made up of a collection of independent investment advisors, operating as a partnership. Most of its partners are registered investment advisors (RIAs) because of strict legal standards that require RIAs to put clients' interest above all others, including their own.
They say money talks -- well, it's talking, and RIAs have been grabbing market share of high-net-worth clients away from traditional brokerages for over a decade now. Despite challenges posed by the pandemic in 2020, Focus Financial Partners posted its first profit since going public over two years ago. Its focus on RIAs has provided it with a steady stream of revenue, but its aggressive expansion strategy is what put this company on my radar.
What it does
Focus Financial Partners is a partnership of 71 independent wealth management firms, most of which are RIAs. Its primary customers are high-net-worth individuals and families, which it competes for with traditional brokerages. The company's growth strategy is to acquire high-quality wealth management firms that meet stringent qualifications. The purpose of the partnership is to provide its partner firms with knowledge and capital to help them thrive, while still fostering the partners' entrepreneurial spirit.
Image source: Getty Images.
The company has two sources of revenue, with its main source being its Focus Business Solutions program. This is the core of the company, where it uses its sheer size, purchasing power, and expertise to help firms grow faster and improve margins. This revenue is largely fee-based and recurring in nature, making up 95% of the company's revenue.
Its other revenue source is Focus Client Solution, its cash and credit program that helped provide $1 billion in cash and lending solutions for its partners in 2020. This newer program is not a profit maker for the company yet, but it gives partner firms access to private banking capabilities, another benefit of the scale of the partnership.
Positioned in the growing RIA industry
Focus Financial competes with traditional brokerages like Charles Schwab and Fidelity Investments for its high-net-worth clients. The company sees an opportunity as more client assets are transferring out of traditional brokerages and into independent wealth management practices. Between 2007 and 2018, RIAs and hybrid RIA firms saw their collective asset market share go from 16.8% to 24.2%, and are expected to have an asset market share of 29.6% in 2023, based on the Cerulli 2019 Advisor Report.
Management at Focus Financial Partners believes that the RIA channel is a superior structure to provide wealth management services. This is because RIAs must register with the SEC or other state security agencies and must follow the fiduciary standard -- where they place clients' interests ahead of their own.
This contrasts with brokerages, which follow the less stringent suitability standard -- meaning transactions must be suitable for clients' needs, but may not necessarily be the best thing for them. In addition, using the RIA model provides Focus Financial with recurring and visible revenue streams, which contrasts with traditional brokerages that rely on commissions for revenue.
A history of strong revenue growth that it will build on
In 2020, Focus Financial Partners posted revenue of $1.36 billion, representing a growth rate of 11.7% on the year. Since 2016, the company has grown revenue at a compound annual rate of 29.4%. The primary driver of its income was growth at existing partner firms of about $121 million, via its fee-based model.
As a result, the company posted net income of nearly $49 million, a big improvement on its $12 million loss the year before. The company credits its scale to helping it weather 2020, as it completed 25 acquisitions -- one of the company's best years for mergers and acquisitions volume. It also saw strong demand for credit, which allowed it to increase its term loan by $500 million, giving it $1 billion to spend on future acquisitions.
The future prospects for the company looks good too. For one, the company is scaling up its Focus Client Solution program in a joint venture with Orion, which will make its cash and credit capabilities available to Orion's 2,000 advisor clients. While this program is not expected to be a moneymaker in 2021, management is optimistic about the long-term prospects of the program and partnership. In addition, the company has plans to grow its scale to over 100 partner firms, which is key if the company wishes to reach its 2025 goal of $3.5 billion in revenue, representing a compound annual growth rate of 20.8%.
Keep an eye on Focus Financial Partners
While Focus was trading at an expensive price-to-earnings (P/E) ratio of 81 on Friday, its forward P/E ratio was much more reasonable, under 13, signaling to me that investors anticipate high growth from the company in the coming years -- and for good reason. The company posted its first profit last year since going public in 2018, and so far it has shown a good ability to grow its revenue and partner base along the way. Focus Financial Partners' solid growth in the past four years along with its ambitious goals for 2025 make this stock a solid choice for long haul.
