2022 has been a challenging year for the market. Inflationary pressures, rising interest rates, geopolitical conflicts, and ongoing supply-chain issues have been at the forefront of investors' minds.
One company positioned to take advantage is Focus Financial Partners (FOCS). It's a network of wealth management firms that operate as partnership firms. The business is in a fast-growing part of the wealth advisory market and stands to benefit from volatility as clients seek advice from firms that place their clients' needs above all others.
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Focus Financial's higher standard versus other wealth managers
Focus Financial Partners operates in the registered investment advisor (RIA) industry, providing advisory services to high-net-worth individuals and families. The partnership competes with traditional brokerages like Charles Schwab and Fidelity Investments for its clients.
Management believes its advantage over those traditional brokerages is its RIA advisory business model. RIAs manage investments for clients, but unlike broker-dealers, they have a fiduciary obligation to their clients. This means an RIA is required to put the interests of its clients first.
This differs from broker-dealers, who are only required to follow a suitability standard, which is less stringent than a fiduciary obligation. Broker-dealers are not required to place clients' needs first and disclose conflicts of interest or make clients aware of less expensive investment alternatives.
Growth through mergers and acquisitions
Focus Financial's primary method of growing is through mergers and acquisitions and by adding new partner firms to its network of RIAs. Since 2006, it has made 250 M&A transactions while growing its total partner firms to 80. In 2021 alone, it added 14 new partner firms while merging with another 24 firms.
Image source: Focus Financial.
This aggressive acquisition and expansion strategy has driven Focus Financial's earnings growth. Since going public in 2018, it has grown its total revenue at an impressive 25% compound annual rate.
Image source: Focus Financial.
Solid growth continued in the first quarter as Focus Financial brought in $537 million in revenue, up 36% from the same quarter last year.
What you should watch out for
Investors should be cautious about the slowdown in mergers and acquisitions activity impacting the broader market. Because this is a big part of Focus Financial's expansion plans, a slowdown could impact the stellar revenue growth that the firm has seen. However, CEO Rudy Adolf told investors that "our pipeline is robust" and "2022 will be one of our most successful M&A years again."
A good value in a fast-growing industry
Focus Financial stock looks expensive on the surface, trading at a price-to-earnings ratio of 55 at recent prices. But when you consider future earnings expectations, it looks cheap, with a forward P/E of just 7.7.
These high expectations come because Focus Financial is a fast-growing company in the rapidly growing RIA industry. According to McKinsey & Co., since 2016, RIA firms have been the fastest-growing category in the U.S. wealth management market as people move on from broker-dealers.
The recent market backdrop could work in Focus Financial's favor as investors seek advice about navigating volatility amid high inflation and rising interest rates. Investors could seek out RIAs because of the fiduciary standard they follow, and Focus Financial is one firm in prime position to take advantage.
