Dan Kraninger, president and CEO of NorthCoast Asset Management, talked to Focus Financial Partners for years before recently agreeing to join the company. “I think Focus and I dated about as long as my wife and I did before we got married,” he joked.
Kraninger wanted to sell his wealth and asset management business, but he was far from ready to retire from it. And Focus was finally offering exactly what the chief executive said he was looking for.
“They came up with a business model that I think really aligned a lot of interests,” Kraninger said.
Founded in 2004, Focus has been a serial investor in RIAs, which it acquires and provides capital to for their own mergers and acquisitions. It still does that. But last year, Focus created Connectus Wealth Advisors, its own RIA to do tuck-in acquisitions. RIAs that join Connectus get centralized technology, investment support, marketing and lead generation services, and more. They can also keep their name and maintain their own way of doing business.
For years, people have been creating companies with the intent of attracting wealth managers as would-be sellers, customers, or some combination of the two.
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Dynasty Financial Partners offers a platform and services to independent RIAs for a fee, but if the RIA so chooses, Dynasty will also become a minority investor in them. Hightower, an RIA with more than $100 billion under management, 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 $248 billion in assets, is rapidly acquiring RIAs to scale its business and build its own proprietary suite of services. Many others exist, too.
Connectus is not, in essence, innovative. But it is already showing that it appeals to RIAs. “I like to think of it as my goldilocks model,” Rajini Kodialam, co-founder and chief operating officer at Focus Financial, told RIA Intel.
Ten RIAs, including Kraninger’s NorthCoast, which manages more than $2.7 billion for private clients and institutions, have already joined Connectus. Five of those deals were done this year, a high volume for most RIAs (most firms never do a single deal, or they do them sporadically).
There were a record 76 mergers and acquisitions involving RIAs in the first quarter, and another 54 — a high volume considering seasonality — in the second quarter this year, according to Echelon Partners, a boutique investment bank that publishes the industry’s most inclusive M&A report. A short list of prolific buyers, including Focus, account for a disproportionate number of deals — more than 40 percent, according to Echelon — and the investment bank says that the trend will continue.
“We expect activity for this group of buyers to remain high, as many concentrated, seasoned ownership groups seek liquidity before next year’s potential tax increases,” Echelon said in its second quarter report.
Focus believes there are still plenty of deal opportunities. Kodialam has said there are 1,000 potential partner firms — RIAs that Focus would invest in and give capital to for their own respective M&A. There will be many times that number of potential RIA sellers, as owners in an aging industry seek liquidity and make succession plans. According to Cerulli Associates, a Boston-based research and consulting firm, retiring advisors represent $1.81 trillion in assets, far more than so-called breakaway brokers or growth-challenged RIAs.
But Connectus is not just a landing place for advisors trying to define a professional sunset. Focus says taking care of back and middle office tasks and providing other support services is helping successful wealth managers — in the U.S. and abroad — realize their potential. Connectus firms are also based in Australia, the U.K. and Canada. (Most of the frequent RIA acquirers based in the U.S. have only done deals domestically.)
NorthCoast has twice come close to managing more than $3 billion, Kraninger said. He wasn’t sure what growing the business beyond that would look like. But with Connectus, he said, he can see a clear path to becoming a $10 billion firm.
Michael Thrasher (@Mike_Thrasher) is the editor at RIA Intel and based in New York City.
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