Focus Financial Partners is it a buy?
Focus Financial Partners (NASDAQ: FOCS) is a wealth management firm that takes on the bigs of traditional brokerage firms. The company is made up of a set of independent investment advisers, working in partnership. Most of its partners are registered investment advisers (AIR) due to strict legal standards that require AIRs to put clients’ best interests above all others, including their own.
They say money talks – well, it talks, and RIAs have been taking market share from high net worth clients away from traditional brokerage firms for over a decade now. Despite the challenges posed by the pandemic in 2020, Focus Financial Partners posted its first profit since its IPO more than two years ago. Its focus on RIAs has provided it with a steady stream of income, but its aggressive expansion strategy is what put this company on my radar.
What he does
Focus Financial Partners is a partnership of 71 independent wealth management companies, most of which are RIAs. Its main clients are wealthy individuals and families, for whom it competes with traditional brokerage firms. The company’s growth strategy is to acquire high quality wealth management companies that meet rigorous qualifications. The aim of the partnership is to provide its partner companies with knowledge and capital to help them prosper, while fostering the entrepreneurial spirit of the partners.
The company has two sources of revenue, its main source being its Focus Business Solutions program. It’s the heart of the business, where it uses its size, purchasing power and expertise to help businesses grow faster and improve their margins. These revenues are largely paid and recurring in nature, representing 95% of the company’s revenues.
Its other source of income is Focus Client Solution, its treasury and credit program that has provided $ 1 billion in liquidity and lending solutions to its partners in 2020. This new program is not yet profitable for the company. company, but it gives partner companies access to private banking capacities, another advantage of the scope of the partnership.
Positioned in the growing RIA sector
Focus Financial competes with traditional brokerage firms like Charles Schwab and Fidelity Investments for its high net worth clients. The company sees an opportunity as more and more client assets are shifted from traditional brokerage houses to independent wealth management practices. Between 2007 and 2018, RIAs and hybrid RIAs saw their collective asset market share increase from 16.8% to 24.2%, and are expected to have an asset market share of 29.6% in 2023 , according to the Cerulli 2019 Advisor Report.
Focus Financial Partners management believes that the RIA channel is a superior structure for providing 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 put the interests of clients before their own.
This contrasts with brokerage firms, which follow the less stringent standard of suitability, which means transactions have to be tailored to clients’ needs, but aren’t necessarily the best thing for them. Additionally, using the RIA model provides Focus Financial with recurring and visible revenue streams, which is in contrast to traditional brokerages that rely on commissions for income.
A story of strong revenue growth on which it will build
In 2020, Focus Financial Partners achieved sales of $ 1.36 billion, representing a growth rate of 11.7% for the year. Since 2016, the company has grown its revenue at a compound annual rate of 29.4%. The main driver of its revenue was the growth of existing partner companies of around $ 121 million, through its fee-based model.
As a result, the company posted a net profit of nearly $ 49 million, a marked improvement from its loss of $ 12 million the year before. The company attributes its scale to helping it overcome 2020, as it completed 25 acquisitions – one of the company’s best years for M&A volume. He also experienced strong demand for credit, which allowed him to increase his term loan by $ 500 million, giving him $ 1 billion to spend on future acquisitions.
The future prospects for the company are also looking good. On the one hand, the company is extending its Focus Client Solution program as part of a joint venture with Orion, which will make its cash and credit capacities available to Orion’s 2,000 advisor clients. While this program is not expected to be profitable in 2021, management is optimistic about the long-term prospects for the program and the partnership. In addition, the company plans to expand its size to more than 100 partner companies, which is critical if the company is to meet its 2025 goal of $ 3.5 billion in revenue, which is a rate annual compound growth of 20.8%.
Keep an eye on Focus Financial Partners
While Focus traded at an expensive price-to-earnings (P / E) ratio of 81 on Friday, its forward price / earnings ratio was much more reasonable, under 13, signaling to me that investors anticipate strong growth for the company in the years to come – 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’ strong growth over the past four years and ambitious goals for 2025 make it Stock a solid choice for long journeys.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.