60/40 Model 'Is Not Working' in This Market: Focus Financial's Adolf

What are two or three top RIA trends you're hearing about right now?

The megatrends really drive this industry. This industry is really made for times like these, meaning really complex, tough times, [whether it] was COVID in 2020 or now the current volatility, inflation, rising interest rates, increase in taxes, and all of these things that are happening as we speak. They really put a premium [on] rock-solid fiduciary advice.

And what we are seeing is our industry as a whole and as you are seeing in our Q2 numbers, we are in particular weathering this storm extremely well. And it's really a reflection of the quality of the relationships our partners have and the quality of our partner firms. And [it's at a] time where advice like what we do is just essential for wealthy clients and families.

The more challenging the time, the more this model resonates. And we have proven this again and again. Ultimately, fiduciary advice is simply superior to any other form of advice, you know, that you can get in the wealth management industry.

We looked at … the last five, six, seven crises in the economy more broadly. And then we met the market share of RIAs versus broker-dealers and really the wirehouses.

And what you see is, in the year of the crisis, it was proven again in 2020, RIAs do significantly better than the traditional players. But then, even more important and more powerful, when you then look one or two years after, the normal growth rate of the RIA industry is almost double. The RIA industry grows about 10% the year of the crisis.

The industry grows at 17%, and it then sustains this extraordinary level of growth for a second year. And you see the wirehouses, they suffer much more in the crisis and recover much more slowly and this is ultimately a reflection of the superior fiduciary advice model that really is the foundation of the RIA industry.

What are clients' top concerns, and what are your RIAs doing in response?

We are constantly out there talking to our partners. We are constantly interacting with them and we've got, I think, a pretty good cross section of what's happening in the industry. The good news is clients are so well trained to weather this storm.

Equally good, [and] I hear it again and again, referral volumes are excellent. We are seeing very good momentum from satisfied, confident clients referring prospects to our partners.

The flip side: Everybody's worried about inflation. Now we are in a very, very tricky situation [and] there's a very difficult economic environment and … a government that is kind of challenged in a way to respond.

There aren't many governments that would raise taxes during a time of a recession. It's almost unheard of, but that's what they seem to be doing. So the macro environment is very complex.

And when you think [in] the short term, yeah, the volatility kind of is what it is. But you need to think medium- and long-term the impact that this has on retirement plans. The impact this has on kind of wealth transferred to another generation is pretty dramatic. And this is where you really need your professional good advice to help through these complex times.

What's your short-term view of the markets? Would you say we're in a recession?

Well, you know, fortunately I'm not managing this $350 billion that the Focus partners, in aggregate, manage. It is managed by each of our partner firms individually.

But if you want my layman's opinion … it's a recession or we are very, very close to a recession. It's a very complex market environment. No question we are going to see significant volatility for a time to come, which really requires a steady hand, a thoughtful hand here to manage assets.

And by the way, one thing I should have mentioned before, we're seeing … more on the lower end of the high-net-worth market, [is] many people who were self-directed, who were kind of managing their own money, are simply throwing their towel [in] and then basically concluding, 'look, I really need an advisor.'"

What else is on your mind?

Maybe just one thing, because I'm very excited about it. One of the deals that we announced recently: a new partner firm is our first entry into Switzerland, Octogone, a firm of almost $5 billion in client assets.

We really have high hopes for international in general. Today, Focus only is kind of [about] $100 million in revenues from international. But we believe, ultimately, we want to move this to $400 million to $500 million in revenues over time, or 20% or so of our total revenue.