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Industry Spotlight > Mergers and Acquisitions

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

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One significant challenge that RIAs face now is that the effectiveness of the traditional 60/40 investment model has been reduced as a result of multiple factors including high inflation, according to Rudy Adolf, CEO of RIA aggregator Focus Financial Partners.

“For sure, the traditional asset allocation model, the traditional investment models really need an update. In fact, the traditional 60/40 model just is not working in this environment,” he said in a phone interview on Friday.

“For high-end clients, you truly need to move into a multi-asset class approach and these are very difficult to build. It requires a lot of expertise. It requires access. It requires sophisticated reporting, and it’s very difficult for many RIAs to build these sophisticated multi-asset class strategies,” he explained.

“Quite frankly, this is one of the areas we are very helpful to our partners [with] and we can really help them leapfrog into kind of the next level of investment management. But given where the economy is going and where interest rates are going, the traditional portfolio construction approach is not working, and we need to have a more sophisticated approach,” he added.

After closing a record 38 transactions in 2021, including 14 new partner firms and 24 mergers,  Adolf predicted on Friday that 2022 will again be one of his firm’s strongest years for transactions but will fall short of 2021’s count.

Last year’s total included eight mergers for partner firm Connectus, which expanded the company’s footprint in Australia, Canada and the U.K., he told ThinkAdvisor early this year.

Adolf on Friday declined to predict how many transactions his firm will make in 2022.

But Focus closed on 14 RIA and independent wealth manager transactions in the first half of 2022, including three new partner firms and the others becoming part of existing Focus partner firms, he said. The company has completed over 250 transactions since launching in 2006.

Octogone, the Geneva-based firm that Focus closed on a deal for July 1, is not an RIA. Octogone, Icon Wealth Partners and Azimuth Capital Management are expected to add about $9.5 billion in client assets to Focus.

Focus’s 87 partner firms manage a total of more than $350 billion in client assets.

In the interview, Adolf also discussed additional challenges RIAs are facing now and his firm’s overseas expansion plans, among other topics.

ThinkAdvisor: Beyond model portfolio issues, what other major challenges do RIAs face?

RUDY ADOLF: Clearly, we see a very dynamic technology environment. I’m really excited about much of the innovation that’s happening right now from a technology perspective — whether it’s on the CRM side, whether it’s kind of on the portfolio, reporting systems, rebalancing systems.

Technology is becoming very, very helpful as an enabler of more sophisticated investment management approaches and also more sophisticated planning approaches. But ultimately, these technologies are [too] complex to really integrate into the practice of an RIA. They require process changes. They require a higher technology IQ than you see [in] many of the RIAs, which ultimately is a driver of consolidation and a driver of scale.

In many ways, the industry is still underconsolidated. [In] this industry, depending which numbers you believe, there are like 250 deals a year. There should be 400 deals a year. There should be 500 deals a year. And there is still too little M&A volume and, over time, it’s going to continue to go up.

What are your RIA partners looking for and what’s your key business strategy today?

Building the business and remaining the main decision-maker, one. Two, access to real value-added programs and permanent capital.

If these things matter to an RIA, there’s nobody else who has this mix of a value proposition. So the value-added programs here [at Focus] … are really important.

We have two types of programs [for them]. We have everything that relates to practice management, meaning helping our partners run their businesses [and] get better on the next level.

The second area I’m very excited about is Focus Client Solutions. [This is] where we use our unique scale in this industry to simplify better solutions for the end client and really enhance our partner’s value proposition and basically enabling them to serve their clients better.

These are areas like access to alternatives. This is credit. This is access to cash. This is trust services. There are other areas that we are still working on that really ultimately are a differentiator, not just for Focus, but really for our partners.

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.


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