The days of aggregating registered investment advisors to operate independently are over, according to one of the leading pioneers of the practice.
Michael Nathanson, CEO of Focus Financial Partners, told an audience of advisors at Wealth Management EDGE that the RIA industry has entered the age of “interdependence,” with large firms who don’t adapt to that evolution potentially “going instinct.”
Nathanson made the case for the interconnected model, noting that his own firm has been working to bring its national network closer together in what he calls a “coalition of the willing.” Nathanson said this model has evolved to meet the shifting needs of clients and their advisors.
“I think that ultimately things have changed in the industry,” he told the audience at The Boca Raton resort in Boca Raton, Fla. “Clients want more from advisors. They have higher expectations. Advisors want more, and you hear a lot about talent shortage and what advisors are looking for as well. The world increasingly depends on technology. These are all things that require scale.”
Nathanson said it’s still possible to be an aggregator, but it must be combined with “some form of scale.”
Focus Financial has done some 400 deals over its history, building up to $450 billion in billable client assets. It also does business management and outsourced chief investment officer work—“think of it as a family office for famous people”—that accounts for about 25% of revenue.
Now, Nathanson said the firm is focused on bringing centralized offerings and services to its Focus Network division and its more independent Focus Partners.
“On our network division, we intend and are already in the process of building capabilities in Focus Partners like tax services, bill pay services, family governance and family office type services, trustee services, insurance services, that we can in turn bring to the Focus Network firms,” he said. “We can also bring to them recruiting, technology and practice management.”
Nathanson said there is still space for smaller RIAs in the market. However, he sees the most competitive models as boutique practices specializing in specific client bases.
“If, however, your goal is that you want to present a small version of what the larger scale businesses can do you are going to have a hard time competing over time,” he said.
For such firms, he advised “finding niches and ways to differentiate yourself” that go beyond discussing your role as a fiduciary or offering “best of breed services” or open architecture.
He also said it will be critical for such firms to find people who are great advisors as well as business developers.
“The age of the founder is coming to an end,” he said. “It’s finding those people who can be great advisors but also great business development people.”
Meanwhile, Focus Financial will continue to acquire firms that are a good fit and show strong organic growth, Nathanson said. In May, the firm announced its Focus Partners division had agreed to acquire Churchill Management Group, a Los Angeles-based RIA with $9.4 billion in client assets. The deal is expected to close in the third quarter.
Nathanson, who called himself an “economist Darwinist,” said the RIA space more broadly has “had a change in the environment.”
“We have moved from a period of fierce independence, which was effectively a reaction to wirehouses and suitability and people looking to get closer to clients, into interdependence,” he said. “Now we can embrace the best part of independence but also the benefits of working together.”
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