The pandemic that led to a historic market downturn and ongoing economic turmoil will hurt Focus Financial Partners (ticker: FOCS) in the coming quarters. But it will accelerate trends in the wealth management industry and “lead to outperformance in the long term,” founder and CEO Rudy Adolf said during Thursday’s first-quarter earnings presentation.
Despite a guidance adjustment for the coming quarter, investors cheered first-quarter results, lifting shares 5% to $24.05, compared to a 1.1% gain by the S&P 500.
“These are the times when prudent fiduciary advice is of utmost importance and we are confident that our partners are well-equipped to face the challenges posed by the COVID-19 disruption. Our team has responded by supporting them in every aspect of their businesses and helping them maximize the value they deliver to their clients, which is at the core of what we do,” Adolf said.
Focus Financial had “an extremely strong first quarter,” Jim Shanahan, the chief financial officer, said during Thursday’s call.
The serial acquirer of RIAs reported net income of $34 million in the first quarter, after reporting a loss of $12.7 million in the fourth quarter. It was modestly profitable in 2019 and the company’s continued growth has analysts fawning.
That growth continued into the start of 2020. Total revenue of $337 million rose 29.7% year-over-year in the first quarter. Non-GAAP net income of $54.5 million jumped 52.5% and adjusted net income per share increased 57.4% to $0.74.
The company’s leverage ratio — its borrowings outstanding relative to cash and equivalents — was at 4-times, well within its target range of 3.5- to 4.5-times. In March and April, Focus Financial also entered into three interest rate swap contracts totaling $850 million, converting approximately 75% of the borrowings under its term loan from a variable interest rate to a fixed rate. The weighted average rate on the borrowings is now 2.62% for approximately the next four years.
But the first quarter results don’t fully reflect the market and economic backdrop of today and Focus Financial adjusted its guidance for the second quarter.
“We anticipate that our results will be impacted by the effect of the 2020 first quarter equity market decline on our market-correlated revenues, of which approximately 70% are billed in advance, and by a modest decline in our non-market correlated revenues due to the effect of COVID-19,” the company said.
Asset-based fee revenue at wealth managers plunged in March alongside the fastest-ever bear market. Revenue at RIAs typically falls two thirds of the broader market’s decline, which means Focus Financial’s revenue will, too. The company owns minority stakes in its 65 partner firms.
The company estimated that second quarter revenue will fall to between $290 to $300 million, down from $337 million in the first quarter. Focus Financial’s pipeline of deals already in motion is expected to continue, but it anticipates activity to slow in the second and third quarter.
Focus Financial also stands to lose as much as $25 million in 2020 due to disrupted family office services that generate revenue, specifically some related to the movie and entertainment industry, executives said.
One short-term benefit of prohibited travel and meetings because of Covid-19 are the immediate expense-savings, although Adolf said that will harm partner firms and Focus Financial overall if that continues beyond the coming quarters.
Focus has about 80 employees and the holding company is a small part of Focus Financial’s expense base but it could later cut expenses if needed, Adolf said.
Adolf was sympathetic to those impacted by the novel coronavirus and positive about Focus Financial’s future. Partner firms experienced little or no client attrition so far this year and some RIAs were even adding new clients, he said. Like the global financial crisis in 2008, the current market and economic environment will lead investors to rethink relationships with their current advisors, or push them to work with one for the first time. Many of those investors are going to choose independent RIAs, a trend that “will lead to outperformance in the long term,” according to Adolf.
Partner firms told Adolf this crisis was “easier to work through than ” because they had previously worked through the global financial crisis.
All of the 4,000 employees and partners affiliated with Focus Financial across 200 offices globally, have been working remotely. The company had the technology in place to do so before the pandemic.
One equity analyst asked Thursday if Focus Financial planned to give more specific guidance for the remainder of the year. For the time being, it is not, as countries slowly begin to reopen and the timeline for economic recovery remains uncertain.
“This is not about how we survive this crisis it is really about being positioned for the upswing. And when the upswing is going to come, it’s just a matter of when,” Adolf said.
Focus Financial has made headlines this year unrelated to its performance. Buckingham Strategic Wealth, a partner RIA that manages more than $15.5 billion, made what one executive called “the talent move of the year” in hiring Michael Kitces and Jeffrey Levine, two of the most prominent financial advisors, who left or closed their respective RIAs to join it.
In January, Buckingham also partnered with Flourish Cash, a new cash account service that leverages partnerships with a group of FDIC-member banks to offer an interest rate of 1.70%.