Goldman Sachs, once iconic among Wall Street firms, renowned for its C-suite relationships and institutional business, is forging headlong down market with recent acquisitions designed to bolster its capabilities among registered investment advisors and the mass affluent.
It’s latest acquisition was Washington, D.C. based Folio Financial—a 20-year-old online brokerage that pioneered the idea of offering fractional shares and customized stock portfolios to investors—and now serves RIAs advisors with an $11 billion custody business.
In a similar move, Charles Schwab recently announced its assumption of the assets and intellectual property of struggling Motif Investing, an online brokerage backed by Goldman in 2014, that like Folio offered customized stock portfolios and fractional share trading.
McLean, Virginia-based Folio adds 160 employees, a custody business serving small RIAs, as well as novel technology, which includes robo-advisor capabilities, to Goldman and will be positioned in its global markets division.
In January, Goldman Sachs rebranded investment advisory firm United Capital, which it originally acquired last July for $750 million, adding more than 100 offices, $25.7 billion in assets, 230 financial advisors, and 23,000 clients, to Goldman Sachs Personal Financial Management. United Capital CEO Joe Duran joined the firm in a senior position. With many of its former areas of profitability, like proprietary trading, now largely off limits, these moves give Goldman access to a new set of investors as well as additional avenues of revenue. It also doubles down on its commitment to serve mass affluent clients, which ultimately could prove more profitable and valuable, especially in the eyes of Wall Street.
The United Capital acquisition is apparently getting a mixed reception with concerns that the Goldman Private Wealth division is going downstream and becoming more retail-oriented, according to Diamond Consultants president and CEO, Mindy Diamond.
“You have an elite ultra-high-net-worth advisor force that views the industry as Goldman, and everyone else,” Diamond said. “United Capital is the embodiment of retail, and while Goldman advisors will not mention United by name there are a number of things going on at Goldman that make them feel like it’s going more retail.”
Tucker York, Goldman Sachs global head of private wealth management, says there was concern about moving into the retail space and the impact it would have on existing employees. However, he said, the new attention on private wealth is a benefit. “From advisors to clients to shareholders, we see this as a good development and are already seeing lots of referrals that we thought would go to the personal financial management business,” York said. “We run this place recognizing people have options, our people more than most, and [we] run it so people want to come in every day and stay for a long time.”
Morningstar director of equity research, Michael Wong, likened these deals to the decision by Morgan Stanley to add Smith Barney from Citigroup back in 2012. That acquisition expanded Morgan Stanley’s wealth management footprint that resembles Goldman’s effort to expand its retail client pool.
The success of this strategy can be seen in the market rewarding Morgan Stanley for being proactive, according to Wong. Morgan Stanley had a .512 price to book value at the start of 2012, the year it acquired Smith Barney. At the end of last year that had grown to 1.1 and has dipped amidst the Covid-19 pandemic to a .80 price to book value. Goldman Sachs has seen less enthusiasm from investors, with a .688 price to book ratio in 2012 hitting .99 at the end of last year before dipping to .74 over the same time period.
Morgan Stanley has doubled down on its wealth management bet with its recent agreement to purchase online brokerage firm E*Trade in a $13 billion deal. “Morgan Stanley transformed its business after the financial crisis and was ahead of the curve in realizing what the market will reward. Goldman is a few years behind in realizing this and satisfying investor market demands,” Wong said. “The institutional securities and traditional Wall Street business has become a lot tougher over the years and we have seen a bunch of banks scaling down and leaving those businesses.
But the United Capital deal is more complicated than Morgan’s acquisition of Smith Barney. United Capital is made up of financial advisors who “broke away” from their traditional Wall Street brokerage firms in search of a more independent business model. The so-called breakaway trend is what fueled the rise of United Capital as well as its competitors such as Kestra Financial or Hightower, both of which are backed by private equity investments. Breakaway brokers (financial advisors leaving big institutions and brokerage shops for independent firms) have resulted in a 10% market share loss for wirehouse firms like Morgan Stanley and Merrill Lynch, according to a report by the Aite Group.
With a decidedly institutional firm like Goldman Sachs acquiring United Capital there is potential for some advisors to feel misled by what they signed up for when they joined United. “The vast majority of United Capital advisors were not major forces in the ultra-high-net-worth community, but folks that came from the captive world and chose to associate with United Capital for more freedom and control. That is the major issue,” Diamond added. “You leave the bureaucracy and go independent, wanting to gain control, and suddenly are working for a big bank again.”
There’s also concern among United Capital advisors about being forced to sell Goldman products, according to Diamond. “Many of the Goldman Sachs private wealth advisors have GSAM products in their portfolios,” Diamond says. She adds that United Capital advisors have been told they have a choice in whether to include these in-house products in client portfolios, but notes that a couple of advisors she spoke with after the announcement were not happy with the arrangement.
“The United advisors had total control and autonomy of their business, and are going to be employees of the biggest and most bureaucratic business on the street. It’s got to be a concern,” she added.
Duran pushed back on that idea, saying that there has been “no hint of doing anything that isn’t best for clients,” and “no pushing product.”
A person familiar with United Capital and the acquisition said it was not clear to advisors that joined United Capital that it would end up being sold a bank. The deal will force some in the independent space to rethink private equity as a capital source given the pressure to profit from a sale, he added, noting that United Capital advisors were “blindsided.”
Duran says advisors were presented with two possible deals and indicated a preference towards the one that was agreed upon. Duran says the deal to sell to Goldman originally took shape in late 2018. Leadership was aware it had to recapitalize their private equity investors in 2020 by either finding new investors, or a strategic buyer.
On the acquirer side, Goldman’s York says the firm spent years looking for the right fit to expand the wealth management footprint. He conceded that the firm has historically favored organic growth (it launched Marcus, a digital-first banking app for anyone looking for personal loans and savings accounts, in 2016) but says, in this case, the better choice was finding an established business to acquire. At the firm’s investor day, Goldman’s chief operating officer, John Waldron, pointed out that the high net worth-segment is an $18 trillion market but where Goldman Sachs currently has less than a 1% share.
According to Goldman Sachs, its consumer and wealth management segment saw more than 40% growth over the past five years going into the end of 2019, with client assets jumping from $590 billion to $840 billion. That growth though comes during a market boom in which the S&P 500 grew nearly 75%.
While the $2.3 trillion firm has $560 billion within its consumer and wealth management division, the balance of those funds is decidedly upmarket. The aforementioned report estimated $475 billion in ultra-high net worth fee based assets under supervision, dwarfing an estimated $85 billion in high net worth fee based assets under supervision.
Goldman plans to use Ayco, its financial advisory service for top executives, to help build out its United Capital unit. “What we do with our Ayco franchise, with executive planning in the corporate market and as part of the broader wealth franchise is natural referral flow within the organization,” York says. “In the corporate channel we heard from more C-suite clients about taking care of executives and in addition taking care of all employees. When we look at that and connect it with what is now Goldman Sachs Personal Financial Management this is a solution we are able to offer to people in a seamless way.”
Additionally, this increases the ability for the firm to service client referrals who traditionally were not within the firm’s expertise
“The reality is that one of the success factors of our private wealth management business was having a discipline around a small number of extremely wealthy clients,” York added. “It’s inevitable you get referrals and those outside the ultra-high net worth space are good clients but we didn’t have capability to serve those referrals, now we do.”