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Goldman signals a future in retail wealth management with $750M deal

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Goldman signals a future in retail wealth management with $750M deal

Goldman Sachs Group Inc. is once again buying its way into greater retail exposure.

The investment bank on May 16 announced its largest acquisition in about 20 years: a $750 million purchase of registered investment adviser United Capital Financial Partners. For much of its existence, Goldman Sachs has been largely focused on institutional investors and corporate clients. But the pending acquisition, which is expected to close in the third quarter, would mark its latest effort to expand its offerings for consumers.

In March, Goldman said it was launching a credit card with Apple Inc., and in 2018, Goldman Sachs closed its acquisition of Clarity Money Inc., an app that helps consumers manage their personal finances. The Clarity deal came about two years after Goldman Sachs purchased General Electric Co.'s online retail deposit platform, which helped form the basis for its online consumer deposit and lending platform Marcus.

SNL ImageJoe Duran, CEO and founder
of United Capital
Source: United Capital

Now, Goldman Sachs, which supervises nearly $500 billion within its wealth management arm, is extending the reach of that division's client base by bringing Newport Beach, Calif.-based United Capital under its corporate umbrella. The 14-year-old company, which holds about $25 billion in assets under management, will add approximately 220 financial advisers that target clients with about $1 million to $15 million in assets to Goldman Sachs' existing wealth management client base.

That marks a considerable shift for Goldman Sachs. United Capital founder and CEO Joe Duran estimated that Goldman has historically served individuals with about $25 million in assets.

Goldman Sachs has been looking to widen the net for its wealth management business — as well as other parts of its operations, including investment banking — for some time now.

The investment bank's CFO Stephen Scherr recently said the company wants to expand its wealth management arm to the mass-affluent market, particularly for its corporate wealth management business known as Ayco. In April, Scherr noted that Ayco counts executives at 60 of the Fortune 100 companies as clients, "but only about 220 of the top 1,000."

The acquisition should help Goldman accomplish the goal of expanding to a new customer segment, said Sandler O'Neill & Partners LP analyst Jeff Harte.

"Virtually overnight, [this deal] brings them from really having very little presence in the mass affluent market for wealth management to being a leading player," Harte said in an interview. "Strategically, it makes a lot of sense longer term for them beyond just the assets they're bringing in."

More expansion is coming, United Capital's Duran said in an interview. The growth plan will include opening new offices, and the hope is United Capital can expand the inroads that Ayco has already made. Ayco works with the most senior-level employees at companies, and United Capital will try to establish relationships with the executives who are on the next tier below Ayco's clients, Duran said. The company expects most of its growth to be organic, but M&A will play a role too.

Building out wealth management should also further Goldman Sach's effort to add more stable revenue streams, a transition meant to make the company less dependent on the profitable yet volatile trading business. While trading has been the bedrock for Goldman Sachs throughout its 150-year history, the company in the post-financial-crisis era has looked to expand business lines that can generate a more consistent influx of cash.

SNL Image

Investment management accounted for 14.1% of the company's pretax earnings in 2018, up from 11.0% in 2016. Wealth management, which is part of Goldman's investment management business, is especially attractive alongside its growing deposit base, according to Sandler O'Neill's Harte. During the April earnings call, Scherr said wealth management is a key component in the company's goal of turning Marcus into a fully integrated digital business.

While Goldman Sachs has shied away from fully transformative deals, the investment bank can use acquisitions to flesh out business lines, Scherr said in October 2018. He added that Goldman had an interest in small M&A deals, potentially in the consumer space.

If M&A is part of the plan for expanding the wealth management business, Goldman Sachs is bringing in a management team that has experience consolidating registered investment advisers, and the fragmented RIA marketplace is rife with possible acquisition targets.

While consolidation in the space is picking up, firms with less than $100 million in assets under management still make up 60% of the total market share, said Marina Shtyrkov, a wealth management research analyst with Cerulli Associates. Shtyrkov said smaller firms are looking to sell because the demographics in the business are changing, and that is leading to succession issues.

"In general, it's an aging adviser force that's serving aging clients," she said in an interview.

Selling to a larger company can solve those issues because bigger platforms have more resources to recruit and create an on-ramp for younger advisers who can eventually take over from retiring advisers, Shtyrkov said.

But aside from acquisitions, United Capital will continue to recruit independent advisers, Duran said.

"We are still going to be offering white-label access to the entire platform," he said.

The executive believes that recruiting could even come easier once his company is a part of the well-known Goldman Sachs platform.

"It's a great brand," Duran said.