Goldman Sachs has no ambitions to launch its own RIA business, President and CEO John Waldron told attendees at the firm's inaugural RIA Professional Investor Forum in New York City on May 9 and 10. It also does not aspire to replace more widely used custody platforms, such as Schwab or Fidelity. Instead, the bank would like to become what Waldron called a “trusted advisor” to RIAs with services that complement those offered by other providers and fill gaps in the market by addressing the “pain points” of RIAs.
In five to 10 years, Goldman aspires to be thought of by the RIA industry the way Schwab is currently thought of, where advisers wouldn't consider running their business without it, Waldron said. To do this, it plans to build on existing asset and wealth management capabilities, ranging from market research to deal execution and education to lending.
“We will not displace Schwab. We love Schwab; they are a great partner of ours,” he noted. “But we can be complementary with Schwab for example, or Fidelity, or other people that you all are doing a lot with.”
According to Waldron, Goldman Sachs has been “amazed” by the growth in the RIA industry in recent years. However, after her acquired RIA United Capital in 2019 in an effort to enter the RIA business, Goldman executives realized that strategy created more challenges than advantages. For example, because Goldman is highly regulated as a bank, those added restrictions made running United Capital more expensive than when it operated independently. In addition, to gain enough market share in the RIA space, Goldman will have to continue on the acquisition trail, seeking Fed approval with each acquisition and complicating the strategy, Waldron noted.
As an alternative, Goldman decided to capitalize on growth in the RIA business by focusing on “value-added” products for RIAs.
“If we become a great service provider, that's actually more of what Goldman Sachs should be good at. And, basically, maybe over time, if you think about creating value for us and our shareholders, ultimately it's better than owning our RIA,” Waldron said.
The firm has its own wealth management division, but is focused on ultra-high net worth clients. The bulk of the RIA market serves clients with $500,000 to $20 million in net assets, and that's where Goldman plans to focus its “added value” for RIA efforts, according to Padi Raphael, global head of counterparty wealth management the third. Many of the panels during the first day of the forum were devoted to highlighting the services that Goldman Sachs would like to offer to advisors. One teased an upcoming product that includes custom models with public and private investment. Another featured Goldman executives from the fixed income division. A third discussed investing in real estate debt funds and included Jeff Fine, global head of alternative capital formation.
Growth for growth's sake?
The forum also devoted some time to the discussion of continued consolidation in the RIA industry and the challenges that come with it. For example, featured speaker Mark Tibergien, president of Mark Tibergien Insights LLC, advised attendees to focus on achieving scale and critical mass rather than size when evaluating whether to proceed with acquisitions. Unsuccessful growth efforts can lead to firm failure if there are not enough resources, staff and integration to support a sufficient presence in the new markets the RIA is expanding into, he noted. Additionally, RIAs engaging in mergers and acquisitions must think carefully about their ideal client beyond purely monetary considerations so they can develop the right strategy and hire the right staff to grow. within that specific customer segment. That way, they would be well on their way to using M&A to achieve market dominance within that customer base.
“Once you add a person, you add a cost,” Tibergien said. “We see this case for RIA growth in terms of brand presence. What are you known for? This is perhaps the biggest issue affecting firms today, this idea of what are you known for? It means – who are you serving?
Tibergien also expressed his concern that some RIA M&A activity happening today is replacing the kind of proper succession planning typically practiced in businesses that focus on law and accounting, for example. “Let's be clear. It is the lack of succession planning that they are settling for. They are planning exits in most cases,” he noted.
In his talk with the audience, Waldron agreed with Tibergien's assessment that RIAs need the technology, personnel and control structure to successfully execute mergers and acquisitions. “Scale to me is a relative term with – what does it take to be big enough to have the right economics in that area? You can get really, really big but not have a good operating model or margin structure,” he noted.