Wall Street giant Goldman Sachs is in the early stages of building out an RIA custodian and clearing platform that many believe will seek to compete with industry leaders like Charles Schwab, Fidelity and BNY Mellon’s Pershing Advisor Solutions unit. Goldman is a new entrant in the space but, given its financial strengths and capabilities, it has the potential to become a major force in the RIA profession.
In recent weeks, Goldman has contacted major players in the fintech world and alerted them that Goldman will be sending out RFPs to help construct various components of platform development. One source said Goldman is hoping to launch an expanded platform within the next five months.
Goldman already is involved in the advisory world. It acquired RIA consolidator United Capital, which oversees about $25 billion in assets, in May, 2019. Last year, it also purchased Folio Institutional, a specialty custodian founded by former SEC Commissioner Steve Wallman, that offers customized portfolios.
Goldman is believed to have paid more than $700 million for United Capital and more than $200 million for Folio Institutional. Both acquisitions, and the looming rollout of the RIA platform, are believed to be part of a plan by Goldman’s new CEO, David Solomon, to expand the firm’s footprint in the retail wealth management space.
When Schwab, the dominant player in custodian services, announced its acquisition of TD Ameritrade in November, 2019, many RIAs expressed concern that their choices of custodians were being severely limited. TD Ameritrade was a popular option for small, newly minted RIAs who were entering the profession. TD also offered an open architecture platform that evolved into its own ecosystem and became something of a laboratory for creative software developers in the fast-growing fintech universe.
In February of this year, former TD Ameritrade Institutional executive Craig Cintron became head of consulting for RIA custody in Goldman’s global markets business unit. Other top Goldman executives are believed to be active in the project and more professionals from the other leading custodians are being recruited.
Officials at Goldman declined to comment. Sources said that Goldman is trying to downplay its ambitions in the custodial and clearing business. However, it is already winning business and its web site already acknowledges and promotes the business https://www.goldmansachs.com/what-we-do/global-markets/ria-custody/.
Whether or not the new custodian emerges as a major player remains to be seen. There are now "about 20 firms competing to provide custody to the RIA market, [including] many that are undercapitalized or who don't have a clear proposition," former Pershing Advisor Solutions CEO Mark Tibergien said.
Between the three of them, Schwab, Fidelity and Pershing control about $4 trillion of an estimated $6 trillion market. Two of the leading independent broker-dealers, Raymond James Financial Services and LPL Financial, also are actively competing for the custody business of independent advisors. It's a market these two firms are far more familiar with than Goldman is. Other IBDs like Commonwealth Financial and Cambridge Research also have built custodian operations for fee-only advisors and are growing their operations in the space, albeit under the radar.
Some of Goldman's giant rivals have dipped their toes in the water only to find it too cold. Most notably, Morgan Stanley decided to jettison E*Trade's custodian business earlier this year after acquiring that discount broker, primarily for its self-directed investor business.
"This goes to show that custody by itself is not a substantial money maker until you get to substantial scale, so firms like Goldman will need to look at other ways to generate income to make this a compelling long-term proposition for shareholders," Tibergien continued. "I don't underestimate them at all."
As Goldman’s new CEO, Solomon has wasted little time in trying to address the company’s sparse presence in the burgeoning wealth management world. Traditionally a wholesale institutional investment bank, Goldman partners watched Morgan Stanley CEO James Gorman create more shareholder value, largely by gathering assets from America’s affluent and mass affluent over the last decade.
In contrast, former Goldman CEO Lloyd Blankfein displayed limited interest in the retail space for most of the last decade. Goldman shares lagged.
Since the 2008 financial crisis, the image and reputation of Goldman Sachs has been controversial. Some on Wall Street believe it benefited during the crisis because its former CEO, Henry Paulson, served as Treasury Secretary. Various disclosures about its role in the mortgage and housing crises contributed to the perception that Goldman took advantage of foreign institutions and its own political connections.
But executives in the RIA business said that the Goldman brand could hold a lot of appeal to breakaway brokers leaving wirehouses and looking for another big Wall Street name. Goldman also has extensive trading and investment management capabilities that could appeal to investment-oriented advisors.
Lending credence to this view was a recent report last week in AdvisorHub, which said that Steward Partners, an aggregator of wirehouse reps seeking to become independent RIAs with about $20 billion in assets, would start working with what the news outlet called Goldman’s “fledgling” custodian. The article noted that AdvisorHub CEO, Tony Sirianni, was an early investor in Steward Partners.
Longtime independent RIAs who left Wall Street firms decades ago are likely to be more skeptical about Goldman’s entry into the business. Tibergien observed that some advisors are likely to view the giant investment firm’s proprietary products and banking solutions with a lot of questions.