When the final chapter on Goldman Sachs’ foray into the world of personal financial advice is written, the verdict is likely to be unflattering. The storied firm’s $750 million acquisition of RIA consolidator United Capital in 2019 appears to be ending ignominiously. Coming only one year after David Solomon took over as Goldman CEO, the deal was supposed to place his personal stamp on the firm’s future expansion into the wealth management business.

Last week reports of its sale of the aggregator, which Goldman renamed as its Personal Financial Management unit, circulated through the industry perhaps to an independent broker-dealer looking to expand in the RIA space. At the same time, word surfaced that founder Joe Duran, who sold the firm to Goldman, was out raising capital from private equity firm to launch his third aggregator. Other former United Capital principals left Goldman earlier this year to start their own PE-backed acquirer.

The prospect of more defections looming may explain why Goldman reportedly is scrambling quickly to find a buyer for the business who will pay most of the money upfront, even though the business has underperformed.

The list of failed mergers is endless and, as one of Wall Street’s leading M&A bankers, Goldman management had to know this. It’s “usually because leaders start using financial metrics such as the increase in assets, or increase in revenues or belief that they can find synergy and cut costs,” said former Pershing Advisor Solutions CEO Mark Tibergien, who says he was not close to Goldman management or their thinking.

“From what I”ve read, it would seem that their foray into non-traditional business was more about the ‘art of the deal,’ than the ‘art of the manage.’  United Capital did not have a retail brand, but Goldman had an institutional brand and a HNW brand. The risk one runs when merging in an entity without proper cultural ties is that those that arrived first will be wary of committing time, money and energy to it. It becomes orphaned.”

When relationships head south and key people start leaving the firm, the exodus often accelerates. “The lesson for RIA consolidators, or even banks and brokers merging in other firms, is that [when] the target entity does not fit their strategic framework, it requires substantial capital investment and management time to achieve true organic growth and target profitability, and the people who are merged in need to feel welcome,” Tibergien continued. “Again, I don’t know if this is true, but my perception is quite a few of their leaders bailed after United was sold to Goldman. Then Goldman imposed their own leadership and culture on what up until then was a collection of small practices.”

Other icons of business, like Warren Buffett and Jack Welch, have failed running Wall Street firms while succeeding spectacularly elsewhere. The United Capital failure makes the leaders at Goldman only the latest in a long line of smart, successful executives to wind up with egg on their face. GE took over Kidder Peabody in the 1980s and Buffett took control of Salomon Brothers in the 1990s. Both unloaded those brokerage businesses after frustration and failure.

In recent months, the financial media has been filled with numerous articles attempting to explain what went wrong at Goldman. Many described Solomon in unbecoming terms. Through its Ayco division, Goldman had succeeded in providing personal financial planning services to C-suite executives at Fortune 1000 companies. Many fo those executives often were the same people that Goldman bankers were calling on. In contrast, United Capital clients were the millionaires next door—doctors, dentists, business owners—who populate Main Street America.

It’s not clear if Goldman executives knew what most people in the RIA world did—namely, that United Capital was a collection of small advisory firms without either established succession plans or a major brand presenece in their local markets. Their advisors may have provided sound advice to clients but their firms lacked the scale and depth of those at other aggregators like, say, the firms in CI Financial’s RIA network. United Capital was big and available for sale in 2019, but some questioned whether Goldman conducted extensive research and due diligence on the firm.

Another major question is, was Goldman’s strategy flawed or was it a failure of execution? “The specific actions and activities (United Capital, GreenSky, Apple credit card) betray an attempt to play in a consumer world [that] the leadership and most of the partners simply do not understand or care to understand,” Next Chapter managing principal Steve Gresham said. “There is a confidence that comes with success in one area that is not always applicable to new territory. With roots in deal making and the service of the world’s wealthiest organizations and people, it would be a feat to grow those roots into a consumer and advisor business.”

Some think Goldman’s strategy was sound, but it was executed without patience and without winning organizational buy-in. “They had a great idea where they were going to build a vertical and integrate everything from college savings to checking accounts to college loan repayments to personal financial management, and it wasn’t easy. It was very hard, and the margins just weren’t there,” an industry consultant said. “They realized winning 10 million young new clients would be a lot more costly than winning two institutional clients and might have the same return on it.”

But Goldman faced strong competitors with established brands. “Winning retail clients on a one-by-one basis is a great idea, and all the asset management firms saw this as an untapped growth area," the consultant said. "But first of all you have to displace Fidelity, Schwab and Vanguard, who are very, very good at it, who people know and love. Those are the only three firms that retail investors as a whole know and acknowledge as wealth management firms. But Goldman? I just don’t think they had the appeal as much as they thought they would. Most people don’t know what that is."

Morgan Stanley Made It Work—Over Decades
That’s not to say the strategy can’t work in the right hands, the consultant said.

“It can work. Morgan Stanley in contrast is doing a great job at it,” he explained. “They bought E*Trade, which gives them entrée to young trading accounts. They bought Solium Capital, which administers employee stock purchase plans so that if you’re 25 and you just got an employee stock purchase grant it immediately goes into an E*Trade account, and if you have questions about it, you end up talking to a Morgan Stanley advisor. This is a great funnel for people who are going to accumulate wealth by getting stock options or investing with E*Trade.”

Goldman Sachs picked harder ways of getting there. “The Marcus banking app was a new sexy thing at the time but it didn’t get huge traction," he said. "It had hundreds of thousands of users, not millions of users like they had at E*Trade. It wasn’t a passive funnel. They had to go out and sell Marcus, or get new assets for United Capital, or sell robo advice. These things just aren’t sexy to people. It’s not the path of least resistance that you get with stock options or 401(k)s.

"Morgan Stanley had a more retail-centric approach, where Goldman Sachs said ‘We’ll start with a retail bank and give them 4% interest rates and we’ll just win money.’ But a 4% interest rate versus a 2% rate isn’t that big of a deal when you have $1,000 in the bank. No one was jumping over themselves for that. But if I have a 401(k) with Fidelity, I get a checking account, a credit card, and 3% back on every purchase. That sounds easy.”

Goldman Ignored Retail Investors For Decades
For the last four decades, Goldman and Morgan Stanley dominated the lucrative institutional investment banking and trading worlds despite stiff competition from an array of players, ranging from JP Morgan to Merrill Lynch, which became a unit of Bank of America during the 2008 financial crisis. But Goldman was able to maintain fat profit margins that were were the envy of Wall Street thanks to the wholesale nature of its business.

Morgan Stanley instead expanded aggressively into lower-margin personal finance, first by merging with Dean Witter Reynolds in 1997 and then acquiring a succession of other brokerage firms in the following decade. In 2006 after several years of stagnation, Morgan Stanley’s board ousted the architect of the Dean Witter deal, Philip Purcell, as CEO, replacing him with John Mack, a former bond trader. The board charged Mack with the task of trying to make Morgan Stanley into more of a high-margin risk taker like Goldman just before the housing market imploded.

The blue-chip firm was laid low and humiliated and forced to seek outside capital while Goldman managed its way through the crisis with much less dilution of its equity. Those divergent experiences may have sown the seeds for how the two firms saw their fortunes change.

Asked about how Goldman ended up forced to jettison its United Capital RIA operation, for which it paid $750 million, industry executives are blunt. “Arrogance,” one executive familiar with both firms says of Goldman. “They thought they knew better and could dictate to the market.”

In 2007, Mack brought over a former McKinsey consultant, James Gorman, who had run Merrill Lynch’s retail operations and would eventually become Morgan Stanley’s CEO. Gorman and his team were hardly immune to the same kind of hubris that afflicted the senior ranks at Goldman but they took the time to learn the wealth management business.

“Gorman had a bunch of mistaken notions about strategy,” this executive says. “[Although] Gorman, and his understudy, Andy Saperstein, didn’t get it at first and kept coming up with ideas that would not have worked. But they listened and learned and adjusted.”

For senior partners consistently receiving eight-figure bonuses for structuring big transactions in corporate America, succumbing to a sense of hubris is difficult to avoid. For investment bankers working on deals where the rewards usually are won in the short run, understanding a business like wealth management that involves guiding a client over decades to a retirement that may last 30 years, the game is diametrically different.

A former Goldman banker explains it this way. “They have the ‘we are the smartest guys in the room and this can’t be that hard if they are doing it’ mentality,” he said. “A partner I once worked for described this idiotic mentality as analogous to people who think they can manage a golf course. It looks real easy until you realize how many relatively simple things all have to go perfectly at once for it to work.”

In many ways, it comes down to time and profit margins. “Goldman does big things—deals, trades, etc.—well. But it sucks at anything involving low-margin, high-volume activities," he said. "They simply have the wrong people for those businesses, starting from the top.”