Why Goldman Sachs, which has a $509 billion wealth business geared towards ultra-rich clients, is buying a small Virginia fintech for financial advisers and retail investors (2024)

Registered investment advisers, or RIAs, tend to be smaller, independent wealth management shops with lower account minimums than larger wealth advisory firms and private banking arms. Folio serves some 450 RIAs and has some $11 billion in assets under custody — a tiny player in the custodian business compared to giants like BNY Mellon's Pershing arm with $1.8 trillion in client assets.

While the firms aren't disclosing the deal's value, typically companies would disclose to investors if an acquisition was worth more than $500 million, Reuters noted when it first reported the deal. A spokesperson for Goldman Sachs declined to comment on the deal's value, and Folio did not respond to a request for comment.

With the deal, Goldman Sachs is reaching into a corner of the wealth management industry that has ballooned in recent years and become a formidable competitor to traditional wealth managers.

Assets under management in the independent RIA space grew at a compound annual growth rate of 10.1% between 2013 and 2018, according to the most data from industry research firm Cerulli Associates. Independent and hybrid RIA firms together managed some $4.8 trillion in assets through the end of 2018, according to Cerulli.

With new technology, setting up shop as an independent adviser has become easier than ever, and once-wirehouse advisers have pointed to discontent with compensation structures as one reason for going independent.

The acquisition marks a clear play for the middle and smaller-tier segments of the wealth management marketplace over the high-net-worth base, said Michael Spellacy, senior managing director for capital markets at Accenture. The combination is also indicative of more deals on the way.

"You should, and can, expect a wave of consolidation and structural change across the wealth management landscape," Spellacy, who has worked with Folio in the past and declined to comment on aspects of the deal directly, said in a phone interview on Thursday.

Mike Foy, the senior director of the wealth management practice at J.D. Power, said the deal appears to be a move to diversify Goldman's business. In recent years, many financial services firms and even startup robo-advisers have aimed to become one-stop shops for clients, tacking on new services catering to their overall financial wellbeing.

"You could look at it as part of their core strategy of expanding their addressable market, down-market," Foy said in an interview with Business Insider.

Folio, based in the wealthy northern Virginia suburb of McLean, also provides technology and services for financial advisers anda self-directed trading business for retail investors, which it touted last year as a long-standing product when legacy brands like Charles Schwab started slashing commissions and talking about offering fractional shares.

Trying to 'capture' it all

For Goldman, the deal marks the second acquisition in the wealth arena in two years under chief executive David Solomon, who has been presiding over a period of change at the bank. It acquired the RIA United Capital last year, recently re-branding it as Goldman Sachs Personal Financial Management. It's unclear whether Folio could or would be able to custody that unit's assets.

The bank reorganized its business lines earlier this year and placed a new focus on wealth with its Consumer & Wealth Management division. Within its money-management operation, the firm groups clients in three main segments: the ultra-high-net-worth set, with more than $10 million in assets, the high-net-worth, with $1 million to $10 million in assets, and the mass-affluent space, with less than $1 million in investable assets. Before, there was no such distinct "mass-affluent" focus.

Goldman oversaw $509 billion in client assets as of March 31, according to its first-quarter earnings.

"These are all very large markets, trillions of dollars in each," consumer and wealth management head Eric Lane said at the first-ever investor day earlier this year, according to a transcript on the platform Sentieo. "Small movements in our market share in any of them will drive significant revenue opportunity for Goldman Sachs. We have a plan to capture it."

With United Capital, Folio, and the Marcus consumer banking suiteit's built, Goldman is trying to move beyond the mega-deals it's long financed and super-wealthy clients its long catered to.

"The only firms that are going to add value are those that have scale, or serve a niche," Will Trout, global head of the wealth management research practice at Celent, a division at consultant Oliver Wyman, said in an interview.

The deal announced on Thursday has shades of rival New York investment bank Morgan Stanley's $13 billion E-Trade acquisition set to close later this year.

That will give Morgan Stanley a small foothold in the RIA space — though people familiar with that deal said the driving force was mainly the stock-plan administration and brokerage business, not the RIA capabilities — and opened it up to day-trading retail investors who have long flocked to E-Trade and could one day become lucrative wealth clients.

Folio has some 160 employees, and it's unclear who exactly will be taken on through the acquisition. And Goldman and Folio have been loosely connected before: in 2013, the bank led a $25 million round of funding for the fintech Motif, which shuttered last month. Last week, Folio acquired Motif's clients and assets, while Charles Schwab acquired Motif's technology and intellectual property.

If the deal closes as they expect this year, two-decade-old Folio will operate under its global markets business, and Wallman, Folio's chief executive, will join Goldman as an advisory director.

"Make way for Steven Wallman, who at age 46 could join you in the annals of mass-market financial ground-breaking," the Wall Street Journal wrote in 2000 as Folio, then called FOLIO.fn, launched.

"Wallman's Internet-based brainchild is not likely to push the competition toward extinction," the Journal said, adding "if investors flock to FOLIO.fn the way venture capitalists have, the big firms might be tempted to chow down his company when it goes public."