David Solomon, Chairman and CEO, Goldman Sachs, participates in a panel discussion throughout the annual Milken Institute Global Conference at The Beverly Hilton Hotel on April 29, 2019 in Beverly Hills, California.
Michael Kovac | Getty Images Entertainment | Getty Images
Goldman Sachs is referred to as Wall Street’s top brand, a juggernaut employing a number of the world’s best traders and investment bankers.
However it’s facing an inflection point: Those high-profile businesses have fallen out of favor with investors because the 2008 financial crisis. As a substitute, it has been regular, fee-generating areas like wealth and asset management which can be valued way over boom-or-bust activities like trading or advising on mergers.
Goldman shares have been stuck at a comparatively low price-to-tangible-book value, a key industry metric that measures how the market sizes up a firm in comparison with the worth of its hard assets. Goldman trades for just above one times price to TBV, while rivals including JPMorgan Chase and Morgan Stanley are valued at roughly double that.
Which is why Goldman CEO David Solomon has hitched his fortunes to asset and wealth management. His latest move positions Goldman to reap the benefits of two big trends in finance: The rise of other assets including private equity and growth within the fortunes of the ultrarich.
Still, concerns surfaced recently after former asset management co-head Julian Salisbury departed Goldman for a smaller rival. Salisbury, who was most recently chief investment officer for AWM, is joining San Francisco-based private equity firm Sixth Street. His former co-head, Luke Sarsfield, also left earlier this 12 months, helping fuel worries a couple of brain drain on the firm.
Goldman, which put former trading co-head Marc Nachmann in control of AWM in October, says the corporate has a deep bench and that the typical tenure of partners is its longest in a decade.
What’s asset management, exactly?
Simply put, Goldman portfolio managers make bets across the universe of economic instruments, either on behalf of clients or using the bank’s own funds.
That runs the gamut from the least dangerous, plain-vanilla holdings like money market funds, to fixed-income products like corporate bonds funds, stock ETFs and mutual funds, and at last to alternative assets including private equity, private credit (i.e. loans to corporations), real estate and hedge funds.
In comparison with rivals JPMorgan and Morgan Stanley, that are big players in traditional assets like stock funds, Goldman is more weighted to the esoteric world of other investments, which is why it’s sometimes said that Goldman wants to construct a “mini-Blackstone” inside the bank.
Goldman gets paid through management and incentive fees, which swell as funds attract more assets. Altogether, Goldman has $2.71 trillion in assets under supervision as of June 30, which incorporates wealth management assets.
What about wealth management?
The industry has coalesced around a model where financial advisors charge fees, often 1% to 2% of a typical client’s assets annually, to administer investments. Additionally they can earn fees for loans or other products geared towards the rich.
Goldman does particularly well with the ultra-rich, defined as those with no less than $30 million to speculate; it has about 8% of that cohort within the U.S., in accordance with an organization presentation. In actual fact, Goldman’s average ultra-high net price client keeps about $60 million on the bank.
Where Goldman fares less well is serving the merely wealthy; it has only about 1% of the high-net price market, or those that have between $1 million and $10 million to speculate.
The bank has greater than $1 trillion in wealth management client assets. While significant, key rivals are each larger and growing faster: Morgan Stanley had $4.9 trillion in client assets as of June 30.
Why does it matter?
Goldman remains to be very much tethered to the ups and downs of Wall Street. The bank’s trading and advisory division generated two-thirds of Goldman’s $23.1 billion in revenues to date this 12 months.
A pandemic-era boom in deals and trading in 2020 and 2021 was quickly followed by a bust, and last quarter marked the industry’s lowest investment banking haul in a decade. That is caused Goldman to report the steepest profit drop this 12 months of the six biggest U.S. banks, making the push for sustainable sources of growth much more urgent.
For Solomon, who has battled criticism over his ill-fated retail banking push, leadership style and hobbies, success in AWM would supply a welcome counterpoint to those that say he’s made too many errors.
Has it been smooth sailing?
Not exactly. Solomon has made tough decisions to consolidate the assorted pockets of investment on the firm, after which to focus on raising outside funds while shrinking wagers made with house money. That is upset some insiders used to autonomy over a long time of operation.
He’s also shuffled the deck several times. In a 2020 reorganization, Solomon pulled apart asset and wealth management and assigned Salisbury and later Sarsfield to co-lead the asset manager, a move he reversed when he reunited the companies and named Nachmann to steer AWM.
That upheaval has led to the departure of the ex-asset management co-heads, in addition to other senior leaders.
How’s the business doing now?
Despite the turbulence, AWM has been making progress against its fee and fundraising goals, supporting the concept that Goldman’s repute for savvy investing gives it an edge.
The bank is on track to achieve its goal of generating no less than $10 billion in fee revenue by next 12 months. And its total assets under supervision rose by $42 billion to $2.71 trillion within the second quarter.
While Solomon cautioned that Goldman’s “asset management journey” would take two to a few years before meaningfully helping margins, he sounded optimistic.
“I feel very, superb concerning the strategic decisions that we’re making,” Solomon told investors in July. “We see a transparent line of sight, and we’ll make progress.”