The 'betting-against' allegations have some brokers fearful about their ability to attract new prospects

May 3, 2010 — 6:13 AM UTC by Brooke Southall

1 Comment

Brooke’s note: As the oil spill spews out of control in the Carribbean, Louisiana shrimp fishermen have one major question: when will it stop? The wealth managers of Goldman Sachs may be able to relate to that helpless feeling. The media is having a field day with Goldman Sachs’ comeuppance before Congress and it’s difficult to tell when the seepage of ill-tidings will stop, when the healing can begin and how much permanent damage will have been done. This article looks at the potential collateral effects on Goldman’s relatively small wealth management unit.

It’s always been more challenging for recruiters to get a return call from a Goldman Sachs broker. Until now.

The scandal over Goldman Sachs’ role in the mortgage meltdown and the financial crisis is wreaking havoc with the firm’s golden image – and some wealth managers who sell on the strength of that image seem to be reassessing their options.

Recruiters are reporting an increase in inquiries from Goldman Sachs brokers who want information about moving their books of business to another firm or forming their own RIAs.

“I expect that there will be some migration out of Goldman Sachs,” says Mindy Diamond, CEO of Diamond Consultants of Chester, N.J.. “I think it’s too early to tell just how much but I do think that the decision being made by an advisor as to whether to stay or go will have everything to do with how their clients are reacting to the news.”

Rash of departures

A rash of departures could stymie the efforts of executives, which they’ve spoken about publicly, to build up the wealth management operation.

Goldman Sachs has given mixed signals how determined it is to succeed in the wealth management industry. It hired Peter Scaturro, the former CEO of U.S. Trust to oversee a revamping of the unit in 2007 and then he departed in 2008 and was not replaced. In interviews and in SEC documents, Goldman has consistently avoided giving any details of its wealth management plans. The company is often more specific, discussing product sales though RIAs and other advisors.

Mark Hancock, a managing director at Goldman Sachs Asset Management, told Investment News last August that his company planned to grow its asset management unit’s third party distribution sales force – including taking the unit’s broker-dealer sales force to 53 reps from 44 and double the sales people dedicated to RIAs from 14 to 28. Adverse publicity surrounding Goldman Sachs could make RIAs less inclined to buy its products.

Goldman’s success in wealth management will depend on retaining advisors and hiring more – and both of those depend, in turn, on how difficult the scandal makes winning new clients.

“Betting against…(clients)”

“For the most part, (Goldman brokers) are able to assuage the anxieties of their current client base, but they are petrified about the ability to go out and 'sell’ prospects on Goldman Sachs,” Diamond says. “The biggest concern seems to be that Goldman has been described as 'betting against … (clients).’ Those words are not what a client wants to associate with the firm that manages their investments.”

If they do decide to go, Goldman brokers may look first at smaller wirehouses, or the RIA world, say Diamond and other sources. The big wirehouses have many problems of their own, according to one top ex-Merrill Lynch executive who now consults Wall Street firms and asked to remain anonymous.

“Goldman Sachs advisors tend to view the prospect of life at ML as too big, too retail, and too bureaucratic,” he says. “The Bank of America culture is destroying the ability of Merrill to attract talent on the level it used too. Exiting advisors will look at Credit Suisse or Barclays Capital first where the 'culture of small’ reigns and they have superior access to trading desks and bankers.”

There is also reason to think that some of these advisors will look more closely at forming RIAs, Diamond adds.

Creating a wealth management boutique?

“Many of them seem interested in either creating their own wealth management boutique as an independent or in joining an established multi-family office boutique firm. Culturally, these opportunities may seem like a better fit.”

However, leaving Goldman would be a difficult decision. Not only does the firm offer the richest compensation packages on Wall Street, its 350 advisors have always benefited mightily from the firm’s position as a top investment bank for initial public offerings. Goldman Sachs had 31,700 employees at the end of September.

By the time a company completes an IPO, Goldman has established intimate business relationships with numerous suddenly-ultra-affluent investors.

“Early days as to how many clients leave Goldman Sachs, but it made many of them rich in the first place by floating their business, so don’t underestimate how sticky those relationships are” says the ex-Merrill Lynch executive.

Branch offices

Goldman advisors typically seek clients with accounts of $10 million or more in assets and the company is known to emphasize its own funds in its client portfolios. On its website, under wealth management, it lists branch offices in Atlanta, Miami, Boston, San Francisco, Chicago, Dallas, Houston, Los Angeles, New York, Philadelphia, Seattle, Washington D.C. and West Palm Beach.

Final note: I hope RIAs who use Goldman Sachs’ products will speak up in the comments section below about how they feel about adding the company’s products to their portfolios at this juncture.

Mentioned in this article:

Diamond Consultants
Top Executive: Howard Diamond

Share your thoughts and opinions with the author or other readers.


Stephen Winks said:

May 3, 2010 — 2:46 PM UTC

Goldman Sachs’ advisory business has changed a bit since it went public. Old hands were focused on building important relationships, now it is more focused on advisor productivity, a turn off and less collegial to more established advisors who feel it is no longer all about the client—but this is the new order of things industry wide and why the RIA route is viewed so attractively.

Yet Goldman is still the best firm on the street. The symbiotic relationship with investment banking, the small number of advisors (350), the unparralleled access to highly sophisticated intellectual capital, a global client base of individuals, industry, governments and sovereign funds that is the envy of the world, prestige even considering the present SEC accusation, all make it difficult for Goldman advisors to find a better place to go. Credit Suisse and Barclays Capital are both engaged in the same practices as Goldman which are legal and common through out the world of finance.

There may be a very small opening for a very few to leave, but there are no serious challenges to Goldman.


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