Sparks fly after FundFire reports that Merrill Lynch and Goldman Sachs are offering some RIAs their corner-office research

Brooke’s Note: It may take a while to clear this one up. But I caught wind that Merrill Lynch PBIG advisors were ripped after a FundFire article was published. See: Merrill Lynch PBIG team breaks away in tumbleweed country to better pursue next-gen oil fortunes. Their employer has sold them on the idea that a big part of being in the elite Merrill unit is access to information not available outside the mahogany walls. And now they’re seeing that RIAs can get the research in a side deal? It’s not crystal clear that that is happening but it certainly looks that way based on the reporting in the article. Goldman’s response was to say: 'Yeah, we do that.’

Recent stories published in FundFire saying that Goldman Sachs and Merrill Lynch are offering tip-top-tier investment strategy analysis to big RIAs is sparking controversy in both the RIA arena and the wirehouse channel.

FundFire reporter Tom Stabile first wrote about this on March 1, stating that Goldman, through its Alternative Investments & Manager Selection program and Merrill, through its Private Banking and Investment Group, will be offering access on a selective basis to RIAs.

Clearly, this appears to be a big draw for RIAs who want to tap into the alternative options that Merrill and Goldman vet for their own advisors, according to the FundFire piece. RIABiz has written about Merrill’s tap dance in and out of the RIA space. See: In major reversal, Merrill turns away RIA assets.

But this issue isn’t about allowing RIAs to keep assets under custody at the wirehouses. The story quotes an unnamed industry veteran who has spoken with executives at both brokerages and says each is quietly exploring relationships with RIAs — targeting only a few firms per market in multiple regions.

The core of the partnership with the wirehouses and the RIAs appears to be allowing top-end RIAs access to well-respected investment research teams at Goldman Sachs and Merrill Lynch. According to the piece, the access is happening on a selective basis and details are still evolving. It appears the RIA would be a client of an in-house wirehouse advisor but would also have access to the manager research teams in crafting the portfolios.

On fire

Since the FundFire piece ran, RIABIz has heard from sources who believe that both Merrill and Goldman have already implemented such a strategy.

In its original story, FundFire didn’t directly quote anyone from Merrill Lynch.

Merrill Lynch spokesman Matthew Card declined to comment. However, sources familiar with the situation say Merrill Lynch does not offer research or product access to independent advisor firms for subsequent use with RIA clients.

Other sources have told RIABiz that Merrill sought a correction from the original FundFire story. FundFire did not publish a correction.

FundFire reporter Stabile is currently on vacation. He is returning on Monday but we reached out to Edith Updike, managing editor of FundFire. Updike e-mailed on Friday morning that the company stands by its story.

There’s no question that Merrill Lynch would not want to acknowledge such an offering, says Tim Welsh, of Nexus Strategy LLC. “They’ve had a closet operation working with RIAs for the last 20 years, but do not want to disclose it as their brokers would rebel in unison that the mother ship was competing with them,” he says.

Andy Klausner: One could argue that
the firms are arming the competition
with some of the same weapons
their own advisors have at their
disposal

The FundFire article indicated that neither wirehouse firm had identified current RIAs, but Boston’s Congress Wealth Management LLC told FundFire it expected to work with both Goldman and Merrill on specific alternative-investing assignments. Congress manages $727 million in assets and intends to build out a multi-office unit, according to FundFire.

Goldman deal sealed

For its part, Goldman has offered some details about its interest in working with RIAs and explained that it is making available access to the firm’s sophisticated strategies.

“Goldman Sachs Asset Management’s Alternative Investments & Manager Selections group offers institutional and high-net-worth investors bespoke investment strategies in alternative and long-only managers and we also work with select RIAs to offer their qualified investors access to our investment strategies. This is not a research offering in the traditional sense and is not related in any way to Goldman Sachs’ global investment research,” said Andrea Raphael, managing director of media relations for Goldman Sachs.

The FundFire piece offered quotes from Chris Kojima, head of Goldman’s AIMS group, who explained that the unit oversees more than $120 billion in assets with a mix of pension plans, foundations and other clients, but the firm is hoping more RIAs become part of the mix.

“While the RIA business is a smaller part of the assets that AIMS manages, it has more than doubled in the last two years, and it is growing,” Kojima was quoted as saying in the FundFire piece.

More RIA growth

In a separate press release to RIABiz Thursday, Goldman Sachs and CAIS Group Inc. announced another partnership embracing RIAs that is completely different from what FundFire wrote about. It is another indication that Goldman Sachs is embracing RIAs in its business model. See: How RIAs can best pick alternative investments: Punt.

In this new deal, the release explained, CAIS member firms will have access to Goldman Sachs’ structured-product capabilities. In addition, CAIS member firms will have direct access to Goldman Sachs’ resources to create customized offerings. It appears that firms who are not CAIS member firms will not gain the same access.

Goldman’s partnership with CAIS is crucial to providing this insight to RIAs, Bill Shelton, a managing director within the Goldman Sachs Private Investor Products Group in the Americas, said in a statement. “Their unparalleled technology-driven process and institutional framework delivers quality financial products to the fragmented wealth management industry, and will complement the products and capabilities we offer through the structured-products group.”

Rafay Farooqui, CAIS’ co-founder and president, said in the release that RIAs are seeking access to these sophisticated strategies. “Structured products are a natural extension of our existing offering of pre-qualified hedge funds, private-equity funds and precious metals,” he said. “Our relationship with Goldman Sachs furthers CAIS’ commitment to collaborating with industry-leading participants across all aspects of our business.” See: Genworth, SEI and Envestnet make alternative investments moves amid 'huge interest’.

More reaction

Tim Welsh told FundFire: They can
take the [manager research] machines they’ve
built and 'white label’ it for
others

FundFire published another article on Thursday sparking more interest in the subject and this time it was an Op Ed written by Andy Klausner, founder of AK Advisory Partners LLC, a consulting firm. He wrote a column pointing out the potential hazards of this new program to brokers.

“Is this another blow to financial advisors working at wirehouses, regionals and other traditional broker-dealers? Should these advisors feel slighted that some of their competition is now going to have access to resources that were heretofore considered to be a competitive advantage? And rightly or wrongly, will it accelerate attrition of wirehouse advisors?” See: FRC report: Merrill Lynch, Morgan Stanley, UBS, Wells Fargo are undergoing a radical transformation to a brighter future.

Klausner went on to add that he doesn’t believe the issue should cause problems for the wirehouse firms. “Sure, one could argue that the firms are arming the competition with some of the same weapons their own advisors have at their disposal. But at the end of the day, high-net-worth and ultrahigh-net-worth clients select their advisors based on relationships more than individual products. It would be a stretch to think that client relationships would be endangered by this move alone. In fact, large broker-dealers could use it to their advantage by pointing out to clients and prospects that their firm conducts such good research that many of their competitors value it.” See: The prognosis for Morgan, Merrill, UBS and Wells is even grimmer than the negative hype, Cerulli report shows.

Challenges

The FundFire article points to the potential hazards of what happens when big wirehouse firms seem to work with RIAs. Clearly, there’s an inherent conflict between the wirehouse and advisors who would be frustrated by this partnership with competitors.

Welsh was also quoted in the FundFire story, saying it’s essential for the firms to try to handle the potential conflicts.

“If you look at the wirehouses and traditional Wall Street players, their growth is tied to their advisor force,” he says. “If they can manage the conflicts and competitive issues of serving RIAs, they can take the [manager research] machines they’ve built and 'white label’ it for others,” he is quoted as saying in the FundFire piece. See: Fed up wirehouse advisors more eager to leave than ever, study says.