Goldman Sachs-Creative Planning deal is bleeding defectors -- 16 more last week, report says -- auguring a 'potential disaster,' analysts warn
Dozens of former 'United Capital' advisors are fleeing at once, but Peter Mallouk is still battling to keep them, and Goldman Sachs may play legal hardball, sources say.
5 min read- Advisors are defecting from Goldman Sachs unit slated for Creative Planning acquisition.
- Analysts warn deal faces 'potential disaster' due to advisor exodus.
- Deal structure determines which firm absorbs losses from advisor departures.
- Advisors cite pressure and restrictive agreements as reasons for leaving.
Creative Planning's pending purchase of the “old Joe Duran” unit from Goldman Sachs is turning into a “potential disaster," after a report today of 16 more advisor defections on the heels of a surge in previous departures.
The talent and asset hemorrhage of Goldman Sachs employee-advisors extends far and wide from Los Angeles to Kansas to South Carolina and Stamford, Conn., according to Citywire.
“It appears the floodgates are opening and, depending on how the deal was structured, this is a potential disaster for at least one of the two parties involved,” says Mike Wunderli, a managing director at ECHELON Partners in Manhattan Beach, Calif., by email.
“If this is a back-end-heavy or retention-dependent deal, GS will take the brunt of it, and CP could still be okay. If it is valued on the full book (or close to it) with significant guaranteed consideration, then CP is likely to take a big hit,” he explains.
Many lawyers and dealmakers predicted widescale defections would undercut this deal.
Creative Planning declined to comment, though it confirmed the signing of a management team of United Capital 2.0, including: Jim Rivers, CEO, Rob Mlenek, chief financial officer, and Marie Campion as chief product officer.
Taking a hit
In the latest exit, five teams are reportedly going to Prime Capital in Overland Park, Kan., and 11 other advisors have scattered among eight firms, according to the report.
Peter Mallouk has now signed on 30 Goldman Sachs advisory offices, he says, by improvising a fourth option after advisers gave the side-eye to three others
Though a number of publications are following this deal's progress, Citywire is going to extraordinary lengths to chart its every ebb and flow.
The latest report felt like a possible tipping – or frog-boiling -- point, suggesting Goldman Sachs (GS) or Creative Planning (CP) could lose big if the exodus continues.
“The temperature of the water has been steadily rising and the frogs, who thought they were in a warm bath, are suddenly boiling,” said Brian Hamburger, CEO of MarketCounsel, in an earlier interview.
Creative Planning CEO Peter Mallouk dismissed Hamburger at the time, saying he expected to sign the vast majority of advisor teams.
Cursed deal
Though the steady drumbeat of negative headlines is alarming, the deal's potential for disaster has yet to be realized. The transaction – albeit with some bloom off its rose – could still succeed, a source close to the deal says.
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Many advisors leaving were on teams that otherwise may transfer largely intact, the person adds.
“The number of former United Capital (Goldman Sachs Personal Financial Management) advisors transitioning to Creative Planning has been less than anticipated,” says Patrick J. Burns, Jr. of the eponymous Law Offices of Patrick J. Burns, Jr., P.C in Los Angeles. Burns has provided counsel to some advisors involved in the deal.
The die may have been cast by Goldman Sachs long before Peter Mallouk walked through the door, Wunderli says.
Peter Mallouk told heads at Goldman Sachs' 'United Capital' today on group Zoom that he'll name new president within 14 days -- and whether 'United Capital' brand survives within 20 days
“I believe the situation was likely cursed back when UC sold to GS,” he says. "There’s a reason it has been a one-way street from wirehouses to the independent space and not the other way around.
“UC advisors were on the independent side for a reason, so moving in the other direction to highbrow GS as the ugly stepchild probably never sat too well with them.
"Many were likely determined never to make the same mistake and would choose their own destiny when the next opportunity arose,” he says.
Legal action
The Creative Planning deal itself also may have been more than the Goldman Sachs advisors could stomach, Burns adds.
“Advisors shared they were not given much time to consider their options and felt pressured into signing a new agreement with many restrictions including a non-compete,” he says.
“The difference in perceived firm cultures at United Capital, then Goldman and ultimately Creative Planning in a short period of time was hard for advisors to process.
"Many advisors expressed they felt independent at United Capital and decided to make a move on their terms now to regain their independence.”
For now, it appears that Goldman Sachs is liable to be the one on the hook if the deal tanks.
The New York investment bank is taking legal action against some departing advisors, say sources close to the deal.
If the legal remedy doesn't work, could it dampen the red hot RIA M&A market? Wunderli thinks not.
“I don’t think this will dampen the hot wealth advisory M&A market, especially for smaller deals,” he says.
“But it does go to show how difficult it is to sell a large firm with lots of advisors who are very close with their clients. In these situations, the clients will almost always follow the advisors, which gives the advisors a ton of leverage and control. It also shows why high-producing advisors at independent firms should be equity owners of the firm.”
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