Will Goldman Sachs’s big bet on wealth management work?

A year ago Goldman Sachs chief executive David Solomon pinned his hopes for reviving the Wall Street bank’s stock market valuation on a newly merged asset and wealth management division. As Solomon has faced down unrest inside the bank, his job security may depend on it.

Goldman executives said they “see a path” to generating a quarter of profits from the division by the end of 2025. AWM could contribute $4bn to $5bn in pre-tax earnings by then, president John Waldron told the Financial Times.

That would be more than three times the $1.3bn the unit generated in 2022, which was about 10 per cent of the bank’s total. Pre-tax earnings across Goldman have averaged $17.7bn over the past three years.

Investors have largely welcomed Solomon’s latest plan, cheering the focus on asset and wealth management after years of losses from its six-year effort to become a digital retail bank.

“I don’t think anyone pushes back on the strategy itself,” said Dan Fannon, an analyst at Jefferies. “It is something where they need to get more scale, particularly in wealth.”

But the bank is in a race against time to show it can grow AWM fees quickly enough to balance investment banking and trading, while Solomon, chief executive since 2018, has had to deal with discontent among both rank-and-file employees and the executives displaced in last year’s restructuring.

Goldman Sachs has long been Wall Street’s gold standard for trading and investment banking. But the 2008 financial crisis and the regulatory response to it have damped investor enthusiasm for these highly cyclical businesses in favour of a steadier stream of management fees. 

Morgan Stanley moved to a wealth-driven strategy in 2009 and has generated 58 per cent of pre-tax income from asset and wealth management this year. It now trades at 1.37 times its book value, says Capital IQ, while Goldman lags behind at about 1 times. 

Solomon’s new strategy relies on the bank building up stable, fee-generating business while unwinding billions in proprietary investments to free up capacity to do more for clients.

The man charged with doing it is Marc Nachmann, one of Solomon’s trusted fixers, who previously boosted trading revenues and was elevated to the position of global head of asset and wealth management during last year’s restructuring.

Guidance that Nachmann gave to investors earlier this year suggests AWM could account for about a third of the bank’s annual net revenues within two years. In February, he indicated the division was aiming for pre-tax margins in the mid-20 per cents. Combined with Waldron’s profit figures, that translates to annual net revenue between $16bn and $20bn, compared with Goldman’s three-year group average of $50bn. 

“It’s an exciting business because you’ve got secular growth and a pretty fragmented marketplace when you compare it to banking,” Nachmann told the FT.

Bank leaders said AWM is hitting targets ahead of schedule and building up their client offerings of “alternatives”: private credit, private equity and infrastructure funds among others. They argue that their relationships with super-wealthy individuals position the bank to benefit from a predicted rush into alternative investments.

But years of repeated reorganisations and turnover at the top of AWM have taken their toll on investor confidence and internal morale, and earnings and compensation at Goldman overall are down.

Three of the four people highlighted along with Nachmann on last year’s new organisation chart — including chief investment officer Julian Salisbury — have gone or announced plans to leave.

Gabriel Denis, who analysed Goldman for Morningstar before stepping down last month, said: “Executive instability is one of the primary characteristics we have observed from Goldman . . . Leaders come and leaders go and they all have ambitious goals. It can be very tiring.”

Denis added: “There are pockets of strength, but overall they are just average.”

Goldman, with $2.7tn in assets under supervision, is already very large in traditional asset management. It has also become a top five alternatives player over the past four years by banging together three different departments that were all investing in private markets.

Nachmann said AWM is on a path to reaching $225bn in alternatives fundraising by the end of this year, one year earlier than planned, and up from $40bn in 2020.

But the division’s performance is muddied by the fact that it manages a chunk of investments left over from when Goldman boosted its bottom line by making private equity-style investments with its own capital.

These holdings are disliked both by regulators, which force Goldman to hold a high amount of loss-absorbing capital against them, and by shareholders who view them as volatile and unpredictable. The bank is selling them down, from $64bn in 2019 to $30bn last year with a goal of eventually disposing of the entire portfolio.

The timing of the selldown has been awkward: Goldman has suffered almost $500mn in losses and writedowns on its equity investments this year, particularly from its real estate holdings.

“There’s no question that prices are lower than a year ago,” Waldron said. “Streamlining the balance sheet is far more important than the difference in sale prices.”

Sceptics doubt organic growth will ever be fast enough to make the division a genuine counterweight to the bank’s top-notch investment banking and trading businesses: Morgan Stanley supercharged its wealth strategy by buying ETrade and Eaton Vance.

But Goldman’s record with acquisitions has been patchy. The sale of online lender GreenSky this month for 70 per cent less than it paid 18 months ago is the latest example, even if executives are more optimistic about the 2021 acquisition of Dutch insurer NN Group’s investment management arm.

And more than a decade after Morgan Stanley made its move, competition in wealth management has increased with everyone from Citigroup to Charles Schwab trying to emulate its success.

Goldman stands out by aiming for the richest clients, those with at least $20mn to Morgan Stanley’s target customers’ $5mn to $10mn. Such clients require white-glove service and can take years to woo, so growth will require the bank to add to the ranks of its 1,000 advisers, as well as support staff.

Goldman has also struggled to foster collaborative ties both within divisions and across the bank at times. The private banking and wealth teams are known in the industry for using screen protectors on their computers so colleagues cannot see anything about their clients. “It’s a very dog eat dog culture,” said a senior private banker at a rival.

Goldman’s head of wealth management, Tucker York, defends the practice, saying it underlined the bank’s focus on the “private” aspect of wealth management. “Our clients really, really care about that. We respect that,” York said. 

Attitudes towards the private wealth business have changed, insiders said.

Historically investment “bankers looked down on private wealth guys”, said one former Goldman private banker.

Now, while the bank has been “executing in the ultra-high net worth space for a very long time . . . we have the benefit of internally having more of a highlight on it”, said Kristin Olson, a partner who heads up alternatives within wealth.

Still, industry competitors wonder whether enough has changed — and whether AWM will ever be able to grow fast enough to keep up with Goldman’s investment bankers.

AWM “has always been ‘the other business’”, said a very senior banker who has worked at several rivals.

“Fifteen years ago it was 8, 9, 10 per cent of earnings and they wanted to get it to 15, 20 per cent. That’s still true now . . . They should accept they don’t know how to expand the business and hire a big cheese.”