Goldman's Blankfein: Firm's wealth unit 'should be bigger'

Chief executive says that the firm has no interest in creating a broad business for the mass affluent

Nov 15, 2009 @ 12:01 am

By Jed Horowitz

The Goldman Sachs Group Inc. is eager to expand its wealth management services to the very rich — and to distribute more of its asset management products through third-party brokers and financial advisers, according to chief executive Lloyd Blankfein. “That should be bigger than it is,” he said of the private wealth management unit in a brief interview last week at a conference in New York. Goldman, which has about 350 advisers in the United States who sell investment products to high-net-worth individuals and family offices, has to “do more and be in more places” in wealth management, Mr. Blankfein told investors at the conference, which was sponsored by Bank of America Corp's Merrill Lynch & Co. Inc. subsidiary. He declined to discuss specific hiring goals but said in the interview that the firm “has to get into the high hundreds, before we can talk about thousands, of advisers.”
A Goldman spokeswoman declined to disclose the number of its wealth management advisers, nor would she discuss its expansion goals. Goldman considers wealth management a natural adjunct to its core corporate-advisory, financing and investing businesses, because wealthy in-vestors are a natural market for private-equity funds, initial public offerings and other core and alternative investment products originated by the investment bank. Goldman also wants to manage the personal wealth of the executives it serves through its core banking businesses. The firm's challenge is to attract brokers with clients at the extreme upper end of the wealth spectrum and to differentiate its services from those of scores of competitors, said Russ Alan Prince, founder of Prince & Associates, a consulting firm that specializes in multifamily offices. “If they're just continuing to sell investments to rich people, it's not going to be that dramatic, because people won't be fooled that they'll get access to the Goldman magic,” Mr. Prince said. “They can add offices and get a very steady stream of business, but if it remains a stepchild to their trading and investment-banking areas, it will be a pain in the neck to manage.” Goldman should focus on clients with a net worth of at least $25 million, Mr. Prince said. Goldman, which is expanding in Arizona, Florida, Georgia and other areas with lots of retirees, is not dangling large pay packages to compete with wirehouses for star brokers, according to a knowledgeable source. Goldman's branch managers are looking for relatively junior advisers who have the “proper Goldman degree of controlled aggressiveness” and whose clients generally have $10 million or more of investible assets,” the source said. Mr. Blankfein emphasized that Goldman has no interest in creating a broad brokerage business for mass-affluent investors, a cohort that Wall Street variously defines as those with investible assets of $100,000 to $2 million. He also said that the company has no plans to become a large deposit-taking institution, since it isn't interested in retail-banking products such as credit cards and mortgage lending. However, Goldman takes a more democratic view of asset management. It plans to double the size of its asset management unit's third-party-distribution sales force this year. In an interview in August, Mark Hancock, a managing director at Goldman Sachs Asset Management, said that he planned to expand the unit's broker-dealer sales force to 53 sales representatives, from 44, and double the registered investment adviser sales force by year-end to 28 sales reps. Goldman has stumbled somewhat in its managerial efforts in private wealth management. Peter Scaturro, who joined as global head of the unit in the summer of 2007, left at the end of 2008 and has not yet been replaced. Mr. Scaturro previously was a private-banking executive at Bank of America Corp. and Citigroup Inc., and is a former chief executive of U.S. Trust Corp. The characteristics of wealthy individuals vary greatly by geographic region, making it relatively efficient to have country heads for the business, according to an aide to Mr. Blankfein. Tucker York runs the firm's North American private-wealth business from New York. Goldman converted into a bank holding company last year in the heat of the financial crisis, but Mr. Blankfein said at the Merrill Lynch conference last Tuesday that the company has preserved its investment-banking culture. Raising capital, advising corporations and co-investing with clients is a complex business model, he said, but much more manageable than the supermarket models of its behemoth commercial-banking competitors. Goldman had 31,700 employees at the end of September, compared with more than 280,000 at Bank of America and 220,861 at JPMorgan Chase & Co. Some critics have attacked Goldman for pursuing headlong growth and paying large bonuses to executives while the rest of the economy is imperiled.

Simon Johnson, a professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said in a radio interview with Bloomberg last Tuesday that the Goldman empire should be broken up.

“What have we gained from a societal perspective from Goldman Sachs' becoming four times bigger” over the last decade, Mr. Johnson asked, according to Bloomberg News.

Mr. Blankfein defended Goldman's social value at the conference, noting that the firm remains a flexible provider of liquidity and capital that is stimulating the global economy. He cited new senior loan and mezzanine debt funds that the firm has launched at a time when traditional commercial banks have cut back lending.

The company's ability to stay close to its clients helps guide its investment and capital allocation choices, he added.

In addition to jockeying for more wealth management revenue, Goldman continues to expand quickly into emerging markets such as Brazil, Russia, Indian and China, and sees opportunities in buying the distressed assets that continue to weigh down the balance sheets of major financial institutions. “I would have thought that more [sales of those assets] would have happened by now,” Mr. Blankfein said, adding that Goldman “will be there” to buy the distressed assets when new capital requirements and liquidity needs force such sales.

Mr. Blankfein said his most significant challenge today is monitoring the twists and turns of financial reform legislation and proposed regulation, but he endorsed “the critical role the government has played” in managing the financial crisis.

He even said he welcomes the dozens of New York Federal Reserve Bank employees who now work out of Goldman's offices, drinking its coffee and constantly monitoring its credit decision and capital ratios.

“I like those controls and redundancies,” he said.

E-mail Jed Horowitz at jhorowitz@investmentnews.com.

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