Goldman to Buy Folio Financial, Venture Into RIA Custody

Goldman Sachs Group is reaching further into the wealth management business by purchasing Folio Financial, a 20-year-old firm that offers robo-advisory services to retail investors and a custody platform to other registered investment advisors, Folio said Thursday.

The deal, expected to close in the third quarter, will “bring scale to our business, particularly in the execution, clearing and custody space,” Folio Chief Executive Steven Wallman wrote in a note to clients posted on the firm’s website. Neither he nor Goldman would provide details of the planned transaction, a sign that it is not “material” to Goldman’s financials.

Goldman last July purchased $25-billion-asset RIA aggregator United Capital Financial Advisers for $750 million in cash, and this year created a consumer and wealth division to emphasize its diversification from its benchmark capital markets and investment banking businesses into less capital-intensive wealth businesses serving both upper-end and middle-class investors.

Folio markets itself as a “brokerage, custodian and financial technology company,” with three direct-to-consumer RIA platforms, products marketed through Folio Investments and FolioFn that include fractional shares and “social-impact” and sustainable investing funds aimed at emerging investors, and a custody business that collects end-client assets of small broker-dealers, RIAs, banks, credit unions and turnkey asset management program firms.

Goldman’s primary interest is the Folio Institutional custody unit that can fuel its trading desks with retail volume, said a person familiar with its strategy. To emphasize the point, it plans to house Folio, which has about $11 billion under custody, within its global markets division, not its wealth or asset management sectors.

“Folio fills in the last piece of the wealth management ecosystem puzzle for Goldman Sachs,” said Gavin Spitzner, president of Wealth Consulting Partners.

Folio and Goldman began discussions last year, according to the web letter from Wallman, a former commissioner at the Securities and Exchange Commission who founded Folio 20 years ago and remains its principal owner. Based in McLean, Va., Folio employs about 160 people, most of whom are expected to keep their positions, the source said.

“This is a logical progression as Goldman continues its path into the independent wealth space,” said Shirl Penney,  CEO of Dynasty Financial Partners, which provides product, trading and financing services to RIA firms.

Goldman’s asset management unit also should benefit from the end customers who arrive with Folio, helping to “drive distribution” into the wealth management industry’s fastest growing channel, Penney said.

The deal is the latest example of homogenization at big wealth management firms that are expanding from servicing stratified bases of rich individuals and families to younger, less affluent customers who can be serviced through automated investment programs through digital and workplace retirement plan programs.

Morgan Stanley last year acquired stock-benefits firm Solium Capital to increase its reach to workplace investors, and plans to purchase discount brokerage firm E*Trade Financial this year for $13 billion.

Goldman, which continues to service high-net-worth investors through its private client unit, has rebranded United Capital as Goldman Sachs Personal Financial Management for less affluent investors, operates Ayco, a workplace and executive services wealth business, and sells retail banking and credit card services through its Marcus unit.

“It’s pretty obvious that Goldman is trying to expand its market share in the direction of affluent and mass affluent investors,” said Greg O’Gara, senior analyst at wealth management consultant Aite Group, adding that Folio also provides some compliance ballast.

“Advisors and broker-dealers are going to increasingly look for centralized investment platforms that allow them to deliver products and advice in a very controlled environment, and Folio has a very good goal-based planning engine and a very good client risk- assessment engine,” he said.

Charles Schwab Corp., meanwhile, is moving ahead with its $26-billion acquisition of TD Ameritrade Holding Corp., which services both self-directed retail investors and customers of registered investment advisors.

Schwab also has purchased the direct indexing technology of Motif Investing, a digital firm that created thematic portfolios for mostly neophyte investors. Backed by Goldman, J.P. Morgan and individuals including former SEC Chairman Arthur Levitt and Ellevest founder Sallie Krawcheck, Motif shut its doors after eight years in late April and arranged to move its customer base to Folio.

—Mason Braswell contributed to this story.