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Industry Spotlight > RIAs

Why Goldman’s Folio Deal Is Good News for Schwab

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Thursday’s news that Goldman Sachs is buying fintech platform and custodian Folio Financial seems to bring a major new player into the RIA space. 

The move has implications for the RIA custodial business  including the planned but not yet approved $26 billion Charles Schwab-TD Ameritrade merger and for direct indexing, according to Joel Bruckenstein, publisher of the T3 Technology Hub: “There’s lots going on, and it all ties together.” 

“The Department of Justice still is sniffing around the Schwab-TD situation,” Bruckenstein said. “And, … if you can argue that Goldman Sachs will compete here, and that’s not a foregone conclusion, this does strengthen Schwab’s position.” 

Plus, the Goldman-Folio news comes as RIA custodian Interactive Brokers is partnering with TradingFront on a white-label platform for RIAs that aims to attract advisors frustrated, or at least concerned about, consolidation and other issues. 

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“Schwab can say that Goldman Sachs is trying to get into” the custodial space, and Interactive Brokers is pushing along, too, according to Bruckenstein, who produces the T3 fintech events. 

After adding Folio, which works with about $11 billion in RIA assets, does Goldman Sachs have the tech resources needed to immediately compete with Schwab as a major custodian? “No, but [the Folio deal] chips away slowly at the argument that there is no competition” if Schwab is allowed to merge with TD Ameritrade, he added. 

(Another recent deal in the space — Morgan Stanley’s purchase of E-Trade — also muddied the waters. But E-Trade “has a small RIA presence”  and “custodial work was not ever its DNA,” Dynasty Financial Partners CEO Sherl Penney said in February.)

Another Big Player 

The elephant in the room of the RIA custodial space: LPL Financial, according to Bruckenstein, “which really could pursue it and has been quietly talking about it for about a year.”

The self-clearing independent broker-dealer which just said it’s opening a tech hub in Austin bought the Fortigent platform in 2012. “They dipped a toe or two into the business, but it didn’t work out,” he said.

If the government lets the Schwab-TD Ameritrade deal go through, “It opens the door, so there’s room for another [major RIA] custodian and a sense of other opportunities,” the fintech guru said. 

“I’d be shocked if we don’t hear anything from LPL about this by year-end or early next year,” Bruckenstein added. 

It’s likely that with the COVID-19 crisis, LPL may have slowed down such an effort and/or is waiting for the right moment to announce it, he says. 

With the pandemic, “They do have more time to be deliberate about it,” the tech specialist said. “And as things change and unfold, that impacts their strategy. Taking it a bit slower is not a bad thing.” 

And, if LPL does move to expand its operations in this space sooner rather than later, “It could tip the needle in Schwab’s favor” in terms of government approval of its purchase of TD Ameritrade, he explained.

In a statement on the matter, the IBD explained its view: “We are already active as an RIA custodian, ranking as one of the largest custodians in the industry. We continue to see an opportunity to invest in how we serve independent RIAs.”

Small RIAs

According to Bruckenstein, Folio’s focus has been on small RIAs, where it can be tough to turn a profit.

But Goldman Sachs with the FinLife platform acquired from United Capital can work with RIAs to sell asset management, direct indexing and other products. “And then maybe, they can make money on these clients,” he said. 

Whereas Goldman can’t profit much on small trading or commissions today, it might be able to do so from special index funds and other products tied to its own (or acquired) intellectual property included direct indexing, “which is more personalized than ETFs.” 

“They could do this after they get RIAs on the FinLife platform with a unified managed account and financial planning built in, and they then charge a fee,” Bruckenstein explained. 

Direct Indexing Trend

This field has been disrupted over the past few weeks as Motif Investing shut down its platform for RIAs and moved these accounts to Folio Investing, which now will be shifting over to Goldman Sachs. 

Meanwhile, last week, Schwab struck a deal to buy Motif’s technology and hire its staff. That news came just two days after Schwab said it soon will let retail investors buy partial shares, or “slices,” of S&P 500 companies on its DIY platform.

Direct indexing’s momentum is finally “coming together,” Bruckenstein said. “I thought it would be a thing for a while, but the timing earlier was not right.”

Today, trading charges have dropped to near zero, fractional shares have piqued investor interest, and deals are moving along. 

“Before, the market wasn’t ready, but it is now,” he explained. “Schwab’s recent moves are an indication of that,” as is Goldman’s purchase of Folio.

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