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Will Goldman Sachs be the next big custodian?

Goldman Sachs has made incursions into the high-net-worth RIA world with its purchase of Ayco, and planted its flag in aggregator turf with its buy of United Capital.

Could RIA custody be next on the list?

Perhaps, said Shirl Penney, CEO of Dynasty Financial Partners, at the SourceMedia In|Vest Conference. But not anytime soon.

“The traditional custodian business — I think that's a ways away,” he said. “There's some huge scale players in that space. Goldman's a smart firm. I don't think they're going to answer too quickly without doing some more research.”

Shirl Penney, left; Charles Paikert, right.
Shirl Penney, left; Charles Paikert, right.

Right now, Penney opined, Goldman may be more focused on building a national RIA brand.

“I think it will be done ultimately under the Goldman brand. If you watch what they're doing on the branding side, it's a pretty hard Goldman sticker there, but they have a lot of resources they'll put behind it,” he said.

Penney added that its success in that endeavor will depend on how fast the firm can roll up RIAs.

“There's a significant opportunity there with a lot of principals getting along in years and looking for a succession plan, so that's part of their strategy,” he said. “I think they can really broaden that footprint and become a pretty significant retail wealth management player if they would like.”

Even so, Penney said he wouldn’t bet on Goldman becoming the country’s leading RIA firm in the next two years — nor on Merrill Lynch entering the RIA market in the same time frame.

Regardless of whether the firm can build national RIA status, the $750 million United Capital deal was a clear indicator of the RIA industry’s monetary value.

“I think it's just the tip of the iceberg. You're going to see a lot more significant scale players coming into that arena,” Penney said.

Indeed, there have been record-setting purchases happening in the RIA space. This year is set to break records by surpassing 200 M&A deals.

“The valuations, I think, are more than a bit stretched,” Penney said, noting that Dynasty has “stretched more than we have historically, and we’re still getting outbid.”

Penney estimated there to be about 15 buyers for every seller in the marketplace, “which is part of what's making it so difficult to transact in a somewhat rational way,” he said.

A market downturn would cause valuations to become more reasonable, Penney said, recommending that entrepreneurs caution against thin margins and practice stress testing.

“I think if you don't have a five-year economic model, you're doing yourself a disservice,” he said.

Beyond M&A, strategies at companies across the ecosystem are adjusting to meet the needs of the RIA marketplace, according to Penney.

“I see asset managers double and triple their staff going after the RIAs, and technology service providers targeting it,” he said. “Obviously custodians are investing more. The banks and wirehouses are thinking through their strategy and how they come into the space. There's new entrants that are roll ups. There's national RIA firms that are coming in. There's more capital than ever.”

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