Can ‘White Glove’ Brokers Steal Fidelity’s Lunch?

High-end brokerage firms are seeing the appeal of being able to serve the middle and mass affluent markets, thanks in large part to the success of Fidelity and Charles Schwab.

According to Rob Foregger, co-Founder of Next Capital, one of the biggest but somewhat overlooked financial news stories unfolding right now is exemplified by the ongoing work of Goldman Sach’s young Marcus division.

The Marcus division, Foregger explains, has been working to reshape Goldman Sachs into a more “vertically integrated” investment company that seamlessly spans between mass market, mass affluent and high net worth.

“For decades, the large private banks and wirehouse brokers have focused on high and ultra-high net worth customers only,” Foregger tells PLANADVISER. “What these white-glove institutions failed to understand was the mass market and mass affluent customers of today are the high net worth customers of tomorrow.”

For its part, Goldman Sachs made the decision to enter the consumer finance sector back in 2015. In April 2016, Goldman Sachs Bank USA (GS Bank USA) acquired GE Capital Bank’s U.S. online deposit platform—a transaction that doubled the firm’s client count. This enabled Goldman Sachs, in turn, to provide an online bank for retail customers, offering savings products. Later that year, the firm launched the Marcus platform, initially offering no-fee unsecured personal loans. By the end of 2017, Marcus’ online lending platform originated $2 billion in loans, and the firm integrated GS Bank USA’s online deposit platform under the Marcus brand. Then, in April 2018, GS Bank USA acquired Clarity Money Inc., a personal finance management app, and thereby onboarded more than 1 million Clarity Money customers. Most recently, in August 2019, Apple Card launched in the United States, the result of a collaboration between the Marcus team and Apple—offering the first credit card product issued by Goldman Sachs in its 150-year history.

Foregger highlights this story because of the dramatic strategy shift it represents for Goldman Sachs.

“When we think about the motivation behind the recently announced acquisition of E*TRADE by Morgan Stanley, it’s very much a reflection of the same motivations driving Marcus,” Foregger says. “Both Goldman and Morgan Stanley have operated so high up in the wealth management market that it’s really remarkable for those of us who have long been in this space to see the change to a focus on mass retail.”

It seems clear at this juncture that both Morgan Stanley and Goldman Sachs are banking on strategies that will see clients graduate through various levels of services and products. In other words, it’s still an important goal for both companies to be serving the high-net-worth and especially the ultra-high-net worth clientele. This strategy simply ensures they will have access to the next generation of wealthy Americans as they are becoming wealthy—rather than seeing those dollars go to discount providers such as Fidelity or Charles Schwab.

“It’s interesting, right? This is a strategy that the Fidelity and Charles Schwab have been using for decades now, to their great benefit,” Foregger explains. “The reality is that, looking at inflows, Fidelity and Charles Schwab are absolute monsters now.”

Foregger says he remembers industry professionals—including the then-leaders of Morgan Stanley—opining back in the late 1990’s that these “upstart online brokers” would never amount to anything more than an “interesting niche play.” They would “never be primary asset gatherers.”

“Now in 2020 such comments look ridiculous,” Foregger laughs. “These large, historically high-end brokerage and advisory firms are finally coming to see how their lunch is being eaten, from a flows perspective. In that sense, these strategic shifts we are seeing across the industry are both offensive and defense.”

Foregger says it’s important to understand that Morgan Stanley or Goldman Sachs aren’t simply making a play to scale via “robo advice.”

“These firms are not just making a pure robo play,” he says. “Yes, they see the future is tech-based, but it’s not tech-only. It’s tech plus a human touch. The other dimension at play here is being able to integrate other services into the business model beyond pure investment services—things like health care savings, consumer loans, etc.”

Foregger believes this trend can only accelerate in the future—a fact which may frustrate independent advisers or brokers that are facing a consolidating provider landscape.

“There are a lot of advisers that are frustrated about the consolidation of custodial services, but I don’t think that will lead to any successful anti-trust action to halt these deals,” Foregger says. “More choice will come up in the custody area as needed, I believe. You will see the launch of new tech-driven systems, for example, if they are truly needed.”