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Goldman's wealth management unit shows dip amid tough quarter

ByDan Shaw
July 19, 2023 4:45 PM
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Goldman Sachs saw the net revenue from its wealth management division stagger slightly amid a difficult quarter for the storied Wall Street dealmaker.

In the weeks leading up to the release of its earnings on Wednesday, Goldman had been taking the unusual step of warning investors and analysts to brace themselves for lackluster results. In a quarter that saw the firm's overall earnings decline by 58%, its wealth management division's net revenue fell 4% year over year to nearly $3.05 billion.

The decline resulted mainly from "higher net losses in equity investments, significantly lower incentive fees and significantly lower net revenues in debt investments," Goldman said in a supplemental statement. 

The equity and debt losses were both driven by declines in its real estate holdings, Goldman added. Writedowns on those investments resulted in a $1.15 billion pretax earnings hit.

Goldman has been moving forward with a plan to rely less on investment banking and other parts of its business that are highly susceptible to volatile market conditions and more on steady revenue producers like wealth management.

Read more: Morgan Stanley headed for $10T of assets in just over five years, as wealth unit adds nearly $90B

CEO David Solomon said in the firm's earnings call Wednesday that one bright spot for Goldman in an otherwise difficult quarter was the firm's "scaled asset and wealth management platform that continues to show very strong underlying trends aligned with our investor day goals with growth in both recurring revenue in management and other fees, and private banking and lending."

Scroll down for more highlights from Goldman Sachs' wealth management divisions' second-quarter earnings. To read about its first-quarter results, click here. For the fourth quarter of 2022, click here. 

Note: The company doesn't break out most specific metrics for its wealth management business, including the number of financial advisors and client assets at the former United Capital and the level of custodial holdings in the unit once called Folio Financial. Unless otherwise stated, the metrics below relate to Goldman's Asset & Wealth Management segment.

Wealth and asset management client assets

Goldman's assets under supervision rose nearly 9% year over year to a record of $2.71 trillion on $42 billion of growth in the quarter. Of that total, $30 billion came from appreciation in equity markets.

Goldman's alternative assets under supervision rose by 5% year on year to $267 billion, its equity holdings by 14% to $627 billion and fixed-income holdings by 5% to nearly $1.06 billion.

Management fees

Goldman's management and other fees increased by 8% year over year to a record of $2.35 billion in the second quarter, a result mainly of the firm having more assets under supervision.

Beyond that, Goldman's management fees and other business from alternative investments rose 12% to $521 million.

Private banking and lending revenue

The unit's business from private banking and lending surged by 62% year over year to a record of $874 million in the quarter. Goldman attributed roughly $100 million of that to the sale of loans from its Marcus consumer-lending unit. Goldman recently decided to stop using Marcus to offer personal loans as it overhauled its plans to offer retail-banking services. Last quarter, Goldman's partial sale of its Marcus loan portfolio caused it a $470 million loss. 

The big upswing in the private banking and lending results were also attributed to "higher deposit spreads and balances."

Wealth and asset management earnings

For the quarter, the unit generated a net earning loss of $208 million on its revenue of $3.05 billion. In the second quarter of last year, it had only produced a "non-material" amount of profit, according to the firm's investor presentation. 

Its operating expenses rose by 16% to $3.28 billion in part because of a $485 million writedown on real estate investments. Denis Coleman, Goldman chief financial officer, said in the earnings call that roughly $305 million of that was from markdowns on commercial office holdings in a private portfolio. And about $100 million, he said, came from the sale of "historical principal investments" from a public portfolio.

Coleman said the holdings in the public portfolio have been reduced to roughly $1 billion from $4.5 billion in 2021. Goldman has been trying to shield itself from volatility in recent years by relying less on investments on its own balance sheet and more on fees from investing money for other institutions.

Remark

Coleman implied in the earnings call that the wealth management division's setbacks this year will be temporary. 

"In aggregate the results from Marcus loans and the losses from our historical principal investments negatively impacted our margins for this segment by approximately 15 percentage points for this first half of the year," he said.
Dan Shaw
Reporter, Financial Planning
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