Why Goldman Sachs just did its biggest deal in nearly 20 years as part of a pivot to less wealthy clients

Goldman Sachs agreed to pay $750 million in cash to buy United Capital, a registered investment adviser with 220 wealth managers and $25 billion in assets under management.The deal is the biggest for Goldman since its $6.5 billion purchase of Spear Leeds in 2000. It's scheduled to close in the third quarter. Goldman's purchase is part of a push to bring in more stable revenue, which is valued more highly by Wall Street analysts and investors than the more episodic revenue that comes from trading and private investing activities.The bank's stock has lagged broader indexes, in part because of its reliance on the types of volatile businesses that investors discount. Visit Business Insider's homepage for more stories.David Solomon is wasting little time. The Goldman Sachs CEO, an investment banker who took over from Lloyd Blankfein in October, signed the bank's largest deal in more than 15 years on Thursday, announcing the $750 million purchase of the wealth-management firm United Capital.The transaction is intended to fill in Goldman's wealth offering and bring in more recurring revenue to a firm that still gets more than 60% of its top line from trading and private investing activities. More broadly, the deal is a sign that Solomon and his management team of Chief Financial Officer Stephen Scherr and President John Waldron recognize that investors haven't given the firm credit for maintaining some of the highest returns in the industry, according to analysts.Over the past 12 months, the bank's share price has fallen 17%, compared with a 4.7% increase for the S&P 500 index. The shares rose 1.6% to $199.40 as of Thursday afternoon. “As the stock has underperformed despite solid ROEs, there is a realization the quality of earnings matters rather than the quantity,” Christian Bolu, an analyst at Autonomous Research, said in an interview before the deal was announced. “The sense of urgency has probably stepped up.”Read more: Human resources is the next battleground for Wall Street wealth advisers as Morgan Stanley and Goldman Sachs jockey over new turfThe deal is Goldman's biggest since the firm's 2000 purchase of Spear Leeds, done by another investment banker, Hank Paulson. That $6.5 billion deal was largely seen as a failure as trading began to move away from the floor of the New York Stock Exchange, one of Spear Leeds' specialties. Blankfein, a trader, steered clear of large acquisitions during his time as CEO.Despite the size of the transaction, some current and former Goldman employees worry that the bank needs a much bigger transaction to accelerate its transformation. What's Goldman Sachs getting with United Capital？United Capital is what's known as a registered investment adviser (RIA), which acts as a client fiduciary and tends to make money by managing assets for a flat fee rather than collecting trading commissions. The deal gives Goldman 220 financial advisers managing roughly $25 billion of assets across 90 US offices. The additional people will allow Goldman to scale its Ayco business, which offers financial, tax, and investments planning to C-suite executives through partnerships with their employers.Goldman will now have more people to service those corporate execs who may not be the most senior but still need complex financial advice and investments, according to a statement from the company. United Capital also brings a digital financial-planning tool that is expected to help reach a broader swath of clients. Ayco works with more 400 companies, including approximately 60 of the Fortune 100. Goldman signed a deal last year with Google to provide Ayco services to the tech giant's entire employee base.Ayco has dabbled in the RIA business in the past, though the firm's commitment to it has been uneven. A few years ago, in response to the Department of Labor's proposed fiduciary rule, the firm fired some of its RIA advisers, according to a person with knowledge of the matter. The bank has plans to offer a mass-market wealth-management offering through its Marcus digital bank and already manages more than $450 billion for ultra-high-net-worth clients from its private-wealth-management business. Ayco manages roughly $35 billion. “On the surface it helps them execute their stated game plan to widen their footprint in wealth management,” Shirl Penney, CEO of a tech and back-office-operations provider to the RIA industry, Dynasty Financial Partners, said in an email. “If they can get the divisions cooperating with each other there should be good synergy.”The acquisition will help accelerate Goldman Sachs' wealth plansThe United Capital purchase is not without risk, most notably around merging the cultures of the various groups and retaining talent, according to Mindy Diamond, the president of the financial-adviser recruitment firm Diamond Consultants.Goldman is already suffering from retention issues in its high-end private-wealth business, according to RIABiz. “Now you will bring in a mass affluent, down stream, down market alternative and if I am a Goldman adviser and positioning myself as the elite, I'm not sure how good I'm going to feel about that,” Diamond said. “Retention is the first concern.”Read more: Goldman Sachs execs are opening up about their plans for Marcus, and they think it can do to banking what iTunes did to the music industryIt's also not clear how United Capital's advisers will feel about being part of the Goldman enterprise. RIAs tend to think more independently and don't like being told to sell specific products. When Goldman purchased Ayco in 2003, the firm largely left it alone for the next decade or so, though in recent years some employees have chafed under what they described as a culture that pushed Goldman product. “While Goldman certainly understands wealth management, they have a successful and robust private-wealth unit, they don't understand the mass affluent client space at all,” Diamond said. One reassuring point: Joe Duran, United Capital's CEO, will join Goldman Sachs as a partner, according to a spokesman.