A throwaway comment from Goldman Sachs' CFO shows how automation is changing Wall Street
Goldman CFO Marty Chavez.Goldman Sachs
- Goldman Sachs CFO Marty Chavez on Tuesday provided a window into the dramatic shift taking place across Wall Street as technology touches everything from trading to investment banking.
- The CFO’s comment, made during a second quarter earnings call with analysts, suggests that the firm is beginning to move away from a decades-old focus on the compensation ratio.
- The significance of the comment cannot be overstated at a firm where the ratio has been a key metric, both for insiders as well as investors, since its beginnings as a public company in 1999.
One simple 31-word comment made by Goldman Sachs Chief Financial Officer Marty Chavez shows just how much technology is changing Wall Street. “As we continue to build scale and platform businesses, there is a natural migration from compensation to non-compensation expenses over time,” Chavez said Tuesday on the firm’s second-quarter conference call. “To ensure a disciplined approach, we monitor our costs holistically.” To understand the significance of these words, consider that they’re being spoken by an executive at Goldman Sachs. The same investment bank that paid its people more than $16 billion in 2009 and where making partner is generally considered one of the plummest jobs on Wall Street, largely because of how much it pays.
Remember also that for generations, investment banks have relied on the adage that firms are only as good as their assets and the assets walk out the door each evening. And so they rely on generous compensation packages to attract and retain the best talent. But Wall Street is changing, and Goldman along with it. The firm’s compensation ratio plunged to 39% in the first half, down from 41% in the first six months of 2017, even as staff increased in the second quarter. Non-compensation expenses, on the other hand, rose in part on investments the firm made in technology improvements.
At Goldman, where the firm’s money-minting trading business continues to search for an answer to a years-long slump, the firm is pushing into digital consumer banking. It’s looking for ways to deliver more products and services to institutional clients. And it’s entering businesses long dominated by larger commercial banks, such as credit card lending and cash management, under the theory that technology has suddenly put what may have once been unassailable market positions up for grabs. To do that means spending more on engineers and computer systems, which is what Chavez was getting at with his comment. It could be put another way: as technology changes everything from securities trading to deal advising, it will require fewer humans. And compensation costs will come down with the headcount.
But machines don’t work for free. And some or all of that will be offset by an increase in non-compensation costs, including technology spend.
At Goldman, the change began under current CEO Lloyd Blankfein, and its expected to continue, if not speed up, under incoming CEO David Solomon. The new chief has been a big champion of the firm’s digital consumer banking product, Marcus, and he pushed the investment banking division to think about ways to do more with technology. It’s also a secondary sign of how the notoriously secretive Goldman is opening up and sharing more financial details with investors. The bank has been making a concerted effort over the last year or so to solicit investor and analyst suggestions for how it can disclose more about its financial condition, according to a person with knowledge of the effort.
Chavez on the call today spoke to the bank’s willingness to hear feedback and suggestions from the investment community.
“For all of us at the firm, disclosure is a huge priority and we’re open to any and all suggestions and recommendations from you, the analysts, from our investors and we’re taking them onboard,” he said.
One of those new metrics is the efficiency ratio, which lumps compensation and non-compensation costs together and compares them to total revenue, to come up with a measure of how much it costs to produce one dollar of revenue. It’s a metric that’s been long used by commercial banking competitors and one that Goldman has only started disclosing in recent quarters.
It’s just another sign that Goldman, that venerable Wall Street institution, is changing for the new environment.
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