Wirehouses. RIAs. Fidelity. If you ask BlackRock, most major broker-dealer platforms are good partners and friends — and driving consistently more money to the world's largest asset manager. But what about its rival Vanguard?
Asked this week
how the firm's strategy varies from that of Vanguard, a senior
BlackRock executive said that his firm is best suited to be a leader in educating investors and advisers about exchange-traded funds.
“This is something that many of the other issuers of ETFs really don't think about. They're out selling product, we're selling a solution, and ETFs are part of that solution,” said Robert S. Kapito, BlackRock's president. “It's a very different strategy than Vanguard ... they're a good firm, so we're glad to compete with them.”
Mr. Kapito's remarks came Wednesday as the world's largest money manager said earnings rose nearly 11% to $808 million in the second quarter. The report beat analysts' estimates and its stock trended slightly higher in early-afternoon trading in New York.
BlackRock Inc. said earnings were helped by inputs totaling $13.1 billion to its mutual fund unit and nearly $30.5 billion into its iShares exchange-traded fund business during the quarter.
That lifted the mutual fund unit's assets to nearly $535 billion and the iShares unit to nearly $994 billion.
Altogether, that brings BlackRock's
retail funds business to $1.5 trillion and the overall business to nearly $4.3 trillion, as of the end of June. In comparison, Vanguard, the number one fund sponsor, manages more than $2 trillion in ETFs and mutual funds.
But BlackRock is locked in tight competition, dollar for dollar in many cases, with Vanguard — a fact brought up by an analyst during the earnings call.
“I've heard some wirehouse distribution executives over the years lament that Vanguard products basically free-ride on the wirehouse distributors who have to custody their products as a courtesy to [financial advisers] and clients, and so I wonder do you see any specific opportunity based on your willingness to partner more directly with those firms — to pay channel access fees, etc. — does that give you an opportunity to supplant some of the market share they've acquired,” asked Luke Montgomery, an analyst for Sanford C. Bernstein & Co., Inc., a research firm.
That question led to Mr. Kapito's remarks about education. But the executive sidestepped the question of whether paying platforms for access to their customers could help capture share from the Vanguard Group Inc., which eschews the practice.
Over the past year BlackRock has redefined, in some senses, the way it approaches advisers and the platforms they use. BlackRock has combined its mutual fund and ETF wholesaling operation, and compensation for its wholesalers is now more tied to long-term results than short-term sales. BlackRock executives said the shift will allow the firm's wholesalers to communicate more with advisers about portfolio construction strategies.
But it has maintained close ties with Merrill Lynch, the wirehouse now owned by Charlotte, N.C.-based Bank of America Corp., from which BlackRock acquired a large part of its mutual fund business in 2006. The firms have had a “global distributional agreement” ever since — the agreement has been extended to run at least through 2016. As part of the terms of the agreement, BlackRock has paid Merrill more than $2 billion in distribution and servicing costs since 2006.
According to New York-based BlackRock's filings with securities regulators, “a significant portion” of its revenue “has historically come from [assets under management] generated by Merrill.”
But Mr. Kapito, who helped found BlackRock, then a small bond manager, in 1988, said the firm has substantially increased other third-party relationships, particularly with
platforms used by wirehouse and independent registered investment advisers.
Mr. Kapito said Wednesday “our market share at some of the large wirehouses beyond Merrill Lynch has more than doubled over the last two years.”
Wirehouses including Morgan Stanley Wealth Management and UBS Wealth Management Americas did not respond to a request for comment. Wells Fargo Advisors spokesman Anthony Mattera spokesman declined to comment.
“We do not pay for distribution at Vanguard, and that's just one of our business strategies,” said Jim Rowley, senior investment analyst for Pennsylvania-based Vanguard's investment strategy group. “It is a form of competition in the marketplace and it's one we choose not to participate in.”
Mr. Rowley said the firm does focus on education in its outreach about ETFs — citing their web platform, a quarterly publication and a program that offers continuing-education credits.
Of late, BlackRock has also built a relationship with another Vanguard rival,
Fidelity Investments. As part of their arrangement, BlackRock pays Fidelity, which promotes its funds — and makes them available without the typical transaction commissions — to millions of retail investors as well as about 3,300 firms on its adviser custody platform, representing 1.1 million clients at the end of last year.
BlackRock also
provides a managed-account service to some Fidelity clients and manages Fidelity-branded sector ETFs, which are less than a year old and have gathered more than $1 billion in investors' money.
“Our relationship with Fidelity is strong, growing and it's a very good partnership,” said Laurence D. Fink, BlackRock's chairman and chief executive.
Boston-based Fidelity did not respond to a request for comment.
