The CEO of the world's largest money manager said the company's revenue will increasingly come from software and technology rather than traditional money management.
This analyst blog is part of our coverage of the 2017 Morningstar Investment Conference.
The morning after Vanguard founder Jack Bogle extolled the virtues of mutually-owned asset management companies, Larry Fink, co-founder, chairman, and CEO of BlackRock, defended the business model and structure of the world's largest money manager.
In a video address to the audience of the 2017 Morningstar Investment Conference on Thursday night, Bogle said it is hard to serve two masters. It's a criticism the founder of Vanguard, which is owned by its fundholders, has often lobbed at publicly traded asset managers; they face an irreconcilable conflict of interests between their profit-seeking public shareholders and their fee-paying clients, he argued.
When asked about Bogle's comments during his keynote presentation on Friday morning, Fink contended BlackRock has had to be more adaptive, innovative, and client-focused since it listed its shares on the New York Stock Exchange.
"I ran a private company. I've run a public company. Jack has only run a private company, so he's only speaking from one lens," said Fink.
Fink boasted BlackRock's market capitalization has grown faster than Google parent Alphabet GOOGL, rising from $1 billion to about $65 billion. Public ownership has forced the $5 trillion in assets firm to be more transparent, adaptive, strategic, and mindful of clients and shareholders, Fink said.
"We have a long-term strategy, but you have to bob and weave around it," he said. "I am absolutely convinced we are who we are because we are public."
BlackRock continues to evolve, Fink said. He confirmed that more of the company's revenue, perhaps as much as 30%, will come from software and technology rather than traditional money management within five years. "We believe the world is changing and the asset management industry is changing," Fink said.
The firm is making the propriety risk analysis and asset management software that has been part of its operational DNA since its founding available to advisors via Aladdin for Wealth Management and FutureAdvisor, a digital financial advice engine the firm acquired in recent years. BlackRock also is allowing custodial banks direct access to clients through Aladdin. The firm has regular "hack-a-thons" in which young programmers are encouraged to develop new technology products for future investments, and Fink said BlackRock could make one or two technology-related acquisitions in the future. Such activity is needed to keep pace with the financial industry trends, including the need for more advice, lengthening life spans, the replacement of defined benefit with defined contribution retirement plans, and rising rates of financial illiteracy.
"We are trying to evolve. We need to be closer to our clients and for us that means closer to the advisor," Fink said.
These trends, plus the seemingly inexorable migration of assets from active to passive strategies, will drive consolidation in the asset management industry, Fink said. But it may not happen as quickly as many predict, and it may not be that great of an idea.
A rising market has swelled assets under management via appreciation; that may forestall some hard, strategic decisions. "There's more talk than substance about mergers, but it will be a tougher business," Fink said.
Firms that decide to merge should do so for bigger reasons than cutting costs and gaining scale, said Fink, who assembled BlackRock through several combinations, including the purchase of iShares and Barclays Global Investors, and Merrill Lynch Asset Management.
"Let's be clear about mergers. They suck. They're hard. They take years of your life off. They're really hard," Fink said.
BlackRock acquired companies to expand its product lineup, capabilities, and geography, not just for efficiency, he said. It's very difficult to create a unified culture and sense of ownership and belonging among employees when consolidating for consolidation's sake, Fink said.
"Consolidation is really hard to execute. It's really hard to do that. I can't see how that is a good outcome," said Fink, adding that BlackRock has succeeded because it "had advantages no one else had", such as a common technology platform in Aladdin.
In other topics during his wide-ranging conversation with Morningstar's global head of manager research, Jeff Ptak, Fink attributed Friday's disappointing U.S. GDP numbers to corporate CEOs and consumers pausing to see how the Trump administration's ambitious healthcare, tax, and trade agenda fares. But, he added, "There are lots of people in the world who think the U.S. is less welcoming."
Allowing corporations to repatriate foreign profits at a lower tax rate, something that could be part of future tax reform, is unlikely to spur much corporate investment, Fink said. Even companies with earnings "trapped" overseas by prohibitive U.S. tax rates could have or should have financed investments already by borrowing at historically low interest rates, he said. Most repatriated earnings would go toward stock buybacks and dividends, he predicted. The only way to stimulate the economy in this way was to direct the proceeds on any tax on repatriated profits to infrastructure projects, Fink said.
Finally, Fink said BlackRock's recent decision to move 11% of its active equity assets under management from bottom-up stock-pickers to quantitative strategies as part of a broader stock fund realignment was not a sign that he and his firm has given up on traditional active management. It's an effort to use its scale to exploit rapidly proliferating data sources for insights that can be shared across the firm's equity teams.
Fink, however, did joke, "I'm truly looking forward to a machine replacing the CEO."