BlackRock Inc. (BLK), the world’s largest money manager, became a Wall Street behemoth by serving institutional clients. Now it’s devoting more of its time to individual investors.
As part of that plan, the New York firm is looking to its San Francisco-based iShares unit to attract more financial advisers and individual investors in the so-called retail market -- rather than the pensions, endowments and institutions that serve as BlackRock’s main customers.
Michael Latham, chairman of iShares, has embarked on a strategic review of the business, with the goal of better capitalizing on its exchange-traded funds. With ETFs, investors can buy baskets of securities or other assets and trade them on exchanges like stocks. Latham, who was chief executive officer of the unit until the review was announced last month, is betting that individual investors and advisers will embrace ETFs as part of shift to more passive investing, rather than active stock and bond picking.
“Over the next five to 10 years, retail markets will understand the value of mixing passive and active together,” Latham said. “IShares will be a great way for them to get that exposure.”
BlackRock, which manages almost three-quarters of its $3.66 trillion in assets for institutional investors, entered the ETF business with its December 2009 takeover of Barclays Global Investors and its iShares unit. The deal was designed in part to help the company reach Main Street investors, BlackRock Chairman and CEO Laurence Fink said when the purchase was announced.
Index strategies, which use “passive” investing, make up about 6 percent to 8 percent of total assets among retail investors, compared with about 30 percent among institutional investors, Latham said.
The challenge: BlackRock may have trouble taking on rival asset managers with similar products and higher recognition among investors and advisers, said Scott Burns, head of ETF research for Morningstar Inc., a Chicago-based firm that’s tracked the mutual fund industry for 20 years. Many smaller advisers prefer products from Vanguard Group Inc. and other firms, he said.
Vanguard and Charles Schwab Corp. (SCHW) have cut prices to get investors to use their ETFs. Vanguard’s emerging-market ETF topped BlackRock’s comparable fund earlier this year in size, becoming the third-largest U.S. ETF at the time, by charging an annual fee that’s less than half as big.
“Honestly, a passive broad-based index ETF is a commodity product,” Burns said. “They’re trying to distinguish themselves on service, research information or liquidity, and keep the focus away from cost.”
BlackRock won’t compete on price, Latham said. Instead, it will offer better selection and a product that more closely tracks the prices of the underlying securities, and spend time showing investors that total expenses, including trading costs, are more important than annual fees when choosing ETFs.
The company cut annual fees last year on its iShares Comex Gold Trust ETF to 0.25 percent of assets from 0.4 percent. Even so, iShares’ prices still may not be competitive.
“The pricing of iShares is a problem,” said Patricia Dunn, who gave the green light for the iShares business plan when she was CEO of Barclays Global Investors in 1999. “The broader market is going to look at price first, second and third.”
A big part of Latham’s approach will be using brokerage promotions and education to persuade consumers to try ETFs, which generally offer cheaper fees, tax efficiency and better liquidity. A major partner is TD Ameritrade Holding Corp. (AMTD), which offers more than 100 ETFs selected by Morningstar that customers can trade without paying commission, according to TD’s website. The list includes 46 ETFs managed by iShares and 32 offered by Vanguard.
“At the end of the day, it’s like any consumer product,” Latham said. “You can have the best product, which again I’m confident we do, and you have to couple that with really good promotion and education so people understand you have the best product.”
Latham declined to provide details on iShares’ plans for advertising or marketing campaigns.
ETFs have a number of advantages over mutual funds, industry analysts said. When mutual funds buy and sell securities, the trades generate a tax gain or loss for the fund’s investors, regardless of whether they’ve changed their holdings of the fund. Those are taxes that ETF investors avoid since the funds act more like stocks, with investors generating tax implications mostly when they change their holdings of the ETF.
ETFs also offer daily transparency and can be purchased by any investor with a brokerage account, while some mutual funds are offered only by specific providers or 401(k) retirement plan administrators and have holdings that are more opaque. ETFs, which are traded on an exchange, also provide more liquidity than an investment in mutual funds and offer greater choices of industries and asset classes, Burns said.
“If it’s 10 a.m. and I want to sell, with ETFs I can do it immediately,” Burns said. “If it’s 10 a.m. and I want to get out of my mutual fund, I have to wait until the end of the day and maybe the market drops another 700 points.”
IShares’ U.S. ETFs have attracted $10.3 billion in new money this year through August, compared with $25.4 billion at Vanguard, $1.8 billion at Schwab and $6.6 billion at State Street Corp. (STT), according to data from Morningstar. ETFs held about $1.09 trillion in assets in the U.S. through July, according to the Investment Company Institute in Washington.
“Especially among individual investors, the usage and ownership is really low,” Beth Flynn, vice president of ETF platform management at Schwab, said in a Bloomberg Radio interview. “As more and more people understand the potential benefits that ETFs can offer them in their portfolio, we’ll see more clients adopting them.”
IShares also is moving into “active” ETFs, which seek to combine the skill of a manager selecting investments with the benefits of ETFs. BlackRock is betting that it can package the strategies of its top portfolio managers and distribute them more widely through ETFs, said Jim Wiandt, publisher of industry tracker IndexUniverse.com.
Last month, BlackRock applied to open 13 actively managed equity ETFs that wouldn’t disclose their holdings daily, according to a regulatory filing. The firm already has permission to sell active ETFs that offer daily transparency.
“We have more experience than anyone else in this business,” Latham said. “We have more products and more breadth of product than anyone else in this business. We will continue to promote the benefits of iShares to the direct retail market. It’s a huge opportunity.”