Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Wall Street's biggest banks are in a bright spot after years of massive layoffs and pay cuts. The same cannot be said for the largest asset managers.

On Friday, JPMorgan Chase & Co. and Bank of America Corp. reported generally positive fourth-quarter earnings, with debt-trading revenues surging amid volatility after Donald Trump's election as next U.S. president. BlackRock Inc., on the other hand, reported a mere 1 percent rise in revenue, below analysts' estimates, despite receiving piles of new money from investors.

Hitting a Peak
BlackRock's net income has dipped even as its assets under management soar
Source: Company filings, Bloomberg

While big banks are reaping the rewards of more efficient trading units and rising yields, BlackRock and other investment firms are struggling to find the right model as investors demand ever-lower fees. It's hard to see how even the most-dominant money managers will avoid steeper staffing cuts and some big structural changes going forward.

BlackRock, the world's biggest asset manager with $5.2 trillion under management, is a great example. Last year, most of the money it attracted came through low-fee exchange-traded funds, with its iShares division attracting an unprecedented $140 billion of new money. In order to keep amassing assets, the New York firm has engaged in a fee war with its rivals, which will only further curtail revenues.

Asset Surge
BlackRock's assets under management have swelled in recent years as investors flood into ETFs
Source: Company filings, Bloomberg

BlackRock is the first big U.S. money manager to report fourth-quarter results. As my colleague Eric Balchunas highlighted Friday, it's unlikely this trend toward lower-fee strategies will end anytime soon. 

BlackRock decided to trim its staff last year, which was unusual for the rapidly growing firm. It's easy to imagine another round of cuts. But that can't be the whole solution. Behemoth asset managers in general are being forced to rethink their businesses more profoundly. 

Some certainly already are, with a growing number expanding their ability to give investors access to markets that are out of reach for ETFs and passive funds, such as real estate and private debt. Pimco, for example, is expanding its relationship with Solar Capital Partners. Legg Mason recently purchased a stake in real estate investment firm Clarion Partners.

BlackRock has also earned money with its Aladdin platform, which helps investors manage and execute trades in real time. Aladdin, which caters to firms including other asset managers and insurers, brought in $594 million of revenue last year, up 13 percent from a year earlier.  

The more large asset managers lend directly to companies and earn fees from trading activity, the more they'll resemble the big banks that once served them. Five years ago, that might not have been such a great thing. Wall Street firms were eliminating thousands of jobs, selling entire units and moving more of their activity to electronic systems. 

But now the pendulum has swung back. JPMorgan reported a 31 percent increase in fixed-income trading revenue in the fourth quarter, exceeding analysts' estimates. Bank of America predicted that its net interest income, or money it generates from making loans and holding debt, will jump by $600 million in the first quarter, more than some expected.

Big asset managers will likely shrink in coming years. But they're also going to go after these traditional banking revenues as fees keep coming down. The hot seat has shifted, and now its investment firms' time to sweat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net