Acquired
02:47:51 · Ben Gilbert, David Rosenthal
[02:47:51] S0: Yep. It is an inherent trade off in the model. You don't have as much money in the kitty to build the best in class technology platform or the best in class customer service. You could, but you probably need to raise prices a little bit, and they just need to get comfortable with that. [02:48:05] S1: Yep. Yep. So that's the Fidelity story. The BlackRock story is different, but also rooted in ETFs, and in BlackRock's case, directly rooted in ETFs. So in 2009, during the depths of the financial crisis, BlackRock made a fantastic acquisition of a business called iShares Yeah. From Barclays, and this is all directly related to the crisis. So Barclays had acquired the pieces from a few different banks and financial firms, but really assembled iShares earlier in the decade. And iShares had become the leader in ETF issuance. When Barclays took over the failed Lehman Brothers assets, they needed to raise capital to shore up their capital base, and they had to put iShares up for sale as part of it. BlackRock came in and acquired it, and it has been just, like, a slam dunk, huge, huge win for them. Coming out of the financial crisis, you know what retail investors decided they liked even more than the Vanguard story and the simplicity and the folksiness of the Vanguard index mutual funds? They liked a lot of ETFs that they could trade on their own and make all sorts of Wall Street bets style fancy bets on the market. [02:49:37] S0: That's right. Because even Vanguard only has a few 100 funds and ETFs today, whereas BlackRock has tons of ETFs. Right?
02:49:37 · Ben Gilbert, David Rosenthal
[02:49:37] S0: That's right. Because even Vanguard only has a few 100 funds and ETFs today, whereas BlackRock has tons of ETFs. Right? [02:49:48] S1: Yes. 1,400 total ETFs. Like, really custom In aggregate totaling 3,300,000,000,000 in ETF assets under management, which is the largest player [02:50:00] S0: in the market by far. Across a bunch of different strategies and sectors and stuff that Vanguard has always been religiously against. [02:50:08] S1: Yes. Reluctant to pursue. [02:50:10] S0: Yeah. [02:50:10] S1: Yep. So, yeah, Vanguard is today the number two player in ETFs, but smaller both number of funds and then assets under management, and BlackRock continues to kinda accelerate away from them, which again, right now, the ETF market is smaller than the traditional mutual fund market that Vanguard still dominates. But the ETF market is still growing 30% every year, and BlackRock is starting to run away with it here. [02:50:37] S0: And BlackRock is also very diversified. Vanguard is a competitor with a slice of their business, but they're just in so many different sectors. [02:50:44] S1: Not to mention [02:50:45] S0: private assets. International. BlackRock is way more international than Vanguard is in terms of, the client base that they work with.
02:50:45 · Ben Gilbert, David Rosenthal
[02:50:45] S0: private assets. International. BlackRock is way more international than Vanguard is in terms of, the client base that they work with. [02:50:53] S1: Yep. Similar again though to the Fidelity strategy, BlackRock's profits elsewhere in the business allow them to subsidize the ETF business and just win massive amounts of clients. Yep. So all of this raises an interesting question here at the end of the story. Does Vanguard's no profit mutualized model actually hold it back today relative to Fidelity and BlackRock? When we started the process for this episode, Ben and I originally thought that the question of the episode was gonna be, how do Fidelity and BlackRock continue to exist at all despite Vanguard's, you know, obviously superior model? [02:51:40] S0: Right. And to put a finer point on obviously superior, it was with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so. Yep.
02:51:40 · Ben Gilbert, David Rosenthal
[02:51:40] S0: Right. And to put a finer point on obviously superior, it was with Vanguard undercutting them on price and being structurally incentivized by their shareholders to do so. Yep. [02:51:52] S1: Yep. And we kind of had to change it here as we went through the research of, oh, actually, Fidelity and BlackRock are doing so well. Is the question actually flipped that Vanguard's model is holding it back? I don't exactly know the answer, but what I will tell you to bring us to today here is that twenty four months ago, in May 2024, Vanguard made another big CEO announcement that they were bringing on the first outside CEO in the firm's entire fifty year history, Saleem Ramji from BlackRock where he was, until that point in time, head of the iShares division. So that really says a lot right there. And the question is, can he fix the challenges that Vanguard is facing right now? [02:52:45] S0: And and to itemize those, it's what? Customer service, technology. [02:52:50] S1: And this situation where they found themselves that because of ETFs, their competitors or, quote, unquote, competitors can access their funds easily and in sort of a open garden on their own platforms where they will then profit from the customer relationships with those fund holders.
02:52:50 · David Rosenthal, Ben Gilbert
[02:52:50] S1: And this situation where they found themselves that because of ETFs, their competitors or, quote, unquote, competitors can access their funds easily and in sort of a open garden on their own platforms where they will then profit from the customer relationships with those fund holders. [02:53:11] S0: Yeah. In in in in other ways. See, I don't view that as a problem. I think, like, if you're Vanguard, you're delighted to get the business to have people buying Vanguard funds on Fidelity. But there is a vulnerability of you actually don't have a relationship with those customers, but and they have a relationship with with Fidelity. [02:53:28] S1: Yep. And they can easily trade in and out of your funds whenever they want, and their advisers on those other platforms might one day advise them to. [02:53:36] S0: Yep. Gee. Wouldn't it be smart to have a giant advisory business of your own to build the direct relationship with those customers? [02:53:44] S1: Right. So, yeah, what does Saleem do when he comes in?
02:53:44 · David Rosenthal, Ben Gilbert
[02:53:44] S1: Right. So, yeah, what does Saleem do when he comes in? [02:53:48] S0: Well, I think it's some of these things we've been talking expand the advisory business. In addition to that, expand fixed income, which we haven't talked about in a while. Try and expand into retirement, where, obviously, Fidelity has really knocked it out of the park. He's talked on podcasts about making deeper technology investments and improving the client experience. There is this interesting question, which is that they haven't really had any new innovations in a while, call it a decade, that have been really meaningful to the business and that they've continued to scale. They did buy a direct indexing platform called JustInvest, but afterwards haven't done that much with it. Similarly, the personal adviser services grew really fast at launch and then the in the years afterwards. But since COVID, I don't think [02:54:33] S1: They have been mostly flat. [02:54:35] S0: Yeah. Or at least they haven't been putting out any press releases talking about how big it is getting. One interesting one that I was surprised to see is an expansion into private equity. [02:54:45] S1: Yeah. Yeah. That was surprising.