Larry Fink (BlackRock Co-founder) – Investing and BlackRock Culture (2020)

Chapters

Abstract

The Evolution of BlackRock and the Transformation of Financial Services: Balancing Technology, Risk, and Culture in a Shifting Landscape

Abstract:

This comprehensive article explores the intricate journey of BlackRock, from its humble beginnings to becoming a pivotal player in the financial services industry. Emphasizing the critical role of culture, risk management, and technological innovation, we delve into the experiences of BlackRock’s founder, Laurence Fink, and the broader implications for the wealth management sector, especially in light of evolving regulations and market dynamics. Additionally, we address the challenges faced by capitalism and democracy in the modern era, underscoring the urgency for government action in economic re-engineering and infrastructure development.

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Genesis and Philosophy: The Birth of BlackRock

BlackRock’s inception story is a testament to the vision and resilience of its founders, particularly Laurence Fink. The firm emerged from a distinct culture, one that valued collaboration and a non-competitive stance with its clients. BlackRock was founded by a group of eight individuals, including Laurence Fink, who left a large firm to start their own company. The company’s early success was driven by its focus on client service and its commitment to avoiding competition with clients. BlackRock’s initial asset base was small, but it grew rapidly through a combination of organic growth and industry consolidation. Fink’s experience at First Boston, marked by a significant financial loss, greatly shaped BlackRock’s emphasis on risk management, a principle that remains central to its operations.

Cultural Integrity and Client Focus

Fink’s departure from First Boston and the subsequent formation of BlackRock were driven by a desire for a partnership-based, collaborative culture. This approach was in stark contrast to the fragmented partnership and lack of collaboration he witnessed during crises. Fink’s interactions with John Stumpf of Wells Fargo further highlight the complexities of maintaining a consistent and ethical culture across large organizations. BlackRock’s commitment to a unified technology platform for risk management and general ledger is a testament to its dedication to a cohesive culture.

Regulatory Changes and Investment Strategies

The introduction of the Department of Labor’s fiduciary standard represents a significant shift in the wealth management industry, paralleling the Dodd-Frank Act’s impact on banks. This new standard, emphasizing the client’s best interest, is reshaping investment strategies, notably propelling a move from active to passive investing. The underperformance of active managers, even in high-yield fixed income, underscores the challenges they face in the current market.

The Impact of the DOL Rule on Wealth Management:

The DOL rule elevates the standard of care for wealth managers from suitability to fiduciary, requiring them to act solely in the best interest of their clients. This shift from suitability to fiduciary increases legal liability for wealth managers, potentially leading to more lawsuits and changing the roles of financial advisors. The rule may also result in centralized investment decision-making, a shift towards passive investments, and potential benefits for active managers due to reduced competition.

High Yield Index Performance:

In 2016, the high yield index performed exceptionally well, with only 4% of high yield managers outperforming the index. However, many managers underperformed due to avoiding sectors like energy, which was included in the index.

Fee Structures and Economic Impacts

The shift in investment strategies is also influencing the fee structures within the industry. BlackRock’s initiative in reducing custodial fees reflects broader trends in fee compression, a response to lower returns and changing market dynamics.

Impact on Mediocre Managers and Fees:

Mediocre managers will face challenges due to underperformance, while successful managers may see increased flows. Fees across the industry are expected to decline, benefiting clients but affecting the industry’s revenue.

BlackRock’s Custodial Fee Reduction:

BlackRock’s recent RFP for custodial relationships revealed a potential 30% reduction in custodial fees, indicating a broader shift towards lower fees across the financial ecosystem.

Public Role and Long-Term Focus

Fink’s evolving public role, amplified by the financial crisis, highlights his commitment to addressing critical issues in the financial services industry. His focus on long-term solutions, exemplified by the acquisition of BGI and its large index fund holdings, underscores the importance of long-term investing and responsible proxy voting.

Evolution of Laurence Fink’s Public Role:

Fink’s public role shifted from focusing on internal matters and shareholder engagement to taking a more active stance due to the sell-side firms’ retreat during the financial crisis. He recognized the need for a voice in the financial services industry given BlackRock’s scale and the absence of other voices.

Shift to Long-Termism and Active Engagement:

The acquisition of BGI and its index funds emphasized the importance of long-term ownership and solutions. Fink realized the need for active participation in proxy voting and dialogue with companies.

Global Engagement and Future of Capitalism

BlackRock’s global engagement, devoid of a traditional balance sheet and bolstered by strong risk management, has positioned it as a trusted advisor in times of crisis. This role extends beyond financial services, touching on broader issues affecting capitalism’s future, especially in the context of the upcoming U.S. presidential election.

Increased Engagement with Governments:

BlackRock’s reputation during the financial crisis and its lack of a balance sheet led to increased engagement with governments worldwide. The firm’s involvement includes assisting countries like Greece and working with central banks and finance ministries.

Societal Challenges: Democracy, Economy, and Infrastructure

Fink highlights the challenges facing capitalism and democracy, particularly the growing inequality and economic stagnation that fuel political instability. He emphasizes the need for governmental action in addressing these issues, including promoting financial literacy and re-engineering the economy. The widespread public anger, as evidenced by the political phenomena of Bernie Sanders and Donald Trump, calls for urgent fiscal policy action. Fink proposes an infrastructure bank or similar instrumentality to tackle the infrastructure deficit, potentially leading to job creation and economic stimulation.

Capitalism, Democracy, and Society’s Challenges:

Capitalism and democracies are threatened when the majority of people lose hope for a better future. Lack of re-education, stagnant wages, and job displacement have led to lower living standards. Rapid technological advancements will further disrupt the workforce. Governments have relied too heavily on central bank behaviors, neglecting their role in restructuring the economy. Financial and economic challenges contribute to political instability and the rise of populist parties.

Laurence Fink’s Views on the Economic and Political Landscape in the United States:

– Fink acknowledges the widespread anger among the American public and attributes it to factors such as stagnant wages, rising inequality, and political gridlock. He believes that this anger will persist regardless of who wins the presidential election.

– Fink emphasizes the need for fiscal policy to address the economic and political challenges facing the country. He believes that infrastructure spending is a crucial area for investment, as it would create jobs, improve the nation’s infrastructure, and potentially address the anger among the electorate.

– Fink proposes the creation of an infrastructure bank or agency to streamline permitting and facilitate public-private partnerships in infrastructure projects. He suggests that such an agency should have a budget of around $1 trillion, with 80% of the funding coming from the private sector.

– Fink highlights the need to address the country’s infrastructure deficit, noting that even countries like Uganda may have better infrastructure than the United States. He points to examples like the Tappan Zee Bridge and the proposed New Jersey-New York train tunnels as illustrations of the lengthy delays and inefficiencies in infrastructure projects.

– Fink believes that investing in infrastructure would create jobs and stimulate the economy. He suggests that a large-scale infrastructure spending program, with 80% private and 20% public funding, could lead to wage inflation and improve the mood among the public.

– Fink proposes that the public portion of the infrastructure investment could be spun off into a real estate investment trust (REIT) within a year or two. This would allow the government to recoup its investment and potentially generate additional revenue.

Notes by: datagram