October 24, 2012

BlackRock on ETF Fees: Hello, Pot? This Is Kettle

Firm cuts fees on funds, criticizes others for same

BlackRock is indulging in a bit of “Do as I say, not as I do” with a round of cuts to the fees on some of its ETFs and the introduction of new ETFs with lower fees even as it criticizes other firms for doing the same thing.

The Wall Street Journal on Oct. 15 reported that BlackRock rolled out the new strategy, which includes a revamp of its sales force and the premiere of its first-ever TV commercials to spread the word. The move is seen as a response to Vanguard Group’s ETFs with low fees, as well as the firm’s latest move, announced just this month and reported by AdvisorOne—changing indexes on 22 different mutual funds and ETFs to save its customers money.

Fees have been dropping throughout the industry, as BlackRock and Vanguard are just the latest to take action. In September Charles Schwab cut ETF fees, some as much as 59%, and Fidelity Investments had waived trading commissions in 2010 and 2011 on a group of ETFs.

Laurence FinkBlackRock may be joining the trend, but Chairman and CEO Laurence Fink (left) doesn’t have to like it. In fact, after conceding that it’s “fee pressure,” he’s termed such a move “stupidity.” His criticism came Oct. 17, just two days after the firm bowed to the pressure and announced that six ETFs would have their fees cut while four new low-cost ones would be introduced.

According to the WSJ report, Fink admitted that BlackRock has lost some $70 billion in business from a single institutional client to a competing firm with lower fees. But he said the firm would not surrender to pressure on pricing, and was quoted saying, "If you provide the right solutions, fees become less dominant."

Vanguard’s ETF market share has grown even as BlackRock’s has fallen, although at the end of September the latter was still the largest provider of ETFs, with a market share of about 41%, according to Morningstar. BlackRock said the fee cuts would cost the firm $35 million to $45 million per year, although it expects to make that up in fund growth.

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Editor's Note: The Wall Street Journal recently ran this correction regarding Fink's comments:

Corrections & Amplifications
BlackRock's Laurence Fink said in a Wednesday conference call with analysts that it is "stupidity" for asset managers to sell certain products to institutional investors at cost, or without profit. An earlier version of this article should have made it clearer that he was talking about institutional products rather than ordinary mutual or exchange-traded funds.

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