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What BlackRock’s Latest Deal Means for Rivals, Advisors

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BlackRock’s acquisition of customized index provider Aperio Group, announced Monday, is set to broaden the offerings of the world’s asset manager for financial advisors. It also could help popularize an investment strategy for separately managed accounts — known as direct indexing —  and shake up competition in this area, several industry experts say.

For BlackRock, the $1.05 billion acquisition is “just another bolt-on deal that adds to its capabilities, but it’s not a big mover on its own at the forefront,” said Greggory Warren, senior equity analyst at Morningstar. 

More specifically, the deal adds to BlackRock’s capability of tax-managed SMAs in its model portfolio structure, which Warren says “might come in handy if personal tax rates for the wealthy go up in the near to medium term” — a possibility after Joe Biden assumes the presidency.

Aperio Group offers customized SMAs focused on after-tax performance, including accounts portfolios focused on environmental, social and governance (ESG) factors.

“ESG is a big component here, and growing, although tax efficiencies are probably the biggest driver,” said Tim Welsh, CEO and founder of Nexus Strategy.

‘Future of Investing’

Direct indexing is “truly the future of investing,” and the fund industry recognizes it, Welsh explained. “The operating basis points they get form mutual funds and ETFs are rapidly becoming irrelevant and widely expensive compared to what directing indexing can do.”

“It’s no surprise the biggest players are rushing in to buy these capabilities to protect their turf,” such as Morgan Stanley, he added. Its recent purchase of Eaton Vance includes Parametric and its direct indexing platform; the deal also creates a firm with about $4.4 trillion in total assets.

Earlier in the year, Charles Schwab acquired Motif Investing’s intellectual property and key staff. “We intend to leverage Motif’s platform to build on Schwab’s existing capabilities and help accelerate our development of thematic and direct indexing solutions for Schwab’s retail investors and RIA clients … ,” said Chief Digital Office Neesha Hathi in May.

Schwab’s total assets — including those just acquired from TD Ameritrade — were nearly $5.9 trillion as of Oct. 31. This means it’s still behind but getting closer to BlackRock’s $7.8 trillion.

Competitive Landscape

With about $300 billion in assets, Parametric dominates the direct indexing space and has roughly 10 times Aperio’s assets, according to Ben Johnson, director of global exchange-traded fund research for Morningstar.

Schwab could eventually offer its own direct indexing product as a result of its Motif acquisition, Johnson explains.

But the overall asset level in this investment space is small, he points out. Plus, direct indexing is really a continuation of asset management’s evolution — which has moved from mutual funds to ETFs and now includes more customized ETF products.

Other direct indexing providers include Shaughnessy Asset Management’s Canvas platform, launched in September 2019, and an offering from Folio Institutional, which Goldman Sachs acquired earlier this year.

Also about a year ago, Fidelity inked a partnership with Ethic, which has a technology platform that includes customized SMAs using direct indexing to build ESG-focused portfolios. (As part of the arrangement, Fidelity took a minority equity interest in Ethic and had a contingent right to increase its equity interest under potentially favorable terms.)

Vanguard’s Next Step

Though there aren’t many direct indexing shops left to acquire, Vanguard might offer its own indexing product in the form of SMAs or even individual accounts to its high net worth clients, according to Dan Wiener, senior editor of the Independent Adviser for Vanguard Investors newsletter.

This is a market the fund giant is already targeting with its attempt to bring a fund made up of private equity funds to clients.

“When, not if, Vanguard decides to get into this business there will be another fee-war that breaks out — or maybe we’ll call it a fee-skirmish,” Wiener said. 

Vanguard currently works with $6.6 trillion in global assets. Rival Fidelity has assets under administration of $8.8 trillion, including $3.5 trillion of discretionary assets.

HNW, UHNW Offerings

Compared to BlackRock’s SMAs, Aperio’s are “cleaner, targeted offering for the very high net worth … which gives Blackrock a jump start and essentially a new dedicated business unit,” explained Dave Nadig, chief investment officer and director of Research of ETF Trends and ETF Database.

A pharmaceutical executive who owns a lot of company stock, for example, could invest in an SMA that excludes pharmaceutical stocks from its index, says David Goldstone, manager of research and analytics for Backend Benchmarking, which publishes the Robo Report.

Similarly, an SMA investor who’s more interested in the environmental aspect of an investment rather than its social or governance characteristics — the “E” in ESG investing — could be attracted to a customized ESG strategy.

The acquisition of Aperio is expected to close in the first quarter of 2021.  After the completion, Aperio will continue to operate as a separately branded business within BlackRock’s U.S. Wealth Advisory division.

Goldstone expects the BlackRock purchase to help popularize direct indexing strategies, especially among those investors interested in ESG investing.

“That is a trend that is slowly gaining popularity and ramped up recently, with more investment options among more mutual funds, ETFs and robo- advisors especially among the younger generation,” he explained.