- BlackRock plans to buy the California-based investment provider Aperio for its coveted direct-indexing capabilities by way of separately managed accounts, or SMAs, the firm said on Monday.
- The asset manager is making a big bet on SMAs, which allow investors to tailor investments by owning securities directly, rather than passively owning a mutual fund or exchange-traded fund, for instance.
- In paying $1 billion in cash for Aperio, BlackRock is doubling down on these increasingly popular, customizable investments where the structure can offer clients ways to pay fewer taxes.
- New entrants in the space like Fidelity-backed Ethic have looked to capitalize on that growth, and Charles Schwab bought the technology of the startup Motif, which focused on customized thematic portfolios.
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BlackRock’s plans to buy a firm specializing in customized portfolios is a sure sign that clients’ expectations for personalized investments are rising, and a consolidating industry pressured to boost profits is rushing to keep up.
The world’s largest money manager, which oversees some $7.8 trillion in assets, said late Monday that it would acquire Aperio, a Sausalito, California-based firm that creates bespoke separately managed accounts, from the private equity firm Golden Gate Capital and Aperio employees for approximately $1 billion in cash.
The firm will operate under BlackRock’s US wealth advisory business, which focuses on marketing and distributing BlackRock’s products to wealth management firms and financial advisors, and operate as a separately branded team, and the deal is expected to close during the first quarter.
“We see more and more that investors, particularly high-net-worth investors, have an expectation that they’ll have something that is hyper-personalized,” said Mike Foy, senior director of wealth and lending intelligence at the data analytics and research provider J.D. Power, in a phone interview.
“Being able to provide these personalized portfolios are a necessary way to differentiate going forward in a way other than just lower and lower costs,” he said.
Aperio, which was founded in 1999, managed $36 billion in assets as of September 30 for ultra-high-net-worth households and institutions served by private banks and registered investment advisors. It operates in a corner of the money management industry that firms are drawn to as they look to services and offerings that are outside of plain-vanilla investment products and incorporate ways to invest with a sustainable framework.
With higher taxes for wealthy individuals expected under President-elect Joe Biden’s administration than under President Donald Trump’s, too, strategies that can allow investors to pay fewer taxes are increasingly attractive.
Read more: The asset manager of the future looks like a consultant. Here’s how firms like BlackRock, PIMCO, and Invesco are preparing for it.
Separately managed accounts (SMAs) like the ones Aperio creates, and the so-called direct-indexing capability they offer, can also allow investors to pay fewer taxes on their investments.
Rather than indirectly owning a bundle of securities through the “wrapper” of a mutual fund or exchange-traded fund, for instance, investors directly own stocks and other securities that they choose to belong in a SMA.
Key to SMAs being so tax-efficient is investors’ option to tax-loss harvest through them — that is, selling off securities at a loss in order to offset capital gains taxes — and reduce what an investor owes in overall taxes on investments in that account. While BlackRock has long offered SMA capabilities, building more cost-effective, direct-indexing capabilities through those accounts for investors is what makes Aperio particularly attractive.
On the surface, BlackRock’s acquisition is about adding revenue, said Roseanne Harford, managing partner of the New York-based Guzman Advisory Partners, a law firm representing family offices and other financial services firms when they look to structure new funds or make acquisitions, among other matters.
“Viewed more broadly, this deal reflects a trend among major asset managers looking to expand their client base to include smaller institutions and ultra-high-net-worth individuals. The challenge is making these accounts profitable. Although these clients pay significantly higher fees than large institutions, they also cost more to manage. Investment technology like passive investing can help bridge that gap,” Harford said in an email.
“Tech-savvy SMA managers can deliver more of what their clients want — tax management, for instance, or avoiding investing in certain industry sectors — and generate profits for the parent company,” she said.
BlackRock is hardly alone in its ambitions
The New York-based asset manager’s leadership was vocal about adding SMA capabilities before it announced the Aperio deal, which will grow BlackRock’s SMA assets by some 30% to more than $160 billion.
BlackRock’s existing SMA business has primarily been in actively managed fixed-income strategies, while Aperio will largely add equity strategies, the Deutsche Bank analyst Brian Bedell noted in a report to clients Tuesday morning.
And while it would seem SMAs could eat into ETFs’ market share because they are similar products, SMAs tend to cost more, and would likely appeal to a different set of customers than those looking for simpler low-cost passive funds.
“In addition to iShares, we are also innovating the tax-efficient product designs across our platform. The movement towards fee-based advice and client needs for tax optimization in their portfolios creates significant opportunity for BlackRock, and we are investing heavily in both ETFs and separately managed accounts,” BlackRock Chief Executive Larry Fink said last month during the firm’s third-quarter earnings call, according to a transcript on the investment research platform Sentieo.
Earlier this year, Salim Ramji, global head of iShares, said in May during a remotely held interview with a Goldman Sachs analyst that the “real benefit is that it’s got some tax benefits, which for qualified or non-qualified accounts of wealthy individuals in the United States — that can be a big deal.”
Other firms have made similar bets this year on growing their customizable investment offerings.
Morgan Stanley last month said it would buy the investment manager Eaton Vance, which analysts viewed as a clear way to bolster the firm’s direct-indexing offerings for rich wealth management clients through Eaton Vance’s Parametric fund family.
Read more: Why Morgan Stanley’s $7 billion bid for a storied asset manager gives it a leg up on rivals and signals more deals to come
After Morgan Stanley announced those plans, Aperio’s talks with multiple potential buyers ramped up, the Wall Street Journal reported Monday, citing a person familiar with the matter. Aperio had held talks with several asset managers over the last year, according to the Journal’s report.
UBS has also expanded its direct-indexing offerings. The Swiss wealth management giant said earlier this year that it was growing its SMA strategy lineup, and its finance chief reported during third-quarter earnings results last month that inflows related to the wealth management division’s SMA expansion in the US were “well ahead of our plans.”
Relatively new entrants in the space like the startup Ethic have also looked to seize on that growth, and Charles Schwab earlier this year bought the technology of the startup Motif, which focused on customized thematic portfolios.
Jay Lipman, president and co-founder of Ethic, which separately managed accounts with a sustainable-investing lens that firms and advisors use for their clients, said in an interview that he views the acquisition as recognition that personalization is core to the industry’s future.
“Between the Morgan Stanley deal and this deal, this is all just validation that personalization and direct-indexing is where the investment management industry is going,” said Lipman, whose company would benefit from that theme continuing to unfold across the industry.
Part of Ethic’s pitch, and that of other separately managed account beneficiaries, is that financial advisors need that personalization to survive. Big investors have bought in, too: Fidelity Investments and the venture capital firm Nyca Partners are among Ethic’s backers.
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A new generation of investors expecting personalization in their investments, just as they do in other aspects of their lives where they can have control, “either creates a risk or an opportunity for advisors” to adapt, Lipman said.
Industry participants expect more deals like BlackRock’s bid for Aperio, a word derived from Latin that translates to revealing truth and providing clarity.
“Any asset manager with a long-term strategy of gaining a meaningful presence in the wealth management industry is probably keeping an eye out for a target acquisition among SMA managers,” said Harford of Guzman Advisory Partners.