BlackRock’s Sales Force Reorganization Plan Will Improve Operating Efficiency

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BlackRock (NYSE:BLK) is reportedly reorganizing its private client focused sales force into two separate groups to be able to better cater to the needs of wirehouses and independent broker dealers. [1] The world’s largest asset manager primarily aims to improve the growth rate of its asset base through this reorganization, as it can better tailor its wide range of investment options to the needs of the two private-client channels. But we believe that the move has another big advantage which will help the company unlock more value in the future – it will help boost operating margins.

BlackRock’s decision to focus on the underserved retail investor market has increased its operating expenses considerably over recent years, as the company rapidly adds to its headcount and sets aside more money for marketing purposes. The proposed reorganization will help BlackRock refocus its employees better to attract retail investors – opening up new avenues of expense management, including the elimination of redundancies in its workforce and a revamp of its marketing strategy for more specific targeting of potential clients.

See our full analysis for BlackRock

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BlackRock’s enjoys a strong position in the global asset management industry thanks to the sheer size of its asset portfolio. The company reported more than $4.5 trillion in assets under management across its fund offerings at the end of September, with its extremely popular iShares line of exchange-traded funds (ETFs) being the primary driver of growth over recent years. Since BlackRock acquired iShares from Barclays Global Investors in late 2009, the investment product has seen the fastest growth among all that the company has to offer. BlackRock is already the undisputed leader in the ETF industry, with its nearly $1-trillion in iShares assets representing a market share of almost 40%, and the brisk growth pace is not expected to slow down any time soon.


The string of low-cost ETFs floated by BlackRock over the last two years highlight its long-term strategy of targeting retail investors – a market section that is largely untapped. This is because retail investors are heavily influenced by the price of the products offered – requiring BlackRock to keep its fees from these products low. Now these products themselves are sold via two channels: the large national broker-dealers (or wirehouses) like Bank of America Merrill Lynch (NYSE:BAC), Morgan Stanley (NYSE:MS) and Wells Fargo (NYSE:WFC), and through independent broker dealers. By splitting its workforce along these two lines, BlackRock aims to push appropriate products through these channels better. Importantly, it will also save on costs in the process.

The increase in BlackRock’s operating costs over the last two years can be gauged from the fact that its worldwide employee count jumped from 10,500 at the end of 2012 to 12,100 at the end of Q3 2014 – a 15% jump in seven quarters. This swelled employee-related expenses proportionately over the period, and has been a source for concern among investors. The company has also had to incur higher marketing and promotional expenses over recent quarters to fuel the rapid growth in its asset base. These cost drivers are likely to be positively impacted by the proposed reorganization plan, as BlackRock will be able to allocate its resources better under the newly formed groups. Besides being able to eliminate redundancies, the company can also reallocate its marketing funds in a more economical way to target potential clients under the separate groups.

The chart below represents BlackRock’s operating margins, and you can see how minor cost improvements also impact its share value by making changes here. To put things in perspective, an increase of just two percentage points in margins by the end of our forecast period pushes our price estimate up by more than 5%.

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Notes:
  1. BlackRock reorganizes sales force, taps JPMorgan executive, Reuters, Nov 11 2014 []