Larry Fink is the CEO of BlackRock, the largest asset management firm in the world. His company and its funds have trillions of dollars invested in the stocks and bonds of thousands of corporations around the world. BlackRock manages money for hundreds of millions of people – people who are counting on earning a long-term return on this money for decades to come.
And he is very concerned that the short-term has become the priority for the CEOs of these thousands of companies, to the detriment of his investors’ longer-term needs. Wall Street’s maniacal focus on quarterly earnings reports is partially to blame. The $100 billion now in the hands of activist hedge funds plays a role in this as well. The media earns their share of the guilt on an hourly basis.
Fink sent a letter to CEOs around the nation this week asking them to clarify their plans for the future and to think about investing in tomorrow instead of just dumping dividend and buyback cash back on their shareholders today.
While we’ve heard strong support from corporate leaders for taking such a long-term view, many companies continue to engage in practices that may undermine their ability to invest for the future. Dividends paid out by S&P 500 companies in 2015 amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months. We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment. We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries, that support strategies for long-term growth.
Fink is not alone in worrying about this phenomenon – a Goldman Sachs analyst just tacitly admitted that the very future of capitalism may be at stake if present trends continue. They frame the question in terms of profit margins, which ought to mean revert lower as new competition gains ground in various industries and the workers’ share of business increases. Because it’s been cheaper to do buybacks than to invest, margins remain extremely high, even for stagnating companies and industries.
But what if margins stay elevated? That too is possible, and the implications could be unsettling.
Goldman writes: “We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.”
Fink and Goldman are way off the reservation in talking like this – but I like it.
The BlackRock CEO is now formally asking the CEOs of companies they invest in to clearly and methodically lay out their plans for investing in their companies’ future. He tells them that BlackRock, as one of the largest shareholders of, well, everything, is going to be looking for this framework when meeting with corporations.
I thought this was an interesting request. I also thought about how it would apply to my own business and our plans for the future. To close things out here, I thought I’d answer Larry’s call as a thought exercise for my own benefit. As CEO of Ritholtz Wealth Management, can I clearly articulate for shareholders (myself, Barry, Michael and Kris), how we are investing for our firm’s future?
I’ll take a stab at it below, before iterating a more in-depth version internally.
- The first thing – investing in the personnel who will drive this firm forward into our next phase. Over the last few months, we’ve announced many major hires. Last week, I introduced Dan McConlogue, who has agreed to become our Director of Corporate Retirement Plans. Dan has two decades of experience in the 401(k) space and has worked with thousands of plan sponsors, plan providers and plan participants around the country. Prior to that, we announced the hiring of Anthony and Dina Isola, two former teachers who had built a $50 million registered investment advisory practice catering to the specific needs of educators. We’ve also welcomed Joey Fishman to the team, a fantastic advisor who can work more closely with our large and growing clientele in the Pacific Northwest region. We’ll be announcing the addition of more talented personnel in the near future.
- The second thing – keeping abreast of the technology trends in the industry. Our use of technology enables us to serve more clients, and to do a better job servicing them in every way. From communications to performance reporting to risk tolerance assessment to cyber-security to trading and rebalancing – we seek out the absolute top of the line tools being used in the industry and invest the necessary capital and time to be able to use them effectively. It might be cheaper (and hence more immediately profitable) to cut corners on tech, but our employees and clients deserve the best. We regard this drive to remain ahead of the curve as both a competitive advantage as well as an investment in our future.
- Third, we’re thinking about decades in terms of the way we manage money. We currently run five investment strategies in-house, from strategic asset allocation to tactical management. We’re also working with outside money managers who can bring strategies to the table that align well with our own philosophy for areas in which we have no internal expertise. Forging relationships with accounting firms, estate planning attorneys, tax professionals and insurance specialists also represents an investment of time and energy, but one that we think pays off for years and years to come. It would be easier or less costly to simply outsource our asset management and tell clients to find their own tax and insurance help, but true fiduciary advice and wealth management demands that we incorporate this stuff into our practice.
- Finally, we know that the long-term success of the firm hinges on the long term success of our clients’ portfolios and plans. There’s no way we can win big as a firm if our clients don’t win and go on to achieve their financial goals. The lifeblood of an advisory firm is referrals and happy households. In service to that idea we’ve instituted an orderly, regimented service model, managed by the CFPs who interact with clients day, in, day out. We’re also trying to be innovative about the way we marry service with asset management all the time. One example would be our creation of the Milestone Rewards program, whereby clients earn a lowered fee on their three-year anniversary with the firm. We see this is as a win-win: lower fees will help the performance of our clients’ portfolios, and will keep everyone focused on the kind of long-term relationship that leads to good financial planning outcomes.
Investing in the future is probably the most important thing I think about every day in the course of my business. It’s the area in which I have the most control and the best chance to influence things in a meaningful, positive way. And I agree with Larry Fink that if more people thought about the next five years instead of the next five months, the economy would be better, even if that meant the absolute level of the stock market would be lower for the time being.
Let’s hope others heed this call as well and actually do something about it, before we squander any more opportunity for long-term returns.
If you’re an advisor or an investor who wants to find out more about what we’re doing, get in touch here: