First, a quick history lesson. When BlackRock decided to move USD1trn of common trust fund assets from State Street to J.P. Morgan, the bank said it expected to onboard the assets “over the next two years”. That never happened. In fact, it took over three years to finish the project. Transitions are complicated, and J.P. Morgan – and, quite probably, BlackRock – underestimated the challenges, not just of the process itself but also building customized links to Aladdin.
Now multiply those challenges by any factor you choose, and you will have some idea of how tough it will be for any new provider to step up and provide a package of product breadth, industry expertise and specialist service comparable to that currently provided by State Street. BlackRock is smart, and already knows this, even before it receives all the RFP responses.
So why does the commentariat think that it’s a done deal? Here’s an excerpt from a particularly ill-informed piece written by Global Custodian: “BlackRock holds so much weight in the financial services industry that any landmark decision it makes can cause a seismic impact…In terms of the global custody landscape, the decision to transition from using State Street as its only service provider for its USD2trn iShares portfolio to a multi-custodian model cannot be understated (sic) and starts a battle among rivals for the coveted assets…Therefore, whichever decision BlackRock makes as to who will hold these assets is going to have major ramifications on the custody world”.
See what they did? Even though the RFP process is still live, Global Custodian has already decided that BlackRock is moving some, if not all, of these assets. Yet that is not what an RFP process is about. RFPs can be issued for any number of reasons, not the least of which is an exercise in market benchmarking. A lot has happened in the ETF space over the last three years, so it is only prudent that BlackRock – or any other ETF manager – reviews the competitive landscape. Several banks – most notably BNY Mellon and Citi – have upped their game in the sector, whilst there have recently been some major transitions, including VanEck and USCF. In fact, it would be surprising if BlackRock weren’t reviewing its options, especially given the unrelenting pressure on ETF fees and margins.
None of that leads to an inevitable conclusion that BlackRock will move a single cent of assets. After its experience with J.P. Morgan, it will be thinking very carefully about how much better any alternative provider would have to be to displace the incumbent. Of course, there are other considerations, such as concentration risk, the balance of trade, sleeping with then enemy and corporate-level relationship factors, but BlackRock cannot afford to risk its core ETF franchise by making a decision that is not primarily motivated by service excellence – something it can already rely on at State Street.
We all understand this, but many analysts, commentators and journalists do not. RFPs do not represent either the start or the end of the journey, but are one part of an ongoing discussion that every asset manager is having with a panel of existing and potential providers. RFPs do not represent a fait accompli, as some seem to believe. State Street, and all its worthy competitors, get it – and so does BlackRock.