The Race to Replace Larry Fink
He’s the Steve Jobs of the money game. Who will be his Tim Cook?
Larry Fink, like Winston Churchill and the New England Patriots, excels in turbulent times — and a memo he sent to employees in January showed that he thinks there will be plenty of turbulence in BlackRock’s future.
In the memo, sent after the fourth quarter’s market rout, Fink laid out the long-simmering pressures facing the industry, and predicted that they would become more acute. To Fink, the 66-year-old chairman and chief executive of BlackRock, January portended the end of the long bull market and the beginning of a different cycle. Active managers had their last chance to prove their worth to investors.
They failed, he said.
“Last year, when active management, including the hedge fund industry, was expected to outperform, the majority of the industry didn’t — which will only accelerate the barbelling of client investments into index and illiquid alternative products,” he wrote.
Fink told employees that BlackRock would be making changes — but not because it was weak. Rather, Fink argued, the firm is the asset manager best positioned for the future, and the next downturn could make it even stronger.
“I recognize some of this may sound scary, but it doesn’t have to be,” he wrote, sounding an almost energetic note. “This is certainly not the first time we have faced adversity as a firm.”
Indeed, Fink has deftly steered his firm through several crises. At the height of the global financial crisis of 2008 and 2009, he shuttled between New York and Washington, D.C., advising the government on complex mortgage-backed securities and establishing BlackRock — and himself — as the go-to expert for institutions saddled with the toxic product. In 2009, he led BlackRock’s acquisition of Barclays Global Investors, which made the firm the largest asset manager in the world and positioned it to benefit from investors’ dramatic shift to index funds and systematic strategies over the past decade.
In the January memo, Fink seemed ready to tackle the challenges facing the firm in the future — but he warned it wouldn’t be easy. “We need to be willing to reimagine every aspect of the firm and how we manage it,” he wrote. “Nothing should be off the table.”
Though he didn’t say so explicitly, that almost certainly includes figuring out a future without Fink at the helm.
To be clear, Fink has no plans to retire any time soon, especially in a time of heightened market turbulence. But as a public company — one that manages $6.5 trillion and has a market capitalization of $67 billion — BlackRock needs to have an answer to the question of who might replace him when he does.
Figuring out the answer to that question might be BlackRock’s biggest challenge yet. The firm has identified a group of talented successors who could swiftly take over leadership when Fink steps down. But asset management executives, several of whom spoke with Institutional Investor on condition of anonymity, don’t think any of them have the potential to be a bona fide visionary like Fink.
It’s not because Fink hasn’t made mistakes, strategically or managerially. It’s because Fink, who came up with the idea for the asset manager and then joined with seven others to co-found the firm under the umbrella of Blackstone in 1988, is generally thought of as one of the few legends — along with Jack Bogle and John Templeton — who have transformed asset management.
He’s also seen as the thread that has held together not just the talent but also the discrete pieces of a firm that has grown through multiple acquisitions — including the purchase of three big asset managers — into the single biggest asset manager in the world. “More than strategy even, he’s been masterful at being the glue keeping this business together,” says one executive.
Donald Putnam, founder of investment and advisory firm Grail Partners, puts it more bluntly. “You can’t replace a Larry Fink with a Larry Fink,” he says. “He knows that.”
But Putnam, who also founded investment bank Putnam Lovell Securities in 1987, argues that this isn’t necessarily a bad thing.
“In the old days, the king had no dukes — he had vassals. He was involved in the tactical decision-making of everything,” says Putnam. “The Larry I see operating today actually has a handful of dukes. There is one king. How do you keep the dukes happy? You keep them happy in two ways: You grant them their territories and agree to a Magna Carta.”
Still, everyone wants to know who the next king will be.
BlackRock started formalizing its current succession plan about three to four years ago. Around that time, Fink’s name had been floated as Treasury secretary and Charlie Hallac — the firm’s first employee, who founded BlackRock Solutions and who had long been thought of as a strong successor — lost his four-year battle with cancer. BlackRock’s leaders in general were also getting older.
“There are a lot of talented and capable leaders at BlackRock,” says Milton Berlinski, who co-founded investment firm Reverence Capital Partners, which invests in midmarket financial services companies, including Venerable and Victory Capital.
“And who knows, Larry is a strategic thinker. I have to believe that he has his eye on internal talent that can succeed him when the time is right. Having said that, it’s also possible he could make an acquisition and bring someone in to succeed him. But no doubt he’ll do it right. The success of any transition will be directly tied to him,” says Berlinski, who, during a 26-year career at Goldman Sachs, was a founding member of the financial institutions group and subsequently oversaw global coverage of the firm’s financial sponsor and hedge fund clients.
There is a short list of stars in line for Fink’s job, according to asset management executives. But the real candidates to watch are Mark Wiedman, head of international and corporate strategy; Robert Goldstein, chief operating officer and global head of BlackRock Solutions, and the executive closest to the firm’s technology; and Mark Wiseman, former president and CEO of the Canada Pension Plan Investment Board who is now global head of active equities and chairman of BlackRock Alternative Investors, a division smaller than BlackRock wants but which is one of its biggest priorities. Wiseman only joined BlackRock in 2016. Wiedman and Goldstein were identified as rising stars about ten years ago. Both have been intimately involved in BlackRock’s reorganization and the slew of new appointments that came this year.
In January, BlackRock appointed Wiedman, who had been global head of iShares and index investments since 2011, to a two-part role: running international and running corporate strategy, reporting directly to Fink. Wiedman, a former consultant at McKinsey & Co. who holds a law degree from Yale, joined BlackRock in 2004 to help create its financial markets advisory group. The group put BlackRock on the map during the financial crisis as the adviser to major banks and the U.S. government on their mortgage securities. Wiedman also led the integration of Barclays Global Investors.
Although Goldstein’s role didn’t change in April, when the firm made a string of new appointments, his successor status is as strong as ever. That’s because he’s the guru of the money management giant’s strongest suit: the Aladdin portfolio and risk management systems. Aladdin is BlackRock’s central nervous system. In addition to his COO responsibilities, Goldstein has also been global head of BlackRock Solutions, the unit responsible for Aladdin, since 2009. Goldstein’s been working in the portfolio analytics group since he joined the firm in 1994. As BlackRock has shrunk its active equity group, invested in data science capabilities, committed to factor-based funds, expanded Aladdin to wealth management, and acquired eFront, the data analytics company for private investments, Goldstein’s importance to the firm has only grown. Goldstein also set up a new artificial intelligence lab in Palo Alto, California, early last year.
But BlackRock has another serious contender in the succession drama.
In a closely watched move, the New York–based firm recently appointed Mark McCombe to the newly created position of chief client officer. McCombe, who heads client businesses in the U.S. and Canada and was previously global head of alternatives, is now also at the center of BlackRock’s efforts to woo and keep clients. McCombe’s new position follows BlackRock’s realization that if it wanted to further expand growth internationally, it needed to move its client coverage to local regions around the world. As chief client officer, McCombe’s job is to keep everything consistent, especially for the firm’s largest clients.
Previously, McCombe was global head of BlackRock Alternative Investors and global head of the firm’s institutional client business. McCombe joined the firm in 2011 from HSBC Hong Kong, where he was chief executive.
BlackRock’s current leadership structure is a pragmatic nod to succession issues. Fink is the big-picture strategist, while Robert Kapito — a co-founder who worked for Fink beginning in 1983 on the mortgage desk at First Boston — is president and manages the firm on a day-to-day basis. If Fink is BlackRock’s public face and ubiquitous voice for clients, the press, and regulators, Kapito has quietly fathered the intense culture within the four walls of the firm. Together, Fink and Kapito have the gravitas the market expects.
Life after Fink might look similar. For one, Goldstein, who joined the firm after graduating from Binghamton University in 1994, grew up under the founders who built the technology infrastructure. He was there at the start of BlackRock Solutions, when the firm made the bold move to offer its technology to outside clients. Sources inside the firm say Goldstein, who has been the visionary behind Aladdin since he took over BlackRock Solutions in 2009, could be the right person to take over from Kapito, if Kapito left the firm in the short term, but Goldstein’s also a strong contender for the CEO role. Rich Kushel, head of multiasset strategies and global fixed income, has an office a few doors down from Kapito and is also a contender for Kapito’s job. Kushel has been with BlackRock since 1991.
With the CEO-president structure, sources familiar with BlackRock say some of the successors would be a good fit for one job or the other — or both. Kapito could succeed Fink if he unexpectedly stepped down, but it would likely be for an interim period only.
But the real question is whether any of these executives can replicate Fink’s gift for seeing where the asset management industry is going. As a co-founder of what was originally called Blackstone Financial Management, Fink took his expertise in helping develop the mortgage-backed and structured securities market on Wall Street and then built the first specialist asset manager at a time when investors knew little about the mortgage products or their risks — other than what Wall Street had told them. The firm grew with the acquisition of State Street Research & Management and then Merrill Lynch Investment Managers.
Fink also foresaw how important technology would become to the financial services industry, building BlackRock on a proprietary technology platform, Aladdin, that has long helped it generate some of the highest margins in the industry. It also made the firm a sought-after adviser beginning in 1994, when General Electric Co. wanted to know what to do with subsidiary Kidder Peabody’s $7 billion portfolio amid a bond-trading scandal. Since 1999, BlackRock has sold the same technology to other asset managers, pension funds, and institutions like Fannie Mae, making BlackRock Solutions, which it formalized in 2000, one of the company’s fastest-growing sources of revenue.
By the financial crisis, BlackRock was doing everything from assessing Bear Stearns Cos.’ mortgage portfolio before JPMorgan Chase & Co. CEO Jamie Dimon decided to buy the firm, with the Federal Reserve’s assistance, to analyzing American International Group’s credit default swaps portfolio for the Fed.
But it was Fink’s 2009 decision to purchase Barclays Global Investors and its exchange-traded funds business that was the most defining. With the intellectual capital in iShares, which alone has $1.9 trillion in assets, BlackRock has benefited from investors’ virtual wholesale shift to index funds and increasingly their move to smart beta and rules-based factor products. In the first quarter, ETFs brought in more than double the amount of cash gathered by its actively managed funds.
Still, BlackRock hasn’t been immune to market pressures. In the last few years and into 2019, under fee pressure and in response to other trends, BlackRock has restructured a number of businesses, including paring back its active equity group. A week after Fink wrote his January memo asserting that BlackRock wasn’t going to be afraid to disrupt itself, the firm announced it would reduce its global workforce by 3 percent, or about 500 people.
All of this means that Fink’s successor won’t just need to be a visionary. A newly minted CEO will also need to guide the company through the next downturn, and do so within an industry that is begging to be disrupted — and faces threats of just that from the likes of Google and Amazon.com. Against this backdrop, the buzz of succession talk has become louder. And succession raises the issue of whether anyone can replicate Fink’s strategic intuition — and his prescience about the future of the industry.
BlackRock understands this — which may explain why its executives are among the most well paid in asset management. Alan Johnson, founder of compensation consulting firm Johnson Associates, says BlackRock has made several retention payments to potential successors.
“But you can’t afford to lock down everybody with money,” he points out.
That’s because these men — and it’s worth noting that they are all men — don’t want to be placeholders, even with fat paychecks. They really want Fink’s job someday. And they won’t wait around forever.
“I’m 100 percent sure that people like Wiseman want the prestige of being in the top job of the most influential firm in the global asset management industry,” says one former CIO who has had a front-row seat watching BlackRock grow since its founding. “There are plenty of firms where being second or third or fourth works fine. The CEO perch isn’t so desirable. But at BlackRock, the CEO job is worth the trouble.”
If Fink stays longer than five years, these executives will be poached to be the CEO at another asset manager. Although their departures could hurt the firm, there have been plenty of exits over the years — and none were losses big enough to put any pressure on Fink to retire.
Not everybody thinks Fink is irreplaceable, however. He’s missed opportunities even as he’s made some bold decisions that transformed the firm into a powerhouse. In other words, he’s human.
“Was he the only one who saw the potential of iShares? No way,” says an asset management consultant, who nonetheless acknowledges Fink’s canny timing. “He was willing to pay a high price at an uncertain time. He’s a brilliant strategist who helped shape BlackRock into its current form.”
Still, Fink hasn’t created a disruptive product, like the iPhone, that no one knew they needed. BlackRock is a traditional asset manager that operates much like any other, the consultant says.
“Having the type of vision and the ability to execute takes a very special individual. But at the end of the day, one person doesn’t make it all happen. In the evolution of where the business is today, Larry is an important contributor to it, but the firm has plenty of leaders that will be able to carry on his vision,” Berlinski of Reverence Capital Partners says.
Shareholders — who are happy with BlackRock’s results — may be enamored of charismatic leaders, but they ultimately want stability.
“When someone like Larry Fink eventually decides to step away, things will change,” says Rob Lee, an equity analyst covering alternative and traditional asset managers at Keefe, Bruyette & Woods.
“The question is whether the business is on the right path when the transition happens.”