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asset management, blackrock, corporate governance, shareholder voting, State Street, vanguard, wealthmanagement, WealthTech

A Fintech side-effect: Excessive Corporate Control by the Big Three

The growth of the ETF sector is well documented and the robo-advisory fintech growth merits a piece of this `success`. According to my estimates, last year digital investing from startups and incumbents represented roughly 12% of the entire ETF market. This is of course, is from the point of investors’ point of view. Earlier this month I looked at facts and figures for ETF issuers.

Clearly, incumbents dominate ETF issuance. Very few standalone Fintechs are involved in issuing ETFs and their market share is negligible. Those include Sofi, Salt Financial, Ark funds. The growth of passive investing is not limited to the ETF wrapper. Other indexing investment products have also been growing, with mutual funds dominating. Vanguard is has pushed the industry towards such investment products with low expense ratios. Vanguard boasts an average expense ratio of 19bps compared to an industry average of 108bps. Robinhood has pushed the industry to commission-free trading. Most large asset managers have currently, significant platforms with commission-free trading investment products (from Fidelity, Vanguard, Charles Schwab).

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

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Customers – Investors should be extremely happy with all these developments. However, there is one major concern whose ugly head may not be noticeable. An elephant is in the room, here too. Its name is `The Big Three`. The concentration power of three US-based companies, Blackrock, Vanguard, and State Street, and its ramifications has gone largely unnoticed.

Blackrock just passed the $7 trillion AUM. An increase of $1.5trillion from last year.

Vanguard just passed the $6 trillion AUM and State Street the $3trillion AUM.

These three corporates manage $16 trillion AUM. This is a 45% increase from 2017 ($11 trillion AUM)!

Through a visualization produced by Corpnet Research what becomes clear is that `The Big Three` are the largest shareholders in 40% of all publicly traded stocks in the US[i]!

Screen Shot 2020-01-20 at 10.36.07

The growth of low cost investing, the disruption of the brokerage business model and the digitalization of the investment process, has created this excessive concentration in the Big Three asset managers.

Blackrock, Vanguard, and State Street have corporate control over 40% of the US stock market! These giant index fund businesses have too much shareholder voting power. That is one of the reasons that it matters a lot what the Fink says about climate change and ESG. In this case, we like his commitment but let’s be aware of this Corporate Governance entity in the room

The Harvard Law school forum on Corporate Governance is also researching this theme. In their paper The Specter of the Giant Three they look closely into this issue and estimate that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades.

Even though, the Big Three own less shares than 40%, their impact is amplified because they exercise their voting power 100%, whereas smaller asset managers do not. The Big Three currently collectively hold an average stake of more than 20% of S&P 500 companies and each one of them (BlackRock and Vanguard) now hold positions of 5% or more of the shares of almost all of the companies in the S&P 500.

Even more interesting is that this corporate governance problem was identified initially as the “Problem of Twelve”[ii] — the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.

In just these last two years, the problem has become more acute. If we continue to focus on democratization (access, low cost) of financial products and services with no innovation in corporate governance, we will end up pretty much in the same corner as we have with the Big Tech companies.

We need more fintechs innovating in the shareholder voting process. We need to increase the shareholder voting participation and make it 100% transparent for majority shareholders that are already required to publicly disclose their holdings.

The Big Three references

BlackRock, Vanguard and State Street Own Corporate America

[i] Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk

[ii] The Future of Corporate Governance Part I: The Problem of Twelve

 

The post A Fintech side-effect: Excessive Corporate Control by the Big Three appeared first on Daily Fintech.

asset management, Challenger Banks, goldman sachs, Marcus, personal loans, WealthTech

Welcome Marcus to the rebranded Goldman asset mgt division and to the UK

I can’t believe that it is already 2 years from the launch of Marcus from Goldman. I wrote about it Nov 2016 in Will Goldman become a verb? Watch the Marcus ads!

  • The consumer pays a fixed interest rateon the loan (which includes a profit margin for Goldman). It has no complexities (APRs and all the usual hidden in a credit-card type of arrangement).
  • It is simple and clear. No fees for late payments.
  • It is transparent and simple! No credit-score changes! There is nothing hidden, no optionality (hiding misunderstanding and potentially Goldman outsmarting the user).

My right hand, Gaston Greindl, briefed me last week on Marcus. Goldman has decided to add a dedicated loan specialists workforce who deliver live, personalised support to client, which goes well beyond the flexibility already offered on the platform to choose payment dates and payment options to fit their payroll schedule.

During the first year of Marcus – by the end of 2017 – Marcus had more than $2.3 billion in loans ranging from 12 months to 4 years.

The deposit part of the business – Online Savings Accounts for retail – is FDIC insured, no-fee again, and offering rates higher than the national average. During the first year of Marcus – by the end of 2017 – Marcus had more than $17 billion in deposits.

After extensive research and surveying, Goldman found that customers preferred to speak with human advisers for their borrowing and savings inquiries. So, all of Marcus calls are answered by loan or deposit specialists, improving the customer experience.

What caught my attention this time around, was the Barron’s article about Goldman Sachs moving Marcus into its asset management unit, which will be renamed the consumer and investment management division. Previously, Marcus had been part of Goldman’s investing and lending division.

I always talk about Fintech towards serving your existing customers in ways not possible before. Goldman has been fearless in experimenting with new business models in serving customers and in acquiring new customers. Over the past decade, Goldman has been an investment bank that wasn’t shy to get a banking license after the subprime crisis; has opened its proprietary IP to its Buy side clients (read more in my contributing chapter in the WealthTech Book ); and has acquired 37 Fintechs already making it the No.1 bank in Fintech investments (as of end of 2017)

fintech

Marcus was born in a neighbourhood catering to the basic consumer banking retail needs. Goldman now feels that it can and should be integrated in the next generation wealth offering of Goldman in the US. No fees, human advisors, flexibility even for the very basics: online savings and personal loans. This makes sense as product lines are blurring. Clients don’t want to have shop for their financial needs in 5 different places. Integration is the name of the game. Goldman is moving gracefully in that direction.

Screen Shot 2018-10-29 at 20.05.54

While Marcus is being integrating in the US in the wealth offering, at the same time Goldman is launching Marcus retail in the UK. It started just a month ago and up 50,000 customers signed up in less than two weeks. UK residents can deposit from £1 to £250,000 – and withdraw their money as many times as they like, with no fees or charges. Fully digital onboarding plus customer service with a specialist available. Now this can’t be great news neither for the challenger banks nor for the high-street banks. Marcus has a brand name and offers an interest rate of 1.5% (for the first year), which is well above the UK average of 0.6%. The Marcus account rate drops to 1.35% the 2nd year. The closest easy access savings rate is currently 1.41%, offered by Yorkshire Building Society.

Expansion in Germany was also announced in May but there is nothing talked about since.

Marcus in the US has built a loan book that is not even 5% of the $72billion loan book of Goldman. It’s value is not the amount of loans or their margin. It is the new retail customers and moreso it is the learnings that Marcus is offering Goldman Sachs’ so that they can enhance their wealth offerings with consumer best banking services (deposits and loans) which means below cost and with human specialist customer service.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

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