A booming stock market is supposed to be a bonanza for investment firms that collect fees on assets they manage for their clients. Not so for ETF giants BlackRock Inc. (BLK) and State Street Corp. (STT), which are posting weaker earnings even as the stock market has reached new records, and even as their assets under management have exploded in size. These and other companies have attracted hundreds of billions of dollars in assets in the past decade as investors increasingly have favored passive investments instead of active investments that long dominated Wall Street. These two financial giants' latest performance is a bad omen for other companies set to report in the coming weeks, including T. Rowe Price Group Inc. (TROW), Franklin Resources Inc. (BEN) and Legg Mason Inc. (LM), as outlined by the Wall Street Journal

BlackRock investment and administrative fees declined by 1.4% year-over-year (YOY) in the latest quarter even as assets jumped by $500 billion. State Street’s investment-management division posted a decline in revenue, even as assets under management rose to $2.9 trillion from $2.7 trillion.

Investors Seek Lower Cost Products

A shift to low-cost investment products and index-tracking funds has shaken the financial industry. While asset management once was only accessible to higher net worth individuals who could pay hefty fees, the fintech revolution has democratized access to financial services. This revolution has created robo-advisor platforms like Wealthfront and Betterment, which cater to younger clients who prefer automated services to higher cost alternatives. 

“In some cases, you’ve got firms losing both assets and revenue,” said Ron O’Hanley, State Street’s chief executive, per the WSJ. “There’s a shift from active to passive, and they’re just not participating." He added, “For us and BlackRock, you’re seeing growth but also a movement into lower-cost products.” 

Shares of State Street are lower 6.5% YTD, and 32.2% lower over the recent 12 months. BlackRock stock is higher 19.5% YTD, and down 7.7% over 12 months. This compares to an 18.9% increase for the S&P 500 in 2019 and a 6.2% return over the year. 

Looking Ahead

Some analysts see worse results ahead for other asset management firms. “Peers are going to be down significantly more,” said Morgan Stanley analyst Michael Cyprys, per the WSJ. Not all are so bearish, however. Some analysts see the asset management group’s depressed valuation as an attractive time to buy, per Barron’s. Bulls cite potential catalysts for asset managers including improved fund flows, an easing trend toward passive investing and a boost in merger activity.