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With Michael Latham of Barclays Global Investors

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By Brooke Southall

September 4, 2007 6:01 am ET

When Michael Latham took over the reins as the managing director and head of iShares, Americas, for Barclays Global Investors last year, he faced the challenge of making a successful business into an even better one.

In one sense, Mr. Latham, 41, is succeeding. Financial advisers are making greater use of Barclays’ iShares exchange traded funds in their accounts with each passing year.

But now the San Francisco-based company is hatching plans to kick the growth rate up a notch.

Part of the plan is to introduce new products. But the bigger goal is to take aim at mutual fund companies’ dominance in 401(k) plans by better positioning iShares in that market.

This will be difficult for Barclays, said Jim Blachman, chief investment officer of Advisor Partners LLC in San Francisco, which manages $300 million in indexed assets.

“They really delivered the tool kit financial advisers were looking for” in the taxable arena by rolling out iShares, he said.

“But in the 401(k) space and the annuity marketplace, it gets more muddied,” Mr. Blachman said. “It gets back to the individual; it’s difficult to identify the decision maker.”

Q. Your iShares ETFs have been a great success, but the percentage growth is starting to mature, isn’t it?

A. Yes, the law of large numbers has begun to catch up with us. We’re [about] $300 billion in assets now [for North America]. We’re still at the top of the lead tables from a mutual fund perspective.

We were No. 2 [in asset gathering] in 2006, more than [The Vanguard Group Inc. of Malvern, Pa.]. In 2005, we were third. In 2004, we were third. In total mutual fund assets, we’re No. 5 [in the United States].

Q. How are the ETFs sold by Barclays Global Investors a good fit with financial advisers, and how might that fit be improved?

A. We don’t have any sort of conflict. We have no direct sale of our products to end investors. The only way we sell to retail actively is through advisers, and 95% of our total sales and marketing costs are geared to advisers. We believe that most investors need an adviser. We don’t [believe in the idea that you] buy one fund, and you’re done.

With full-service broker-dealers, we do a lot of training. Ultimately, we think the market is going to go completely that way. In 10 years, we think 90% of the business will go [to fee based] and up to 50% in five years, and then it’ll accelerate.

Q. Vanguard is showing some heady growth with its ETFs, and the company says it has the stronger brand name at the retail level. Can you fend off this new challenge?

A. We certainly view Vanguard as a serious competitor. Their [mutual] fund business is a serious competitor [to our ETFs]. The iShares brand we believe — in the space that we care about, which is with advisers — has as good a reputation as Vanguard now, and particularly because we’re really focused on the adviser.

Some advisers love Vanguard, but some advisers actually hate Vanguard because they’re conflicted in going after direct investors, as well, and preaching the fact that you don’t need advisers.

Q. What about your market share?

A. As far as our market shares goes, it continues to rise. It’s rising as fast as I could possibly hope. It’s up to 59% in U.S. ETF assets, which has been steady growth from about 45% over the past couple of years. It’s actually growing even though we’re the biggest.

And Vanguard’s market share is also growing. You’re hearing about this proliferation of ETF providers. What’s really happening is that there’s us and a few that are having success and then about a dozen that aren’t having any success.

Q. What progress have you made in developing your own actively managed ETFs?

A. Since we’ve last spoken, we’re even more confident we’re going to play in that market, and you’ll see it happen in a number of ways. It’ll be proprietary BGI active products. It’ll possibly be a partnership with other [asset managers] providing the alpha, and we’re providing the ETF mechanism.

But I would say that certainly next year, our hope would be to launch some active product. We expect it to be quality active product. We wouldn’t just throw a bunch of active product out there.

Q. Where does your progress stand right now in 401(k) plans?

A. About 7% of our assets are in retirement plans, but that would include individual retirement account rollovers and 401(k)s. My guess is that 35% of the mutual fund market is 401(k) flows, so if you add that on, then it’s pretty significant.

Retirement can accelerate growth, and the other thing that can accelerate it are products that have big demand. And one that we think will be like that is the [municipal bond ETF] that we launched recently.

Q. Advisers have talked forever about going into the 401(k) business, but little has happened there. What can Barclays do to make it more palatable to advisers?

A. The first thing will be the focus on the need for advice.

The Pension Protection Act is already pushing for a better process — not paying for record keeping and other services out of the [fees of the] product. One of the ways we’ll differentiate is to have a separation between the product, or ETF, and the advice, record keeping and services that are being provided.

Particularly in the small-business-plan market, there is a place for advisers. They can provide the asset allocation advice to the plan. They can allocate assets better between taxable and non-taxable investments.

Q. How does that work with iShares?

A. The adviser is involved. With most 401(k) plans, the adviser doesn’t see that account. Our focus will continue to be that if you’re the investor, you should have all your accounts with your adviser so [they] can manage across [all] the portfolios.

Q. What is the missing link to cracking this market?

A. I think it’s separating the product cost from the record-keeping and advice costs. Today you can’t get the [third-party administrator] to do business with you unless you have the products, because that’s how he’s getting paid.

There’s not much for me as the adviser to do in that model. If I have a model that we’re pushing, we have mutual funds side by side with ETFs. But we want the right class of mutual funds side by side.

Q. Whose platform is all this run on, if you don’t have one?

A. We’re working with a lot of small record keepers … Ultimately, then, we believe that will push the big guys into the market. So if you ask Fidelity [Investments of Boston], they’re not [given an incentive] to [use ETFs in 401(k) plans] today. That’s why we use the small players who have less to lose for this business model [of using ETFs in 401(k) plans] to take off.

Q. But by bringing the adviser into the equation, aren’t you adding a layer of fees?

A. I believe that advisers’ fees are well worth the money. The difference between defined benefit returns and defined contribution returns is hundreds of basis points. Ultimately, we want to get advisers involved with defined contribution plans. Instead of [plan participants’] paying for services they’re not using, they can pay an adviser who gives them real service and value in asset allocation and managing risk.

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