BlackRock's Rob Goldstein on the Next Megatrends in Finance

24:54They're at centers of an ecosystem. The ecosystem is highly regulated. The ecosystem has zero tolerance for fault or error. the processes you do not only leverage tremendous amounts of proprietary data, so it's not within these models or accessible by the models, but importantly, clients are putting their most sensitive data into these platforms. And then what you're doing in terms of workflow is highly, highly, highly idiosyncratic and requires this combination of people, process, and technology. So it's a hard time in this world, in my opinion, to predict what 2050 looks like. But when you look forward 10 years in our industry, these platforms, if anything, are going to do more, not less.

25:57And I think what really is going to be unlocked is that users like Joe are going to access these platforms through their own coding tools, but these coding tools are going to be central to those platforms. I didn't forget your black box comment. Going back to - You will never forget. Going back. No, I think it's - I'm quoting other people. No, I think it's important. And I think that technology, 10 or 20 years ago, certain technologies were designed to be closed systems. You know where I'm going. Certain technologies were designed to be closed systems. Aladdin was one of those technologies. And roughly 10 years ago, we started this Open Aladdin campaign well before anything to do with this round of AI we're in, which was all about the future of technology is going to be some people are going to want to interact with it through a keyboard and a mouse, and many people are going to want to interact with it through code.

27:02Because even if you're graduating with an English major, if you're graduating at most schools at this point, you've taken a coding class. So just the amount of technical expertise that you come in is a whole different level.

27:16Tracy Alloway:So this is like opening up more like API endpoints and things like that, as opposed to say like open source, like open within a closed ecosystem. And that is a critical element because open within a closed ecosystem, one of the things, and it's like obvious after the fact, but one of the things that we realize like, oh my God, this is amazing. And it's so valuable is that when you call our APIs, for example, in Aladdin, your permissions go through. So if you think about the complexity of managing permissions in an asset manager with thousands of people, you could see some portfolios, you could see some portfolios.

27:59They're different portfolios. You could trade, you're not allowed to trade, you could only confirm trades. The complexity of those permissions, so the fact that when you call an API, it knows what you can and can't access, that whole control plane and layer is an incredible value proposition. And the more you have people coding and the more you have people interacting with systems in more technical ways, the more valuable those control planes actually wind up being.

28:31Tracy Alloway:What happens to the flip side? Okay, you've described some core pieces of infrastructure that are regulated, there's proprietary data, etc. Clients are putting their most sensitive info in the world. And your view is that the value of those platforms will grow. Is there a software that's not that? Are those zeros? Absolutely. Absolutely. Absolutely. Absolutely. Well, first of all, these things have long tails. So actually going through the process of retiring a system is a lot of work, no matter what the system is. So there are long tails, but there are certain technologies that are really, and we all use them, there are certain technologies that are about collating public information and making it easy for you to access.

29:32And I think it's fair to say that the AI tools that exist are the ultimate oracles in being able to do that, in being able to scour all public sources and give you back information in the way you're most comfortable with. So particularly that segment of SaaS, which is that convenience layer, where they don't really have proprietary data, they're not really in the workflow. They're a convenience technology. I think those convenience technologies are in trouble. They're certainly going to be looking for ways of reimagining their value proposition. Well, one of the reasons we wanted to have you on the podcast is because you are both a provider of AI, viz Aladdin, and also a user of AI at your own company.

30:31And we've all seen various executives and managers talk about AI as a productivity enhancing tool, and they tend to talk about it in very general terms. So I would be curious to hear from your perspective exactly what a productivity enhancement at BlackRock actually looks like. I will give you a productivity enhancement from Friday of last week. Because, and by the way, what I'm describing, I think, is the future. Everywhere, I hope BlackRock gets to that future faster than others, but I believe it's the future. So we have been doing a lot of work, enhancing a lot in many ways. And one of the big themes that we have is how do we provide more transparency in the private markets to be as close as possible to the public markets in pursuit of this whole portfolio?

31:29So we have a large program of work that's been going on for quite some time. So I try to spend hours every Friday getting demos of things we're working on. So my Friday afternoon demo along the theme that I just described was a demo of a tool that was awesome. But let me go through how it was created. And this was the first time end to end that at least I've been shown this. So a group of people that included portfolio managers, risk professionals, engineers, product managers, a group of people sat in a room for multiple hours talking about how this capability should work. That discussion was recorded.

32:27That discussion, through the recording of it, created a functional document. That functional document was lightly tweaked. That functional document was then put in some of the AI coding tools that we use. That document, through the AI coding tools, led to a prototype. There was a debugging process that you lived through that we just described. And on Friday, I've seen a lot of prototypes before in my sort of 32 years. Can imagine. So I know the questions to ask where you see the prototype is like a thin shell. Yeah. But if you press enough, the shell cracks. Like this wasn't like a prototype. This was like the real deal.

33:16And when you look at that cycle, we effectively collapsed what would have taken the unit of measurement would have been months. Now the unit of measurement was days. Now it will still go through our software development lifecycle. It will be tested, all of those things. But when you look at that as a productivity tool, this goes back to the 10xing, the amount of lines of code in the world every year. There's just going to be an explosion in the ability to engineer things. Now I'm wondering if the coding tool, when it sees a transcript of a meeting like that, do you think it weights the participants by title and level of importance?

34:04No, this is a real question.

34:05Tracy Alloway:It probably does. It would be weird if it didn't, right? It's interesting. My intuition is it doesn't. My intuition is this would be a great exercise in those who talk most are probably most reflected. I heard about a company that's doing third party consulting for helping companies implement software. And one of the things that they're doing is they get on a Zoom with the client and they have a camera trained on the whiteboard that they're working on. And that video file also is part of. So in addition to the audio, because, you know, whiteboards are the lingua franca of software development.

34:45Tracy Alloway:So that also gets uploaded to it and so that it like sees that whole workflow and stuff. It's pretty wild stuff. I'm curious, tokens, there's been a lot of headlines lately about token sticker shock. We are spending a lot on inference. I'm curious if you could tell us anything about token consumption this year versus last year at BlackRock. But also, like, one of the things that we're also seeing, and it's related to this, is like the compute constraints that have long been talked about as theoretical are starting to actually bite people who are sort of like anthropic users or like whatever. Like, can you talk a little bit about token consumption and is the compute constraint real from your perspective?

35:30Tracy Alloway:If you could snap your fingers and get 100 ,000 more plugged in GPUs, would that be a big help right now? Well, I think that you have to sort of go back in time a little bit. So one of the key, key, key lessons learned that I've experienced, and I remember one of the near founding partners, a gentleman, Charlie Halleck, who unfortunately passed away, what he instilled in me, among many other things, was if you have the right modelers and engineers, and you leave them unconstrained, they will bankrupt the company in terms of their insatiable appetite for compute. In the old days, you had a physical data center that was the constraint.

36:19You would have to order hardware. At some point, people would say, we're outgrowing our data center. You'd say, let's wait a year and see what happens. So in today's world, the elasticity is obviously very different. But as a starting point, there are a group of people within BlackRock, and I think this is true in any sort of great financial services company, that if you leave them unconstrained from a compute power perspective, 20 years ago, they would have bankrupted the company, 10 years ago, and today they will. So part of it is, how do you think about where to invest? I don't know offhand the number of tokens we're consuming today relative to a year, but it's multiples higher.

37:04And I think that we're still at a point, again, as a company, but also at a broad industry level, where I don't really think the game has started yet. So I don't think anyone really knows what the token consumption is going to be. And equally as important, I don't think anyone has really started optimizing their token consumption. You know what someone needs to do is build an Aladdin for token efficiency. It is a certainty that not only will that exist, but one of the gentlemen who, the person who actually leads our AI lab, a gentleman, Stephen Boyd, I had called him in the early days of this happening and I'm like, what are we missing?

37:48Like, Stephen, help me understand what are we missing? he said two things and he is a professor of engineering at Stanford he said you're missing two things one is that articulate language is very very powerful and I'm like okay like what does that mean and he's like think about it I'm a professor if I'm reading a paper and it's like not in great it's not written that well you check everything and if you're reading a paper that's written really well, you just assume it's right. So that was the first point. The second point he had, which relates to this topic, he said, just remember, there's a bunch of graduate students here and everywhere else that right now are working on the most boring aspects of this too, including how to have these models be more efficient.

38:38So right now, it's all about the quest for intelligence. I think we're going to see it pivot slightly to the quest for enterprise use cases. And then I think it's going to pivot very quickly to the quest for efficiency of how you're accessing things. We're not there yet.

39:42I want to go back to something you said about private markets quickly, which is this whole portfolio management idea, this idea that via a system like Aladdin, you can manage your private assets the same way you would manage your public assets and you get more transparency around pricing and things like that. So part of the sales pitch with private markets has been this idea of an illiquidity premium and the idea that you earn a little bit more because these things are not treated like public market assets. Once you start to integrate them via new technology into your system, once you start to be able to manage them much more similarly to a more liquid asset, does some of that sales pitch start to go away?

40:25I think of it as an effort premium. There's a liquidity element to it, and then there's like an effort premium. If you have to do more work, presumably you need to be compensated for that. But I also believe that, and I feel so old as I talk like this, I'm only 52, but I feel so As crazy as it sounds to many people, when I started, the way you would get information about public bonds, because even Bloomberg back then was a bit nascent, you would read a prospectus and you would type into a computer, this is the maturity, this is the sinking schedule, this is the call schedule. Now, today you say that to people who entered the industry in the past 20 years, and they think you're nuts.

41:15So I think there's no fighting technology. That's my own opinion. So I think it is certain that if you say in 10 years are the private markets more or less transparent, they're certainly more transparent. And I think if you think about your life, almost everything in your life is becoming more transparent. It's funny. I don't think any of us, I try not to affix technology on my body, but it's very rare that three people would be together where someone doesn't have some device that's monitoring their blood pressure in real time. So everything is pointing towards more transparency. I have a hard time believing that as private markets exposures in portfolios grow, the end asset owner is going to wind up with less transparency.

42:06So I think this is just the direction of travel. I do think over time, certain components of it will start to become more standardized, very similar to things that happened in the public bond markets and the public equity markets. And then there will be new innovations in other ways. But I believe that things will become much more transparent. It's a certainty.

42:34Tracy Alloway:In the future, and this is, I guess, more from just an investment standpoint, but what is the investor's source of edge in the future? At one point, maybe there was a source of edge because you were early to jump on and see the potential of stringing together some microsystems and you could replicate whatever are these workstations. Just looking forward for the portfolio manager, et cetera, what constitutes edge? It's a great question. And I think across industries, if you think of them as a treadmill, everyone's going to have to run faster. There's no question that that's the case. I think the edge, you could break up into three categories.

43:10First, I think the edge is going to be helping clients with their whole portfolio as opposed to just pieces. And I think if you look at the asset management industry, a very significant, I would say, evolution aspect of the asset management industry is that the industry organized itself inconsistent with how clients build portfolios. You had fixed income shops, you had equity shops, you had index managers, you had active managers, you had systematic managers, you had public markets, you had private markets. And then you force the client to put all this stuff together. So the industry is going to pivot more towards helping with the whole thing, which is a different type of edge.

43:57I think that the ability to use these tools is going to be an edge in and of itself. So notwithstanding, coding is going to be easier and there will be multiples more. The ability to build technology is going to become more, not less important, even if the frictions to build technology go down. I would argue, I was at a conference and someone asked me, who would you like to hire coming out of university? And I said, English majors. And that was a big mistake because then thousands of people emailed me that their child's an English major while I speak to them. But the reason I said English majors, and I believe this, we're living through a time where those who could have imagination and articulate it, the ability to implement that has never been as fast.

44:54And literally, if it used to be like years, now it's like days. So the ability to have those ideas, the implementability of those ideas is going to be different than any point. So that creativity and imagination. And then lastly, obviously, the world is becoming very complicated. You basically have this collision between national security, technology, and capital. You have this fragmentation of geopolitics. You have the changing demographics of the world. You have what's happening with this alien technology that's now been found on the planet Earth. So if you think about the global connectivity that's required to really manage portfolios and how geopolitics is going to implement within portfolios going forward, I think that requires on-the-ground networks as much as it requires technology.

45:59And it's interesting. I'm sure you guys have had a similar experience. I read the paper. I read Bloomberg. I watch a lot of stuff. But when you talk to, and I was actually supposed to be traveling last week in the Gulf region, and instead I did a virtual tour, when you speak to our clients there, you get a very different picture of what's going on than what you're reading. And I think those networks are going to become more important in terms of edge as we look forward. Nothing will replace being on the ground. Well, actually, on that note, you're in a position where you're hiring people constantly for very specific roles.

46:46Are the processes or the questions that you're asking people now different in the age of AI versus what they were like four years ago? It's interesting. I hope so. I know the questions I'm asking people are. I hope that's at scale. Maybe I should follow up on that. But the questions I'm asking, I couldn't be more excited about the opportunities ahead for BlackRock, but I couldn't be more aware of the requirement in today's world. Everything needs to be reimagined. and what we need and what I think leaders are going to be faced with. And ironically, I think a lot of the re-imagination is going to come bottom up.

47:33But how do you re-imagine what you do? How do you re-imagine how you grow? How do you re-imagine how you interact with clients in this new world. And I think that, again, I don't think that's started. I think right now it's a bit of a brain teaser, a lot of experiments, but it has not started. Almost every great company, if you walk in in the year 2030, is going to be fundamentally different than today. And the way I think of this, this is not an overnight reimagination, but it's not a five-year reimagination. It's somewhere in between those two.

48:18Tracy Alloway:You know, we said in the beginning, we could go for hours and there's a million other things that we could ask. One last question on my mind. I've asked this version to a few different people, and it maybe kind of relates to the other kind of tokens, tokenization. But just this idea - That's going to get confusing. I know. She's really annoying already. Well, can I just say one thing before you ask your question? It's going to get confusing. It already is. But importantly, AI and digital assets are very related topics, extremely related topics. Well, this kind of maybe you can fold that into the answer here.

48:56Tracy Alloway:But, you know, like an interesting thing, there's a lot of very exciting private companies that people want to get access to. But in many cases, they're already kind of trading in some way. And there might be like these SPVs that people have already or some token somewhere that trades on hyperliquid on the weekend that represents somehow shares of Anthropic or whatever. You need other hobbies. But I'm curious from your perspective, like, and another thing that relates to this is the disclosure obligations for existing public companies seem like they're going to come down over time. And maybe companies will only have to report every six months or a year, maybe never.

49:34Tracy Alloway:Like, will there always be a bright line between what's a public and what's a private asset? Or is it just going to be this spectrum of liquidity and disclosure, but no clear definition of what it means anymore between public and private? It's a great question. I think over time, it'll be more of a spectrum. I think that when I look at the broad industry over the past multiple decades, the lines, one of the defining themes, the lines almost across everything you could imagine have been getting more and more blurry. And I would argue that's been because of technology. So if you think about the old style boxes that existed, they were convenience technologies because you couldn't bottom up model things.

50:22You basically said, okay, mid-cap equities have this attribute and that's a Lego piece as opposed to let me model what the individual stocks are and then I could think of it in the context of a whole portfolio. So I think that what's happening is that technology is enabling those lines to be less discrete and more blurry across spectrums and across how do clients build portfolios? How do these Lego pieces get put together to actually achieve their objectives? I think that there's a lot going on embedded in your question, including you see, and to me, this is one of the most remarkable things that is happening, is that two, three, four years ago, the whole narrative was private for longer.

51:16And certainly, I don't know how this is true, that there's fewer public companies today than when I started. Yeah, you always hear that, Stan. I still don't really get it. I've checked it. It's actually true because I didn't believe it. Yeah. But you wonder, how is that possible? Now, that said, the flip side of it is you see for these companies like OpenAI, Anthropic, SpaceSat, their race to go public, because at some point, the public markets provide a lot of value propositions that are beyond what the private markets can provide. So I think you see this sort of tale of two cities that's happening.

51:52But there will be a spectrum, including a spectrum of certain end investors and institutions that want to have a digital wallet and certain end investors and institutions that want to have a traditional custody account. And it's not a binary thing. It's about technology enabling that personalization. I have one more question, sort of a wild card. But what do you and Larry Fink disagree about the most? And the reason I ask is, no, I'm genuinely interested. You've been working alongside each other for years and years and years now. I have a personal interest in close collaborative relationships.

52:35Yeah, Tracy and I disagree on a lot. So it's a very legit question. I would say often we both see things similarly in terms of the endpoint. point, Larry is more of a tomorrow person, and I'm more of a, well, there's work to do here. This is going to take a few years. I would say that that's typically it. Okay, Larry is a Joe, and I'm a Rob, I guess. All right, Rob Goldstein, thank you so much for coming on Oddbots. That was great. That was a lot of fun. That was great.

53:08Tracy Alloway:Thank you so much. Awesome. My pleasure.

53:23Joe, that was a really fun conversation. That was fun. And a lot to think about. I mean, I do think when we're talking about moats around some of these businesses, you brought up the power dynamics law very early on. And it does feel like a lot of the moat is basically size and data and capability that you have. And I can't imagine that you hear this. You hear people saying that they're like vibe coding a bunch of different programs and they all look kind of interesting and cool. But like, it's hard for me to imagine a big moat around those businesses if you've just like plugged in a few instructions into FODCO.

53:58Tracy Alloway:And no one is going to be putting anything of importance or sensitivity into some homemade. Right. I mean, that's definitely true. That's what was interesting, this idea that actually the regulatory moat around finance actually becomes a valuable thing in the age of AI. Totally. You know, it's interesting, too, not really AI related, but the idea of being able to provide a solution, all of portfolio visibility. Yeah. What is one reason why the big get bigger within finance? One reason is because only a really large entity would have the capacity to be able to like, and here's what we can offer you with private credit, and here's what we can offer you with indexing, et cetera.

54:44Tracy Alloway:So, okay, the end investor has this big portfolio consisting of lots of different types of asset classes. As he mentioned, historically the industry has sort of been verticalized by asset class if you want some entity that has how do all the puzzle pieces fit together which is the essence of portfolio construction then theoretically you just want like a really big company that understands all of it yeah i also thought and it was kind of also on the source of edge question is we've talked about this before it always seems like one of the fun jobs in finance would be the uh the channel check person, the person who goes to the mall to see like - Oh, yeah, the field trips.

55:23Tracy Alloway:Yeah, the field trips is like, okay, how many sweaters are on the gap shelf, whatever. Maybe that becomes even more valuable because it's like things that have not yet been put into a model. Yeah. And look, I love that people listen to Odd Lots. I love that people read the news, particularly financial news on Bloomberg. I've never thought by and large that people read an article and it's like, I'm going to make an investment decision based on that. Hopefully it helps inform their thinking or their processes in some way. But no one listens to a podcast and then goes out and buys the stock, by and large.

55:56Tracy Alloway:But it's because once it's out there in the digital world, it's kind of priced in already. So there's going to be that intense hunt for information that is truly has not been put into the model yet. You are such an EMH purist. I am. It's amazing. But right, like the value of people who can find information that has not turned into training data yet for a model, that data is going to get like super valuable and maybe like more valuable and more reason to like just like get out on the road and stuff like that. No, I largely agree with that. The other thing I thought was really interesting, and it gets to your last question, was the sort of melding of public and private markets.

56:35And it's also what I was kind of getting at with the whole portfolio thing. If all these private assets are tokenized and treated in the same way in a portfolio or at least visible in a portfolio in the same way as a public asset would be, it seems like that distinction starts to get really, really blurry. Oh, totally. Right?

56:53Tracy Alloway:Not to go back to a point that I just made. But on this like – I think we're actually already seeing it on the – Sorry. I moved on too quickly, Jim. No, no. This just clicked to me too. But it's like, OK, where are we? Maybe there'll be more value in people who go out on the road and get information that's not in the model. We saw this recently with all the people going crazy for Cetrini's analyst in the Strait of Hormuz. And this idea that field trips out to the world to collect information that has not been digitized yet is going to be where all the action is. It feels like that's going to be a big thing.

57:26No, it sounds trite, but I feel like the pendulum has swung from, you know, for the past 20 years, if you were a smart person who could think in terms of numbers and code, you were probably very valued by society. And now the pendulum sort of swings to those on the ground relationship building social skills. It's it's an interesting transition.

57:50Tracy Alloway:It's an interesting time. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, go to Bloomberg.com slash OddLots, where the daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots.

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58:52Thank you.

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