BlackRock expected to show its progress winning over retail investors

(Reuters) - When BlackRock Inc reports its fourth-quarter earnings on Thursday, results are likely to show that a three-year effort to win the hearts and dollars of financial advisers and their retail clients has started to pay off, thanks to record inflows to the firm's bond funds.

Since BlackRock first took aim at mom and pop investors in 2011, it has launched a branding campaign and a reorganization of its sales force. Since then, the firm has gotten 500 of its actively managed investment strategies on brokerage platforms, including on the recommended lists of Wells Fargo Advisors, Raymond James, UBS and other firms. The fund family is a top seller at Morgan Stanley and UBS, according to BlackRock.

After adding $37.7 billion through the first three quarters of last year, BlackRock's retail actively managed business stood at $525.5 billion at the end of September.

That is a small slice of BlackRock's $4.5 trillion in assets under management, but it is a key bottom-line contributor, because the funds bought by retail investors carry higher fees than those sold to institutional clients. Though they make up just 12 percent of assets, they account for 35 percent of fees.

For every $10,000, an investor in a BlackRock retail fund pays around $64 a year, compared with $34 for an exchange traded fund and $10 for institutional clients, according to the firm.

"From a revenue perspective in regard to the fees compared to the institutional business, it is extremely important," said Robert Fairbairn, global head of BlackRock's retail and iShares business. "We believe that we can grow it at a clip that is faster than the industry."

BOND GROWTH, EQUITY OUTFLOWS

BlackRock has its bond offerings - along with the abrupt September resignation of Bill Gross from Pacific Investment Management Co - to thank for the growth in 2014 of its retail funds.

Seventy-two percent of the record $18.9 billion inflows into BlackRock's mutual funds went straight into its top-performing, unconstrained bond fund, the $26.2 billion BlackRock Strategic Income Opportunities Fund , according to Morningstar. The firm's bond funds had record inflows of $22.4 billion in 2014.

"The concern is that this is hot money looking for a home outside of Pimco and it might not stick," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

Fairbairn said the Pimco exodus was "a bit of a dividend for us," but said BlackRock bond funds have been outperforming and attracting assets for years before that.

Eighty-five percent of BlackRock's stock funds have underperformed their benchmarks over the last five years. In 2014 they posted record net outflows of $5 billion, according to Morningstar.

On Tuesday, UBS Wealth Management told its advisers that it had dropped BlackRock's Equity Dividend Fund from its mutual fund select list due to concerns about the fund's underperformance, increasing size and potential style drift, according to a memo obtained by Reuters.

"I have never looked at their equity funds - I basically didn't even know they had them," said Jacob Wolkowitz, director of investment research with Accredited Investors, a Minnesota- based adviser with $1.5 billion in assets under management, who moved money to BlackRock Strategic Income Opportunities from the Pimco Total Return Fund last year.

Since 2012, BlackRock has replaced five of its nine U.S. equity teams. The firm's push to turn around its U.S. equity performance "is still early in the process," Fairbairn said.

NEW SALES APPROACH

In 2013, BlackRock reorganized its 150-person wholesale force to enable salespeople accustomed to selling iShares ETFs to also sell mutual funds, and that has accounted for at least some of the success with retail investors, said Frank Porcelli, head of the U.S. wealth advisory business at BlackRock.

Financial advisers agree. BlackRock's wholesalers are more like "portfolio liaisons," rather than pure sales people, said Daniel Roe, chief investment officer of Budros, Ruhlin, Roe, a Columbus, Ohio-based registered investment adviser with $2.1 billion, which started using BlackRock's Strategic Income Opportunities Fund two years ago.

"They have a high level of knowledge about positioning and strategy," he said. "That's not always the case with other fund companies."

In 2012, BlackRock also launched its first-ever branding campaign targeting retail investors, with ads appearing in publications such as The New York Times, The Economist and The Wall Street Journal as well as online.

But the firm has a long way to go in gaining brand awareness when competing with the likes of Fidelity Investments and The Vanguard Group, which have been targeting individual investors for years, Porcelli said.

"We are not nearly there in terms of name recognition," Porcelli said. "But we used to be the firm that only financial advisers or the executives at big private banks knew."

(Reporting by Jessica Toonkel; Editing by Linda Stern and Leslie Adler)