As the pandemic enters its third year and everyday life takes on some semblance of normalcy, the InvestmentNews team looks back at the most interesting industry developments of 2021.
An arms race is already underway to build out direct-indexing technology, following a year that saw some of the most recognizable names in financial services open their war chests to acquire the latest fintech tools.
In July, Vanguard Inc. acquired the Oakland, California-based platform Just Invest with $1 billion in managed assets, and in May, Charles Schwab & Co. purchased the recently shuttered, values-based robo-adviser Motif -- just to name a few. BlackRock Inc. paid more than $1 billion late last year to acquire Aperio, another big direct indexing player based in Sausalito, California.
More recently this month, BNY Mellon's Pershing became the latest to acquire a direct indexing fintech out of the Bay Area. The deal for Optimal Asset Management will open up the tech to their advisers through the recently created Pershing X business unit, as well as to institutional and retail clients.
“[It] is the latest step in our Pershing X buildout, which aims to fuel growth by helping clients solve the challenge of managing multiple and disconnected technology tools and data sets,” Pershing CEO Jim Crowley said in a statement.
So, what’s all the fuss with direct indexing?
The technology allows advisers to trade weighted baskets of stocks on clients’ behalf that are usually built around environmental, social and governance principles. The tools allow clients to directly own a portfolio of stocks designed to mimic the holdings of an ETF, which also creates certain tax benefits by owning the underlying equities. By choosing the select stocks clients want to own, advisers can also better align those investments with companies that promote social good.
The deals are riding an explosion of values-based investors in recent years that is only expected to grow. According to Morningstar, money flowing into ESG funds in the U.S. hit a record $51.1 billion in 2020, more than double the 2019 record of $21.4 billion, a third of which came in during the fourth quarter of last year.
Direct indexing currently represents only about 22% of the separately managed account industry’s total assets, and the growth potential is vast, according to recent data from Cerulli. The strategy currently represents more than $362 billion in assets, but the projected five-year growth rate is 12.4%, ahead of both exchange-traded funds and mutual funds.
Moving forward, expect to see incumbents snap up any and all fintechs with direct indexing in their taglines. Companies will also evolve different direct-indexing strategies based on their clientele to differentiate their offerings. Morgan Stanley's purchase of Parametric, for example, focused on tax-centric offerings for high-net-worth clients, while J.P. Morgan pursued OpenInvest to cater to the more ESG-minded investor.
To read the rest of this series:
Chicago-based Mesirow Fiduciary Solutions adds flexPATH's plan-level outsourced fiduciary book, boosting its retirement market reach to $164 billion.
Also, Raymond James's employee advisor channel adds breakaways from Wells Fargo and Stifel, while UBS welcomes an ex-Morgan Stanley duo in Indiana.
It promised guaranteed principal and 10% monthly returns. The SEC says it invested nothing.
Ten years after entering the fee-based annuity market, MassMutual Ascend says nearly half its lifetime sales came in the past two years alone – but barriers remain among fee-only advisors.
Amplify, WealthReach, Zeplyn and Zocks have unveiled partnerships aimed at automating portfolio management, content creation, account opening, and client communication.
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Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
