Digital RIA Savvy launches direct indexing

Savvy CEO and co-founder Ritik Malhotra

Instead of using a product that was already on the market, Savvy built its direct indexing software in-house.

Savvy, a digitally native registered investment advisor, is joining the increasingly crowded direct indexing market.

Assets managed in direct indexing products reached $462 billion in the first quarter of 2022, driven by client demand for tax optimization and more personalized investment portfolios, according to Cerulli Associates. That’s a 15% increase from the second quarter of 2021, and Cerulli expects assets in direct indexing will grow at an annualized rate of 12.3% over the next five years, outpacing ETFs and mutual funds.

Rather than partner with an existing software provider, Savvy built its direct indexing platform in-house. The firm’s financial advisors will be able to customize a given index according to a client’s environmental, social and governance values, tax situation and financial preferences, said Savvy co-founder and CEO Ritik Malhotra.

“The age of personalization is upon us, and off-the-shelf index funds are largely ill equipped to meet the complex needs of high-net-worth investors,” Malhotra said in a statement.

Despite the growing assets, only 14% of advisors are aware of and recommend direct indexing to clients.

One issue might be that advisors are struggling to differentiate between products. Fintech startups, custodians, asset managers and turnkey asset managers have all rushed to provide the product for advisors, and while small differences exist, many look alike, according to a recent Morningstar report.

“Comparing different options resembles comparing different chain restaurant menus,” Morningstar said in the report.

Savvy didn’t respond to a request for comment on how its product would differentiate from others on the market.

Rather than a consumer-facing robo-advisor or a fintech company building white-label technology for other firms, Savvy is a traditional RIA launched on a proprietary technology system that was entirely self-built. Savvy’s approach has attracted $18 million in venture capital, including an $11 million round in November led by The House Fund, a venture capital firm backed by University of California, Berkeley.

Savvy’s direct indexing will take advantage of the firm’s existing automated rebalancing technology to allow advisors to manage concentrated positions and target exposure to preferred styles, helping to increase diversification and mitigate risk, Malhotra said in a statement.

Using a self-built technology could make it easier for Savvy’s advisors to offer direct indexing than those at other RIAs who must integrate a direct indexing product into existing tools for portfolio management, financial planning, tax optimization and reporting.

Savvy has recruited eight financial advisors to its platform from firms including BNY Mellon, Merrill Lynch, Morgan Stanley and other independent RIAs. In January, Savvy recruited Brad Webber, who had managed $150 million in assets at Bank of the West, to its platform.