Morningstar Wealth jumps into the direct indexing game

The new platform will leverage technology to help financial advisers move clients onto the platform for personalization and tax management.

Morningstar is building on its $12 billion separately managed account platform with the addition of a direct indexing feature aimed at the financial advisory market.

After a five-month pilot program that gave 90 financial advisers a chance to road test the platform, Morningstar Wealth is opening its direct indexing platform with a suite of core and thematic equity strategies that are being promoted as personalized portfolios.

“We think personalization is a key trend,” said Daniel Needham, president of Morningstar Wealth.

Needham said the pilot program uncovered a keen focus on tax management capabilities as well as the importance of ease of use.

“We’ve focused on the workflow to make it as easy as possible for advisers by removing the friction,” he said.

While the general concept of direct indexing has been gaining appeal across wealth management over the past few years, Needham acknowledges that it’s essentially a souped-up separately managed account that leverages new technologies to streamline and enhance the portfolio management process.

“Technology has enabled the implementation of direct indexing at scale,” he said. “If you’re an adviser working with a client, the onboarding process can be quite cumbersome. If you look at some of the steps you need to go through, it can be pretty complicated and include manual overrides. We’ve focused on completely digitizing the workflow. The ideal goal is you don’t have to pick up the phone, print anything out, or send an email.”

Cindy Galliano, head of product for investment management at Morningstar Wealth, said the direct indexing launch follows more than a year of working with an advisory council that “helped us shape our new offering.”

“Their practical insight and experience with clients guided our road map and development,” Galliano said. “We are excited to now make this available to the market.”

The core focused portfolios have a $150,000 minimum investment, with fees starting at 45 basis points and dropping down to 30 basis points after accounts reach certain break-point levels.

The more concentrated thematic portfolios have a $75,000 minimum investment, and fees start at 55 basis points and drop to 40 basis points after reaching break points.

“Advisers are looking for ways to meet client interest in new investment options, particularly those that allow customization and personalization,” Needham said.

But as direct indexing offerings continue to mushroom across the financial services industry, skeptics are keeping a close eye on the trend.

“Morningstar’s big claim here is that tailoring a portfolio with direct indexing is going to make clients feel they are getting more personalized service, but the reality is that most clients have no clue what they are invested in and could not care less as long as they see the end result moving in their favor,” said Sara Grillo, an industry consultant and vocal critic of direct indexing.

“This move is just the typical Wall Street paradigm of everybody jumping in when there is a dollar to be made,” Grillo added.

From Needham’s perspective, direct indexing is the next evolution of separate account management.

“The actual concept of direct indexing is not new,” he said. “It’s an equity SMA, which have been around very long time. But the drivers that make direct indexing different have to do with technology, and the ability to move large amounts of data around and store it and do complex calculations over a large number of portfolios is a game changer.”