Schwab launches direct indexing

Charles Schwab & Co. announced the launch of a direct indexing platform that gives advisers and retail investors the ability to directly own baskets of individual stocks. 

Schwab Personalized Indexing will bring the benefits of direct indexing, like better tax management and portfolio management options, to a wider spectrum of investors. It follows similar launches last year by major investment managers like Vanguard Group Inc. and BlackRock Inc.

The brokerage filed with the Securities & Exchange Commission Thursday and expects to launch the tool by the end of April.

Direct indexing allows advisers to trade weighted baskets of stocks on clients’ behalf  and gives them the ability to directly own a portfolio of stocks. Designed to mimic the holdings of an ETF, the direct ownership of securities can involve a greater level of tax management for investors. 

“Direct indexing has long been available to ultra-high-net-worth investors and institutions able to meet very high investment minimums,” said Rick Wurster, president at Schwab. “We’re able to lower the barriers to direct indexing for more investors and the advisers who serve them.”

Schwab’s platform comes with an account minimum of $100,000, which is lower than most direct-indexing offerings on the market which typically start at $250,000, according to the release. 

Schwab Personalized Indexing starts with a 40-basis-point fee. 

“Each investor is different, and we are now able to leverage our significant scale, deep portfolio management expertise, and commitment to innovation to expand access to personalized solutions that will enable them to invest in ways that meet their distinct goals,” said Omar Aguilar, CEO of Schwab Asset Management. 

Clients initially will have access to three index-based strategies that can be customized, including indexes based on traditional U.S. large-cap holdings, U.S. small-cap holdings and environmental, social and governance, according to the release.

Direct indexing currently makes up 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.

“More wealth advisers are fully embracing the benefits of the approach and utilizing direct indexing as a cornerstone to their investment strategies,” said Jim Dilworth, managing partner at the investing firm Veriti Management.  “Direct indexing could soon become the fundamental building block of asset management for all financial advisers given clients of every size are demanding portfolios meet their unique goals, circumstances and values.”

In May 2020, Schwab purchased the recently shuttered, values-based robo-adviser Motif with an eye toward expanding its direct indexing and ESG investing capabilities. 

An arms race is already underway to build out similar technologies, with some of the most recognizable names in financial services already offering competing products. In July, Vanguard Inc. acquired the Oakland, California-based platform Just Invest with $1 billion in managed assets, and BlackRock Inc. paid more than $1 billion in 2020 to acquire Aperio, another big direct-indexing player based in Sausalito, California.

Internal research by Schwab found one-third of its clients are interested in direct indexing, according to Divya Krishnan, Schwab’s product management director. 

“Personalized indexing will increasingly define what investors want,” she said.