In just three years, independent RIAs have helped asset manager Ethic grow to manage more than $1 billion, an important business and psychological milestone.
“Once you cross that billion-dollar threshold you're in the stratosphere of being an institutional-size advisory business,” Doug Scott, co-founder and CEO of Ethic, told RIA Intel.
When Alex Laipple, the head of Business Development and Relationship Management at Ethic, joined the company in 2018 it was managing about $20 million for a handful of RIAs (it now manages assets for about 75 firms). He “obsessed” over reaching the $1 billion mark but he’s more excited about the company’s future. Managing that much has a psychological impact on investors, Laipple said. Asset managers with at least $1 billion are no longer viewed as business experiments but something proven. They also gain their own unique gravity, although some wealth managers were already feeling drawn to Ethic.
“We’ve been winning mandates against some of the biggest asset managers in the world,” Scott said.
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Wealth managers use Ethic, a separately managed account platform, to build personalized, sustainable, equity portfolios for their clients. Other direct-indexing platforms exist but the investment management component is increasingly commoditized, Laipple said. Ethic’s technology prowess combined with educational materials, and its reporting on the impact portfolios are making, differentiate the platform. Financial advisors are using Ethic to have conversations about sustainability with clients and growing their businesses in the process.
Ethic charges a fee of up to 0.50% annually, depending on the total assets under management and portfolio type. (Ethic also has in-house strategies advisors can use for clients who aren’t interested in diving deep into their portfolios and singling out companies to add or exclude.) There is no minimum advisory fee.
After 20 years at BlackRock, Jennifer Grancio left the firm in 2018 as the asset management industry was wrestling with how to better personalize portfolios for institutions and the wealthiest private investors. The biggest firms had ideas and solutions, but she worried their attention was being pulled in too many directions and that success was hardly guaranteed. “Jury’s out that one,” she said.
In 2019, Grancio, who is now an executive at the upstart activist hedge fund Engine No. 1, ultimately made an early-stage investment in Ethic and joined the startup’s board. She was impressed with the cohesiveness of the founders and believed Ethic was a business needed by wealth managers to serve clients now and in the future.
Ethic’s growth is proving that is the case and showing it is a successful business, according to Grancio.
“If you’re able to raise $1 billion with these smaller accounts, once you’re getting up to a billion dollars, you’re at this sort of escape velocity,” she told RIA Intel. “It’s like a magic number.”
It wasn’t long ago that impact investing faced many, and some powerful, skeptics in the U.S. Now, “ESG investing is not just the future. It’s the present and the future. And it’s not just a fad, it’s become table stakes,” said Wally Okby, a senior analyst at Aite Group, a research and consulting firm focused on financial services. Ethic will continue to benefit from that, he said.
“The billion mark is psychologically a great milestone. No one can take anything away from any group that reaches a billion in assets under management,” Okby said.
“For a company their age, I think they should go out and brag about reaching this milestone. It’s definitely a fantastic achievement and it’s nothing to be shy about. Especially when you consider the time period and you think about the trials and tribulations that companies like Ethic have had to face.”
In March, Ethic raised a $29 million Series B round of funding, bringing its total to more than $48 million and valuing the company at $139 million, according to PitchBook. The startup and its investors do not comment on the valuation of the company, a spokesperson said at the time.
The company is not profitable because it is focused on continuing to grow, Scott said. In addition to more RIAs and broker-dealers, Ethic has begun talks with a large private bank and investment consultants to institutions. The 40-employee company also plans to double in size within the next six to 12 months.
“We've always had very ambitious goals as a business,” Scott said. “A billion dollars is a tremendous milestone for us. We see it as a drop in the ocean relative to where we could be and intend to be in the coming years.”
Other separately managed account platforms have also grown this year. Just Invest, a company founded in 2016 that recently partnered with QMA, the $120 billion quantitative unit of PGIM, has more than $700 million under management, according to regulatory filings.
Vise, another startup founded in 2016, uses artificial intelligence to help wealth managers manage customized portfolios. Since December, it has more than quadrupled its assets under management to more $250 million and doubled the number of client accounts. In May, Vise raised $65 million in Series C funding that valued the company at more than $1 billion.
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.