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‘The Market Was Moving Fast,’ So Franklin Templeton Leapt at O’Shaughnessy Asset Management

One of the largest separately managed account providers still felt an urgency to prepare for an influx of advisors and retail investors demanding more customized, tax-managed portfolios.

Franklin Resources, the investment firm best known as Franklin Templeton, had a watchful eye on direct indexing for years. Then, after it acquired Legg Mason in February 2020, creating a $1.5 trillion asset manager, the company became “a bit more serious” about improving its separately managed accounts in preparation for clients of the future.

Investors, and in turn their wealth managers, are increasingly interested in more customized, tax-managed portfolios. Simultaneously, lower trading costs and fractional shares are making those portfolios more accessible. Asset managers offering a platform to capitalize on those trends have a chance to gather assets in the fastest-growing part of their industry. Assets in direct indexing SMAs are projected to grow at an annualized rate of 12 percent over the next five years, outpacing mutual funds, ETFs and separate accounts, according to Cerulli Associates, a Boston-based research and consulting firm.

While Franklin Templeton considered whether to augment its own SMA platform, find a partner, or acquire another company with other capabilities, its competitors were doing the same and coming to conclusions. Over the past year, Morgan Stanley acquired asset manager Eaton Vance (which owns SMA platform Parametric); BlackRock bought Aperio; Charles Schwab acquired some remains of Motif; and Vanguard acquired Just Invest.

“We recognized that the market was moving fast,” Roger Paradiso, global head of product solutions at Franklin Templeton told RIA Intel. “Speed was important, but [so was] having a platform that was sustainable and solid to be able to bring to the market.”

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Paradiso has built similar platforms before, understood their complexity, and knew the work it was going to take, he said. After considering all options, the asset manager chose to buy what it needed.

On Thursday, Franklin Templeton announced it was acquiring O’Shaughnessy Asset Management (OSAM), a $6.4 billion quantitative asset manager. With it, Franklin is getting Canvas, OSAM's $1.8 billion separately managed accounts platform.

Financial advisors can use Canvas to build and manage custom indexes in SMAs based on client’s needs, preferences, and objectives. Advisors can create their own templates, or use factor investing, passive, ESG, and other strategies, then add or remove individual securities. Canvas also helps plan, set tax budgets, identify realized and unrealized gains and losses, and systematically sell certain positions to create offsets.

“Technological advances are reshaping how financial solutions are delivered, and we continue to invest in innovative technology to enhance client outcomes and their experience,” Jenny Johnson, president and CEO of Franklin Templeton, said. “Custom Indexing is aligned with our commitment to bringing sophisticated customization to a broader investment audience, and I’m excited to welcome the OSAM team to Franklin Templeton.”

Franklin Templeton was already one of the largest SMA providers, managing $130 billion.

The addition of OSAM and Canvas, which Paradiso called “cutting edge,” could help Franklin Templeton cater to the expanding retail direct indexing market and significantly grow assets under management.

“I don’t know if it’s a hockey stick, but I do think there is tremendous growth coming ahead as it starts to spread among advisors,” Paradiso said.

In 2020, Franklin Templeton also acquired AdvisorEngine, a wealth management software and consulting company that, at the time, worked with more than 1,200 advisory firms managing over $600 billion.

Michael Thrasher (@Mike_Thrasher) is the editor of RIA Intel and based in New York City.

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