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The Strategy Behind Ethic’s New, Customizable Morningstar Indexes

Wealth managers can now begin their portfolio construction process with a familiar basket of stocks, then alter it as needed within Ethic’s $1.6 billion platform.

Ethic, a growing platform that wealth managers use to build bespoke stock portfolios for clients, said Tuesday that it gave advisors access to eight Morningstar indexes, familiar portfolio blueprints that they had requested to help them invest more easily.

Many wealth managers already use Morningstar indexes to build portfolios. But advisors are also increasingly interested in giving clients more personalized portfolios with separately managed account platforms like Ethic. Providing advisors with both the customization and the Morningstar strategies they know will help Ethic win over more investors and attract more assets from existing ones, Alex Laipple, the head of Business Development and Relationship Management at Ethic, told RIA Intel

The Morningstar indexes available through Ethic’s platform include broad large-cap and small-mid-cap indexes focused on growth or value, as well as the Morningstar Wide Moat Focus Index and the Morningstar U.S. Dividend Valuation Index. 

Wealth managers can use the indexes to help build portfolios at no additional charge. Ethic charges an annual fee of up to 0.50%, depending on the total assets under management and portfolio type. There is no minimum advisory fee. Ethic will continue to offer in-house strategies.

Assets in direct indexing separately managed accounts (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, although that is largely due to the size of the markets. Cerulli estimates that total retail assets using SMAs is just $360 billion. Trillions of dollars are invested in ETFs and mutual funds, respectively.

Still, more assets are expected to flow toward SMAs in the coming years, which presents an opportunity for asset managers.

“As advisors and their clients increasingly seek out index-based investment tools tailored to individual goals, we’re pleased to collaborate with innovative firms such as Ethic that are answering that call and enabling personalization at scale. Working together, we hope to support wealth advisors and their clients in more informed investment decision-making,” Peter Dietrich, global head of business development for Morningstar Indexes, said in a statement.

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Since it was founded in 2015, ESG-minded independent wealth managers, family offices, and foundations have used Ethic to build portfolios. In June, Ethic surpassed $1 billion under management, and its growth is accelerating. Today, it manages $1.6 billion, across nearly 1,000 accounts and for more than 100 firms and families.

Adding third-party indexes was not always a defined goal at Ethic. But more advisors are likely to use Ethic if familiar indexes make it easier. The addition of Morningstar’s could help the company reach more than $2 billion under management as soon as January, according to Laipple. Ethic is also considering adding indexes from other providers, he added.

“I wouldn't say it was ahead on the road map,” Laipple said about adding third-party indexes. “Democratization and access are what this is about.” 

New partnerships with two custodians are also expected to drive growth at Ethic. For years, Ethic has integrated with Charles Schwab, BNY Mellon Pershing, and Fidelity Investments (an investor in Ethic). It recently partnered with Northern Trust and US Bank, two critically important relationships as Ethic works with more investment consultants to institutions. Endowments, foundations, pensions, and others are unlikely to switch custodians, or repaper, just to use Ethic. To work with more of them, Ethic needed to build the bridge.

In October, Prince Harry and Meghan, the Duke and Duchess of Sussex, revealed that they are investors in Ethic, have assets managed by the company, and will be “impact partners” to help promote the asset manager. 

New York-based Ethic raised a $29 million Series B round of funding in the spring, bringing its total capital raised to more than $48 million. It has 60 employees and expects to have 100 before the end of 2022.

Ethic remains one of the few independent SMA platforms, after legacy banks and asset managers acquired others in a flurry of deals last year. Vise, a venture capital-backed SMA platform that uses artificial intelligence to help advisors manage portfolios, also remains independent. 

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

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