Altruist, a venture-backed startup out to replace most of the third-party software used by financial advisors, revealed Wednesday that it built its own low-cost, direct-indexing system — something asset managers want and began obtaining in a frenzy of acquisitions over the past two years ago.
Alongside an existing model marketplace, the new Altruist Strategist Suite is another twist on the separately managed account platforms that have been around for decades and used by investors to boost returns, lower the taxes they have to pay, or customize a stock portfolio to their liking.
Before the summer, RIAs that use Altruist (and custody assets through its partner Apex Clearing) will gain access to the Strategist model portfolio, which will invest in mutual funds and ETFs, as well as directly in the 500 largest stocks weighted according to their size. Advisors must invest at least $2,000 in the direct indexing sleeve, a minimum that is well below the $250,000 it historically cost to be eligible for a separately managed account (SMA). The Strategist portfolio fee is 12 basis points. Some funds used to build the portfolios have fees between two and six basis points, bringing the total cost to between 14 and 18 basis points.
“These are the largest U.S. stocks and you're getting 80 percent coverage of the U.S. market. It's a really high-impact way to offer direct indexing,” Adam Grealish, head of investments at Altruist, told RIA Intel.
Altruist will automatically rebalance Strategist portfolios and there will be tax-aware versions that only use U.S. municipal bonds for a fixed-income allocation. The company will also periodically tax-loss harvest on behalf of investors and, in the future, advisors will be able to actively harvest losses when they choose.
Later this year, Altruist expects to begin making the baskets of large-cap stocks customizable, like they are in most of the competing separately managed account platforms, and expanding the number of eligible stocks. “There's no reason to stop with just U.S. large cap [stocks],” Grealish said.
Investing directly in individual stocks rather than an index fund can be cheaper (index funds charge fees, albeit low ones), and it allows for tax-loss harvesting (selling a security for a loss then buying a correlated security to achieve a similar market exposure while preserving the tax benefit). Direct indexing also allows investors and their advisors to personalize portfolios by removing individual companies they don’t want to be invested in, for whatever reason.
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When financial services companies eliminated commissions to trade stocks, the cost to replicate indexes and reap the benefits fell dramatically. The new affordability, coupled with increasing investor interest in customized investment portfolios, boosted the popularity of SMAs. A report published last year by the Boston-based research and consulting group Cerulli Associates projected that direct indexing will grow at an annualized rate of 12 percent over the next five years, outpacing mutual funds, ETFs, and separate accounts.
Two years ago, several large asset managers began a buying spree of companies with direct-indexing capabilities.
In early 2020, Charles Schwab acquired some direct-indexing-related technology from Motif and Goldman Sachs acquired Folio Financial. Morgan Stanley acquired asset manager Eaton Vance (which owns SMA platform Parametric) in October 2020 and BlackRock acquired Aperio one month later. In June 2021, J.P. Morgan acquired OpenInvest and then Vanguard acquired Just Invest shortly after.
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. In September 2021, the company acquired O’Shaughnessy Asset Management (OSAM), a quantitative asset manager with $6.4 billion in assets at the time. With OSAM came Canvas, a growing $1.8 billion separately managed accounts platform.
Earlier this month, Charles Schwab launched Schwab Personalized Indexing, a direct indexing solution with a $100,000 minimum. Fidelity recently debuted an SMA platform for self-directed investors that charges 40 basis points and requires only a $5,000 minimum.
Many large asset managers have struggled to price direct indexing solutions after acquiring direct indexing companies, according to Will Trout, director of wealth management at Javelin Strategy and Research.
“I think there's a real challenge to kind of productize these direct-indexing platforms and maintain some sort of decent level of fee,” Trout said. “If you're an asset manager, [and] you get this and you roll it out, are you undercutting your real clients who are wealth managers offering this low-cost solution.”
Trout is also uncertain how meaningful direct-indexing platforms will be to smaller accounts because the tax benefits are small in terms of dollars. The material benefits only begin when an account has $50,000 in assets or more, Trout said.
“The benefits, at least in terms of tax, are minimal. Like what are you going to do? Save 100 bucks a year?” Trout said about accounts with only a few thousand dollars in assets. He likened the high level of customization to vanity license plates. “It's a way to personalize, I suppose, at a small level, your investment holdings but you're not getting tax benefits.”
Still, Altruist and others believe in any level of benefit and that direct indexing represents the future of private wealth management. Trout compared today’s direct-indexing platforms to automobiles in the early 20th century. Dennis Gallant, a consultant at Aite Novarica, said direct indexing is in its infancy and at the stage ETFs were in the mid-1990s.
“Every month, or every couple of months, somebody new is going to be rolling out a new solution,” Gallant predicted.
Some direct-indexing platforms have already found success. Parametric and others have billions of assets under management. Ethic, a direct indexing platform founded in 2015, recently passed the $2 billion mark in platform assets and expects to double that number by the end of this year. Veriti Management, a direct-indexing platform used by 200 institutions and private wealth managers, has reached $1 billion in assets on the platform in just three years.
“I think they'll always be a use for mutual funds and ETFs. Do I think that this is l sending the death knell for the funds structure? No, but I think it's a really compelling alternative,” Grealish said.
Correction: A previous version of this article incorrectly reported that Strategist portfolio fee was between two and six basis points. The fee is 12 basis points.
Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.