12 acquisitions that pushed direct indexing into the mainstream

After decades of only being available to ultrahigh net worth investors via boutique asset management firms, direct indexing has exploded among large wealth management firms since 2020.

Assets in direct indexing are expected to grow more than 12% over the next five years, outpacing traditional products like ETFs and mutual funds, and cross the $1 trillion threshold by 2025. While some, like Fidelity, have opted to build their own product, a dozen large financial institutions have bought their way into direct indexing.

Here are the moves that brought the formerly obscure strategy into the mainstream.

Charles Schwab and Motif — May 2020

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The demise of digital advisor Motif, which used direct indexing and fractional shares to deliver thematic investment portfolios, was described as a “whirlwind.” After announcing plans to shut its doors in April, the company was sold for parts. Folio Financial got the client accounts, Goldman Sachs Asset Management took over the proprietary ETFs and Charles Schwab became the new owner of Motif’s technology and intellectual property, which the brokerage said it would use to accelerate plans to offer direct indexing to retail consumers and RIAs.

Goldman Sachs and Folio Financial — May 2020

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Just days after Motif’s direct indexing technology went to Charles Schwab, Goldman Sachs acquired Folio Financial — the first custodian to offer fractional share trading and the new owner of Motif’s accounts. The company has long offered direct indexing as a strategy to utlrawealthy clients, but Folio’s fractional share technology could help bring down minimums further for the RIA market Goldman hopes to grow in.

Morgan Stanley and Eaton Vance — October 2020

Morgan Stanley's digital strategy focuses primarily on three areas: analytics, automation and new ways for clients to interact with the firm.
The direct indexing market really started to heat up near the end of 2020 when Morgan Stanley acquired Eaton Vance for about $7 billion. The deal brought along Parametric, one of the pioneers of direct indexing, which sold to Eaton Vance in 2003.

BlackRock and Aperio — November 2020

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A month later, BlackRock purchased Aperio, a Parametric rival and fellow pioneer of direct indexing. BlackRock paid $1.05 billion in cash for the firm and specifically cited a desire to use Aperio’s direct indexing capabilities as a reason why. “The wealth manager’s portfolio of the future will be powered by the twin engines of better after-tax performance and hyper-personalization,” Martin Small, head of BlackRock’s U.S. Wealth Advisory business, said at the time.

JPMorgan Chase and 55ip— December 2020

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Just two months after J.P. Morgan Asset Managed partnered with 55ip, which applies tax management technology to model portfolios, the parent company decided to bring the fintech startup in-house by buying it for an undisclosed amount from the TIFIN group. The purchase gave JPMorgan proprietary tax management capabilities, but it needed another purchase to get all the way to direct indexing.

JPMorgan Chase and OpenInvest — June 2021

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The company took the next step over the summer with OpenInvest, a startup that specializes in providing values-based investing via direct indexing. Terms of the transaction weren’t disclosed.

Vanguard and Just Invest — July 2021

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After four decades of championing passive investing through funds, Vanguard made its first-ever acquisition to obtain Just Invest, which at the time managed about $1 billion with direct indexing. Vanguard plans to use direct indexing to enhance the capabilities of its financial advisors rather than its direct-to-retail products, and some predicted that Vanguard’s entrance would launch a new fee war on the cost of direct indexing.

Franklin Templeton and O’Shaughnessy Asset Management — September 2021

Franklin Templeton Investments, a long-time active asset manager, is seeking approval for a Saudi Arabia ETF, according to a filing with the SEC.
Another trailblazer of direct indexing, O’Shaughnessy has Canvas, a direct indexing software it launched in 2019. When it got acquired by Franklin Templeton, the firm reported that direct indexing accounted for 28% of its $6.4 billion in assets under management.

PGIM and Green Harvest Asset Management — October 2021

The move from Prudential would expand PGIM's capabilities beyond mutual funds and target-date funds.
The headquarters building of Prudential Financial Inc. stands in Newark, New Jersey, U.S., on Thursday, July 29, 2010. New York Attorney General Andrew Cuomo began a fraud probe into the life insurance industry and subpoenaed MetLife Inc. and Prudential Financial Inc. for information about profits on death benefits retained from the families of deceased policyholders including military personnel. Photographer: Emile Wamsteker/Bloomberg
Prudential got into the game with Green Harvest in a deal where terms were not disclosed. At the time, the company said it saw an opportunity to improve after-tax incomes in an era of all-time market highs and tax increases on the horizon.

BNY Mellon Pershing and Optimal Asset Management — December 2021

Pershing’s new ETF platform is only available to its clients.
Pershing acquired Optimal, which uses software to create personalized investment portfolios using direct indexing, to form the core of Pershing X. The new business unit launched in October, 2021 to accelerate the development of a highly integrated, all-in-one technology suite for RIAs, independent broker-dealers and trust companies.

RiverFront, Baird and GAMMA Investing — January 2022

Baird courtesy of Baird
GAMMA was founded in 2020 by industry veteran Lorraine Wang to offer a custom index SMA platform. RiverFront and Baird purchased a minority ownership of the firm, which RiverFront CEO Pete Quinn said demonstrated “belief that direct indexing is an important piece of the investment management ecosystem for the long-term.”

UBS and Wealthfront — February 2022

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After the bank spent $1.4 billion to acquire one of biggest independent robo advisors, UBS chief financial officer Kirt Gardner said Wealthfront’s tax-loss harvesting and direct indexing technology were of particular interest.
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