In our FUSE Forecast 2020, we predicted that direct indexing strategies would become more accessible this year to retail investors seeking a level of customization not possible through ETFs. With the elimination of trading commissions and the ability to trade fractional shares, direct indexing has become more cost effective and may be implemented in lower balance investment accounts.
There have been numerous developments thus far in 2020, as firms have begun to add to or expand upon direct indexing capabilities. Perhaps the biggest news to come to date has been Schwab’s purchase of Motif. Direct indexing was a hot topic at the Schwab Impact conference in 2019, and Schwab announced the acquisition earlier this month, with Schwab’s chief digital officer citing the firm’s intention to accelerate its development of thematic and direct indexing solutions for retail investors and RIA clients. Shortly after this news was released, Goldman Sachs announced plans to purchase Folio Financial—a brokerage, custodian, and fintech company—leading some to speculate that Goldman plans to leverage Folio’s fractional share investing and direct indexing capabilities to build upon Goldman’s wealth management offering.
While the Schwab and Goldman acquisitions may have received more attention, there have been developments among smaller firms as well. Ignites reported this month that Brinker Capital, a leading turnkey asset management program (TAMP), will be adding direct indexing capabilities, based on job postings for a senior portfolio manager and quantitative analyst tasked with developing and managing its direct indexing and tax management programs. And Smartleaf—a software platform that manages roughly $50 billion in assets and provides automated rebalancing to wealth advisory firms—announced a partnership with IDX Insights to expand its direct index offering, through addition of US large-cap high dividend, mid-cap and small/mid cap (SMID) index strategies and ADR-based foreign strategies, all of which will be available in the second half of this year. FUSE expects to see increased activity throughout the rest of the year as wealth management firms look to add direct indexing to their product rosters.