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Veriti co-founders Jim Dilworth and David Beatty
Veriti co-founders Jim Dilworth (left) and David Beatty

Fund News Advisors Can Use: Another Direct Indexing Platform Is Quietly Growing

In this week's fund news, direct indexing platform Veriti nears $1 billion in AUM; J.P. Morgan to convert four mutual funds to ETFs; and Hartford enters the ESG ETF market.

Veriti Management, a Boston-based direct indexing platform, has been quietly growing over the past three years and has recently reached nearly $1 billion in assets under management, about half of which are institutional clients and the other half advisors.

In the next couple of months, Veriti also plans to roll out a new advisor portal, which will scale the company’s technology and streamline the process for advisors. Currently, Veriti interfaces directly with the advisor to handle client accounts.

Veriti was co-founded by Jim Dilworth and David Beatty, both graduates of the Kellogg School of Management at Northwestern University. Beatty has a history of building RIAs, including Daintree Advisors, where he’s currently CEO. The two also co-founded Entwood Holdings, a private equity firm that invests in wealth management firms, including breakaway platform tru Independence. Entwood also owns 100% of Veriti.   

Beatty had been doing direct indexing with his clients for many years, but he and Dilworth had a conversation about 3 1/2 years ago about how to build a better solution with the advisor in mind.

“We really started from, what are the clients’ needs and how do we address those needs in the most relevant way?” Dilworth said.

Dilworth said the firm has grown organically, primarily through referrals and word of mouth; Veriti does not have a sales organization.

Advisors are interested in the platform for its tax efficiency and ability to customize client portfolios according to clients’ values, factor tilts, etc, he said.

The offering is different from other direct indexing platforms in that it does not rely on one optimization engine or one data source. And the firm works with 12 different custodians.

“The key to what we’ve built is open architecture, best of breed and super flexible so that we can continue to innovate,” Dilworth said. “Part of the challenge with what we found with some of the firms that we were using in the past is, they had legacy systems and it was very hard for them to break away and innovate beyond the original design of their technology. So ours is more flexible and more open architecture.”

Veriti will do direct indexing for accounts as low as $250,000, but Dilworth said that will decrease over time.

“At a certain threshold, [RIA firms] haven’t embraced it because they just haven’t had the resources or the knowledge to do it, and that’s where the big opportunity’s going to be,” he said. “That threshold to me is under $1 billion where you find less adoption, and that’s changing very rapidly.”

Direct indexing continues to grow in popularity, with some of the biggest players in asset management and financial services betting on the space. Most recently, Vanguard announced plans to acquire direct indexing platform Just Invest, the fund family’s first ever corporate acquisition. In early October 2020, just days after completing its purchase of E-Trade Financial, Morgan Stanley announced it would acquire Eaton Vance for $7 billion, which includes its Parametric business, a leader in offering low-cost, highly customizable, separately managed account products—in other words, direct indexing. And in November, the world’s largest asset manager, BlackRock, announced it would acquire Aperio, which provides customized index equity SMAs, for $1 billion in cash. JPMorgan Chase & Co. also recently agreed to buy OpenInvest, a financial-technology firm that offers a custom indexing solution.

The big firms are essentially betting that the technology to create customizable portfolios for individual clients without, theoretically, abandoning the rules-based characteristics or risk profile of an index is an option that will resonate with investors.

“I think we’re in the early stages of this mass customization movement, and I think as technology continues to improve, these tech-driven solutions will continue to shape our industry and democratize what’s been in the hands of the high-net-worth clients and institutions. And I think it’s good for everybody,” Dilworth said.

J.P. Morgan to Convert $10B in Mutual Funds to ETFs

J.P. Morgan Asset Management announced plans this week to convert four mutual funds, totaling $10 billion in assets, to actively managed exchange traded funds in 2022.

If the funds’ boards approve the move, the firm will convert the following into similar active transparent ETFs: the JPMorgan International Research Enhanced Equity Fund, the JPMorgan Market Expansion Enhanced Index Fund, the JPMorgan Realty Income Fund and the JPMorgan Inflation Managed Bond Fund.

There’s a growing interest among asset managers to convert their existing open-end mutual funds into exchange traded funds, especially with the rise of nontransparent active structures.

Guinness Atkinson Funds became the first asset management firm in history to convert two of its mutual funds into ETFs in March.

In June, Dimensional Fund Advisors converted four equity mutual funds, with $29 billion in assets, into ETFs.

Fund administrator and private label issuer The Nottingham Company got approval in April to convert mutual funds managed by Adaptive Investments into exchange traded funds.

Hartford Jumps Into the ESG ETF Market

Hartford Funds has launched its first ETF focused on environmental, social and governance criteria. The new Hartford Schroders ESG U.S. Equity ETF (HEET) will be subadvised by Schroder Investment Management North America.

Schroders will assess companies quantitatively based on factors, including value, profitability, momentum and low volatility. The manager will then assess companies’ ESG criteria, including the strength of environmental practices, climate change impact and positive stakeholder relationships. And the fund is expected to have less than half the carbon footprint of its benchmark, the Russell 1000 Index.

It has an expense ratio of 39 basis points.

Asset Managers Expected to Boost Year-End Bonuses

Traditional asset management firms are expected to increase their year-end incentive compensation by 10% to 15% from a year ago, according to a new study by Johnson Associates, a compensation consulting firm to the financial services industry.

The increase is being driven by record market highs and broad inflows into fixed income and multiasset strategies, Johnson Associates said. The largest firms are seeing growth in ESG, alternatives and digitally focused platforms, according to the report. But these firms are also experiencing higher turnover, due to remote work, a competitive talent market and pressure from fintech firms.

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