Pathstone, an independent advisory firm with $35 billion in assets under advisement, has acquired Advisor Partners, a boutique direct indexing platform with about $1.9 billion in assets. The tech firm was founded by Andrew Rudd, co-founder and former chairman of Barra Inc., the software company acquired by MSCI in 2004.
Pathstone President Matthew Fleissig said his firm considers itself a "comprehensive" family office, with an average client size of about $115 million. Tax optimization is a focus for the firm and its ultra-high-net-worth clients, and the direct indexing platform will be used to help create post-tax plans for his clients, he said.
Fleissig said Advisor Partners will operate as a sister company to Pathstone and won’t be integrated into the RIA. The tech company will continue to serve its outside advisor clients.
Advisor Partners uses no in-house products, Fleissig added, but can replicate any indexes the client needs, as well as implement active strategies. It can overlay the portfolio with factor tilts or align it with a client’s mission and values. It’s not simply customizing one sleeve, he said, but rather the entire portfolio.
Through a strategic approach to M&A, technology and socially responsible investing, Pathstone has emerged as one of the fastest-growing advisory firms to UHNW individuals. The firm recently acquired $3 billion in assets from Eaton Vance WaterOak Advisors. CI Financial acquired the remaining $11.4 billion of WaterOak’s wealth business.
The firm has been developing some of its own technology in-house, including portfolio stress tests and a rebalancer. Fleissig said the firm plans to eventually sell that technology to outside advisors.
There’s been a wave of enthusiasm recently behind direct indexing, with firms like Vanguard and Franklin Templeton making inroads via acquisition. Cerulli Associates predicts direct indexing to grow 12.4% over the next five years, faster than exchange traded funds (at 11.3%), separate account programs (at 9.6%) and mutual funds (at 3.3%).
Firms opting to use direct indexing platforms can create customized portfolios for individual clients without, theoretically, abandoning the rules-based characteristics or risk profiles of a traditional index.