Fidelity Institutional is rolling out real-time fractional share trading of stocks and exchange traded funds for advisors who custody with the firm, starting this month. The firm plans to expand that capability to Fidelity’s clearing clients in the next several months.
Fidelity has offered Stocks by the Slice, its fractional share trading capability for retail clients, since fall 2019. Schwab has had similar fractional share trades for its retail business since May 2020.
Ryan Plotner, head of transaction and banking solutions at Fidelity Institutional, says he believes Fidelity is the first major clearing and custody firm to announce real-time fractional share trading for its advisor clients. The firm has piloted the capability with six RIA clients over the last several weeks.
“While there are similarities between what a retail investor is doing and what an advisor is doing on behalf of his customers, some of the workflows and the needs are pretty different,” Plotner said. “We had to address some of those more complex workflows and manage some of the technology implementations differently.”
The new capability will allow advisors to execute fractional trades during market hours through the Wealthscape platform, without the need to wait until the end of the trading day or for multiple orders to add up to full shares before executing the trades.
“Our advisors are looking to manage their own portfolios, their own strategies,” Plotner said. “They want to be able to input those strategies and provide personalization for their investors. So for an advisor to be able to go in and trade real-time and to be able to construct that portfolio real-time based on what they’re seeing in the markets, what they’re seeing from the securities they’re looking to invest is really the value.”
The capability applies to all NYSE and Nasdaq securities, although there are caveats. If a security cannot be traded, the advisor will receive a notification through the trading system that it’s not eligible for fractional share trading.
The rise of fractional share trading technology has been key to bringing direct indexing downstream to retail clients and advisors. But Plotner says today’s announcement is not necessarily about a direct indexing offering.
“Direct indexing and fractional shares have been linked and certainly the evolution of fractional shares in many ways helped to enable direct indexing, and that’s going to be a continued area of focus for us,” he said. “But we have nothing to announce today around direct indexing specifically.”
Tim Welsh, president and founder of Nexus Strategy in Larkspur, Calif., believes it eventually leads to a direct indexing offering.
“If you’re doing fractional shares, that means you have specific stocks you want to own in the portfolios you’re managing, and that’s going to be of size, so you don’t really have to do this at that level; it’s got to be for a reason—to do direct indexing,” he said.
One of the big benefits of direct indexing, Welsh said, is the ability for tax loss harvesting, but it makes sense only for large accounts.
“If I’ve got a $5 million portfolio and you save me $35,000 in taxes, that’s massive,” Welsh said.
“It’s really now become the perfect-storm environment to do direct indexing because you got the tech, you got fractional shares, you got zero commissions, you’ve got the algorithms, trading and rebalancing. Why not? Now if you’re an advisor, you almost fiduciarily will have to move into this space, because if you’re defaulting into a mutual fund or an ETF, you’re actually costing the client potential gains,” said Welsh.
Scott Smith, director of advice relationships at Cerulli Associates, said Fidelity's fractional share offering is not a game changer, but it does allow advisors to create more customized portfolios for their clients with a little more refinement.
“It’s going to be one of those things that a platform will need to be considered kind of cutting edge, or up-to-date even or just to be a contender for a firm’s business,” Smith said.
The functionality will also make it easier to trade high-cap stocks. Take Berkshire Hathaway, NVR or Amazon, currently trading at about $421,000; $5,000; and nearly $3,400 a share, respectively.
“Especially in the case of high-cap stocks, it makes a difference in getting people exposure in the proper amounts for them,” Smith said.
There has been a tidal wave of deals in the direct indexing space in recent years, in which some of the biggest players in asset management and financial services made broad inroads—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.
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 2020, the world’s largest asset manager, BlackRock, announced it would acquire Aperio, which provides customized index equity SMAs, for $1 billion in cash.
And more recently JPMorgan Chase & Co. agreed to buy OpenInvest, a financial-technology firm that offers a custom indexing solution, and Vanguard announced its acquisition of Just Invest, a wealth management technology company with a direct indexing offering.
Portfolio management and trading solutions provider Vestmark recently announced it was doubling down on direct indexing, with plans to build out a more robust fractional share trading capability.