J.P. Morgan Asset Management has launched a direct indexing service for independent financial advisers that uses the tax automation software it acquired in 2020.
The Tax-Smart Separately Managed Account Platform lets advisers customize portfolios based on strategies created by J.P. Morgan’s index team, which manages more than $70 billion in assets, according to the firm. The first SMA available is a U.S. large-cap equity strategy that will let advisers select between 275 and 350 individual stocks benchmarked to the S&P 500. Additional SMA strategies will be added in the future.
Like other direct or custom indexing offerings, the benefit of the Tax-Smart SMA Platform is that it helps financial advisers meet the increasing demand from clients for bespoke portfolios and high after-tax returns, said Jed Laskowitz, global head of asset management solutions at J.P. Morgan Asset Management. Advisers can include or exclude equities to fit a client’s investment views and preferences, and owning hundreds of individual stocks rather than a single ETF or mutual fund generates more opportunities for automated tax-loss harvesting.
“The vast majority of the SMA industry has not been customized,” Laskowitz told InvestmentNews. “Capabilities like this will allow for much greater levels of customization — ESG preferences and exclusions, tax preferences — because the digital experience allows for that to happen in a seamless, efficient and frictionless way.”
The Tax-Smart SMA Platform will require a minimum account size of $250,000, and fees will depend on invested assets, ranging from 23 basis points for accounts with less than $1 million to 10 basis points for accounts with more than $50 million. The product has connectivity to all major custodians so the vast majority of RIAs can access it, said 55ip CEO Paul Gamble.
J.P. Morgan built the product using 55ip, a fintech that uses algorithms to offer tax-smart investment strategies, asset transfers, withdrawals and portfolio management. The asset manager acquired 55ip in 2020 to help advisers tax-efficiently transfer clients in J.P. Morgan model portfolios but realized that custom indexing was a natural extension of the technology, Laskowitz said.
“55ip did a great job of doing this with model portfolios, so let’s do this with indices and actively managed strategies,” he said.
Direct and custom indexing strategies have exploded in popularity across the industry in recent years. Direct indexing strategies managed $362 billion in 2020, nearly one-fifth of the total SMA market, according to a report by research firm Cerulli Associates and Parametric Portfolio Associates, a direct indexing pioneer now owned by Morgan Stanley. Growth is expected to outpace ETFs and mutual funds over the next five years and cross $1 trillion by 2025.
What distinguishes J.P. Morgan’s product is that it combines custom indices, actively managed SMAs and traditional models built around ETFs and mutual funds in one digital location, Gamble said. Advisers who want to do a mix of account types across their book of business can do it all from J.P. Morgan’s digital portal.
“A large percentage of SMA assets are in taxable accounts, but less than 20% are doing tax management,” Gamble said.
The SMA strategy allows for more frequent tax-loss harvesting than other custom indices on the market, and 55ip’s technology makes it faster and more tax-efficient to transfer assets into a custom strategy from an existing portfolio, which Gamble says is one of the biggest obstacles preventing advisers from embracing direct indexing.
Despite the customization and tax benefits of direct indexing, the majority of financial advisers are still unfamiliar with the strategy, according to a separate study by Cerulli and Parametric. A survey fielded in the fourth quarter of 2021 found more than 50% of advisers don’t know what direct indexing is, despite rapid M&A across the industry. Just 12% of advisers are currently using direct indexing.
This suggests that the growth curve of direct indexing will be even steeper than current projections, Parametric CEO Brian Langstraat said in a statement.
“Despite all the growth and attention Direct Indexing has received, our new survey shows there is still room for substantial growth in adviser awareness and of the product and the values it provides,” Langstraat said. “As the story of customization is told and adopted, it will help advisers fulfill unique portfolio requirements for investors across the wealth spectrum.”
[More: Schwab launches direct indexing]
The alts giant's latest executive hire builds on its continuing strategy to expand into the private wealth space.
While it's a useful rule of thumb, wealth industry experts agree Social Security benefits, retirement income planning, and individual expenses should also be factored in.
The holdout optimist from Wells Fargo sees market "past peak uncertainty" as trade war fears push many cheerleaders to pare back their predictions.
Last year's standout winners reflect on their triumph as the wealth industry gears up for another unforgettable night in New York City.
Financial advisors are becoming a bit more leery that fees, particularly for their wealthiest clients, are on the verge of taking a hit.
From direct lending to asset-based finance to commercial real estate debt.
RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.
