Savvy Wealth, a venture capital-backed New York–based registered investment advisor that had $100 million in assets as of the end of 2022, has rolled out a new direct indexing tool that allows its advisors to create more customized portfolios in a separately managed account structure.
About 10%-15% of the RIA’s billable assets are now on the direct indexing platform.
“We want to offer all the benefits of direct indexing that other providers offer—things like, for example, personalized investment portfolios that are tax-efficient and can be customized based on a number of different factors and also have the ability to have custom risk adjustments as well as part of the portfolio that’s constructed,” said Ritik Malhotra, co-founder and CEO of Savvy Wealth.
The direct indexing tool was built through a combination of outside partners, along with the firm’s own engineering. For instance, it uses outside partners to provide data feeds to Charles Schwab, its custodian, and for providing reporting or insights on the personalized portfolio. Malhotra declined to name which partners they’re working with. The technology for rebalancing and execution of trades was built in-house.
“What’s special about ours is that we’ve now brought this to be an in-house product, which gives us a lot more control, versus having to work with a third party, which may not have the right controls and customizations, or also have a lot more lead time and lag time as associated with that, and maybe even higher fees,” Malhotra said.
Nathan Wallace, a founding principal wealth manager at Savvy, said he has been using the tool to tilt toward ESG factors, a big focus in his work with clients. The tool can be used for exclusionary screens, he said, as well as tilts, where the portfolio scores well across metrics like equity and pay, for example.
Like other direct indexing tools, it also allows for tax loss harvesting and fractional share trading.
“For me, it’s been a no-brainer for my clients with taxable assets because of the tax loss harvesting and the benefits you can get there, as well as delivering on the value side,” he said. “My book of business has a large tilt toward being environmentally conscious, and being able to help them with that, while at the same time delivering some tax benefits, make it a really easy sell to the client and a really exciting sell to the client.
“What I’ve noticed is that the other advisors are starting to hit that same stride of talking to investors with larger portfolios of taxable assets and having great success converting what was an ETF portfolio into a direct indexed portfolio,” he said.
The tool also allows for scenario planning. An advisor can analyze a portfolio’s numerical information, such as beta, correlation and standard volatility. But they can also use scenario testing to look at black swan events and how the portfolio would hold up in those situations, Wallace said, “which can be especially helpful when talking to clients because words like ‘beta’ don’t mean much to many clients. But understanding, ‘I remember the COVID crash, and let’s see how this portfolio fares through this same time period when I felt really unhappy with my portfolio.’”
There’s no one standard fee for the direct indexing portfolios, Malhotra said. The fee charged to the client depends on how complex the direct indexed SMA is going to be, but they’re in line with other direct indexing providers. There’s also no minimum account balance, but for clients to realize certain benefits, like tax loss harvesting, they need a certain amount of capital.
Malhotra founded Savvy Wealth in July 2021, with the idea to create a digital-first platform for financial advisors centered around modernizing human financial advice. So far, the firm has brought on eight advisors. All of the firm’s advisors receive equity ownership in the RIA.
In November, the firm raised $11 million in a Series A-1 funding round led by Berkeley, Calif.–based venture capital firm The House Fund, bringing the RIA’s total funding to $18 million.
Direct indexing continues to be a hot area of development and acquisition in the asset management space. Cerulli Associates estimates direct indexing assets to grow at a compound annual growth rate of 12.3% over the next five years.