In a new episode of the Financial Planning Podcast, Anton Honikman goes deep on where direct indexing could be heading next and the current state of fintech.
Honikman, CEO of the San Francisco-based
Before becoming leader of MyVest, he was president of startup money manager Ada Investments. Honikman also helped establish the Strategic Ventures Group for Barclays Global Investors, now BlackRock, and led the team at Barra, now MSCI, that created BarraOne.
At MyVest, Honikman develops enterprise wealth management technology for the digital age. A subsidiary of TIAA since 2016, MyVest works with large RIAs, broker-dealers, banks, service providers and others to deliver solutions.
During his conversation with FP Podcast host and lead editorial producer Justin L. Mack, Honikman talks about where he sees direct indexing fitting into the overall investment product set in the future; its ability to cannibalize ETFs; the potential conflict between asset and wealth managers; and how direct indexing needs to evolve to become truly accessible to more investors.
Listen to the new episode — as well as all future and past episodes — by subscribing to the FP Podcast on
Transcription:
Justin Mack: (
Good morning. Good afternoon. And good evening. Welcome to the financial planning podcast. I'm your host, Justin L. Mack reporter with financial planning. And it's my pleasure to introduce this. Week's guest, MyVest CEO, Anton Honikman Anton. Thanks so much for joining us on the show this week.
Anton Honikman: (
Great to be here. Thanks Justin.
Justin Mack: (
Absolutely now, not only are we welcoming Anton to the show, we're kind of doing a welcome back to this platform here at FP. He joined us on FP's invest podcast, live from a conference in San Francisco, way back in 2020 before things changed. And that honestly feels like a lifetime ago. So we're really excited to catch up with him here in 2020, as so much has happened both in the industry and for my vest. Now for those unfamiliar, Anton brings more than 20 years of experience to this week's episode. And his career has always focused on the intersection of investments and technology. Before becoming leader of my vest. He was president of ADA investments, a startup money manager. He helped establish the strategic ventures group for Barclay's global investors. Now BlackRock and led the team at Barra. Now MSCI that created bar one at my vest.
Justin Mack: (
He's committed to building enterprise wealth management technology for the digital age. Pretty important nowadays, a subsidiary of T I a a since 2016, my vest works with large RIAs broker dealers, banks, server providers, and more to deliver solutions and Anton, as a veteran in the FinTech space, there's a lot I'd love to pick your brain about, but we've only got so much time. I wanna start broad though, and get your thoughts on the current state of FinTech. I think in the last two years in particular, we've seen a variety of new and exciting solutions driven largely by necessity as we've been pushed further and further away from each other in real life. I think a perfect example is the last time you joined us on a FP podcast, we got to see your face and now we're doing it through zoom. So really just wanted to get your thoughts on the state of FinTech, how it's changing and how it's felt to kind of be in this space at a time where it seems like everyone is more interested in it.
Anton Honikman: (
Thanks, Justin. I must say it's great to be back. I'm a big fan of, of your organization and happy to share thoughts with you. Uh, yeah, FinTech. It's not just the last couple of years, but FinTech has been in a sort of unprecedented boom in the last, uh, five years or so with a huge influx of capital, uh, backing some great innovations. I, I think broadly, uh, FinTech has the promise and in some circumstances, the, the delivery of bringing more people into the financial services industry, uh, so making financial services more inclusive, more democratized leveling the plane fields, you see this in multiple areas, you see that in sort of embedded finance, like for example, you can be in e-commerce experience and get access to credit at the point of sale. Uh, you see a big rise in neobanks, which are largely digital platforms, uh, disintermediating the traditional banks, um, and having fabulous innovations like giving, uh, people access to their paycheck early, uh, which in some circumstances means that they're not going to payday lenders for in getting, you know, loans, ATUs rates, mm-hmm, , all of these things are fabulous developments delivered by FinTech.
Anton Honikman: (
Uh, you see, uh, traditional tech companies like apple and Amazon and others, uh, getting into, uh, FinTech in different ways, usually innovating around payments, um, and interfaces with merchants. And I think it's generally a good thing for society. And I say generally, because there are obvious exceptions, uh, in that it, uh, it serves to be more inclusive than the financial services industry I grew up in.
Justin Mack: (
Definitely. And on that topic of that change, let's pivot into a topic that's been hot and on the minds of many direct indexing and FinTech technology, really working hard to extend that access. Um, something you've talked about a lot of already just that democratization, what it means, how it's changing, how wealth managers are approaching, working with clients and what clients are looking for. So really wanna start at the beginning in your experience, where do you think direct indexing is heading right now and what do advisors need to know and how is it shaking things up in terms of access for all investors?
Anton Honikman: (
I, I think to answer that question's probably important to, to set the scene, to set the context of the bulk of the direct indexing category today is really a high net worth or ultra high net worth solution. Mm-hmm, , uh, it's about roughly a 400, uh, billion dollar category. And most of that comes from sort of the leading lights, the, the, the, the founding firms in the field like parametric and Aperio, who were offered sort of single security representation of indexes to high networth individuals through advisors, um, in, with a primary goal of extracting tax alpha from their beta, their core beta exposures. I think it's, it's a fabulous mouse trap and, and it's growing, and I think I'm optimistic. I think it will continue to grow. I also think to some extent it will democratize, uh, the future will not simply be, um, the province of the rich with direct indexing, but I think there are some, some caveats that we should talk about over the course of today. Um, I don't think it's a simple story that let's take something that has been traditionally provided to the high net worth and the ultra high net worth provided to a retail audience and automatically it works, it doesn't, um, and part of its evolution. Uh it's you know, I think we're in the early stages of that evolution to a more democratized access to directed Nixon.
Justin Mack: (
Definitely. And, and I won't put you on the spot and make you predict, so what exactly will it reach the masses? Because I think that would be, uh, a lot to ask of you right now, and too much pressure to put back on you in case it doesn't come to fruition. So I'll, I'll bug you about that maybe in a future podcast, but something that interests me that you just mentioned was the evolution, how it will have to change before it could reach something beyond just the high net worth or ultra rich, um, what kind of evolution would you, or, or do you think would need to take place before that wider dispersal could actually happen?
Anton Honikman: (
Well, I think what many people will talk about is, is fractional share support. You know, the minute you have a smaller dollar balance in an account, and you're trying to replicate an index with many, many securities in that account or in that portfolio. Uh, if you don't have a high balance, it's gonna mean you end up having fractional share ownership to represent the proportions of those securities in the index. Uh, historically custodians have not supported, uh, fractional shares, which means that, you know, they've only been able to offer this to high net worth individuals that is changing. Um, custodians are increasingly supporting fractional shares, uh, which in turn allows minimums to, to drop on some of these account sizes. And you see that recently with the launches from fidelity and Schwab where they're, you know, I think fidelity is offering their direct indexing solution at a $5,000 minimum.
Anton Honikman: (
I think Schwabs is about a hundred thousand dollars minimum, but still these are much lower minimums than ever contemplated historically. And in part enabled by the fractional share support. But I think that's only one dimension of this, you know, part of it is also economics in order for it to be promoted at scale and adopted at scale. Um, the premium that one currently plays pays for a direct index solution needs to be evaluated relative to an equivalent ETF. So ETFs are generally lower cost for an index ETF sub 10 basis points for a large liquid index. And the, the lineup of available ETFs is increasing. There's so much more granularity in terms of the type of, you know, granular, I would say I'm reticent to say personalization, but certainly the different types of sub indexes available means there's a lot more on the shelf now than ever before, and a lot more choice to consumers. So you can have a relatively low cost tax away vehicle in an ETF with a lot of choice. Okay. So that has to be compared against paying 25 to 40 basis points for a direct index alternative that might extract more tax alpha and maybe slightly more personalized, but is that premium worth it relative to the alternative? And I think for true widespreaded option to your question, that premium is gonna have to come down.
Justin Mack: (
Mm-hmm definitely, and I guess what's driving the interest or the appetite right now. Is it the personalization? Is it the, I guess the kind of cutting out of the middle man, I guess, what do you see are the, the primary drivers behind this interest in direct indexing and this desire for people to kind of change, you know, the levels at which they're provided?
Anton Honikman: (
Well, I think for the bulk of the existing 400 billion in this, in this category, uh, the interest came from the opportunity to harness tax alpha in the, in the, in the high net worth and ultra high net worth space. But where it's evolving now is to a younger, less affluent audience who wish to invest with their values, it's consistent with their values. Mm-hmm , mm-hmm . So they are looking for more personalization, and that is a more dominant criteria than tax alpha extraction. So it's shifting as you shift away from the high net worth and the ultra high net worth to the affluent and mass affluent and retail categories, the primary drivers of demand shift to it's generally a younger audience, generally, a more activist audience, generally one that wishes to have their investments represent their values. And so what's, what's driving demand then in those categories is really more personalization. They want to exclude certain stocks or certain sectors. They want to tilt towards certain stocks in certain sectors, uh, consistent with their values. And while ETFs, as I mentioned earlier, there's a great menu of ETFs out there. They may not offer sufficient granularity, uh, and, and therefore direct indexing offers some hope that that level of granularity might be delivered to those investors.
Justin Mack: (
Mm-hmm . And, and like you said, tho those investors who wanna be able to step back, take a look at their investments and feel good about where their money is going. And, and like you said, that alignment of actual personal ideologies with their investment ideologies, a very strong driver. I imagine that's tough though, in, in your role as someone who's providing solutions for advisors that will help these investors with this keeping up with essentially a new crop of investors who probably want different tech solutions to do this from my Vest's point of view, what's the biggest, I guess, point you're chasing to keep up with the change in the evolution in the di space.
Anton Honikman: (
I think the biggest challenge is around the data. Hmm. Um, what you find is different data vendors, different, uh, research firms, for example, rate stocks on different criteria. There is no yet established standard for how securities should be measured along the environmental, social and governance, um, dimensions mm-hmm , uh, an example is some people think that Coca-Cola, uh, is, is a very positive start from a sustainability perspective because it, uh, promotes, uh, development of local communities. Others feel like the same company Coca-Cola contributes to the obesity pandemic and therefore scores negatively along those ESG dimensions. So there are legitimate views on either side of an individual company, and there are many, many, many examples of this there that leads to that, that sort of dispersion of uses leads to a dispersion of treatment by data vendors and, uh, which makes it hard to establish a sort of a universal standard for how these products are constructed and evaluated and consumed.
Justin Mack: (
All right. So a lot to keep in mind and, and like you mentioned, views can, can differ on a single organization. Uh Coca-Cola I think was a fantastic example, depending on where you're standing, that might be the right thing or the wrong thing for your investment of your portfolio. And God forbid, you're a Pepsi fan that changes things even further
Anton Honikman: (
exactly. And I mean, even recent examples include, um, some of the weapons manufacturers, uh, military contractors, things like firms like Northrop Grumman, for example, you know, many people believe that they, you know, build, uh, machines of war and machines of death. Other people believe that they're protecting democracy by supplying equipment to the Ukrainians. So it's, it's a really interesting and legitimate, uh, bifurcation of views that is reflected in the data.
Justin Mack: (
Absolutely. All right. Now I wanna thank everyone for checking out the financial planning podcast. We are speaking with today's guest, my vest CEO, Anton Honickman. We're gonna take a quick break, enjoy a word from our sponsors and we'll be right back. All right. And you are listening to the financial planning podcast. I am your host, Justin, om, joining me this week is my vest CEO, Anton Honickman. We're talking about all things, FinTech, direct indexing, and a whole lot more. So jumping right back into the conversation. Wanna talk to you a little bit about conflict and of course, there's this, like I said earlier, that cutting out of the middleman that exists with direct indexing. Do you see, uh, or anticipate any conflict between asset and wealth managers, um, and how that might play out as people go direct and, and people kind of cut out maybe that previous approach or relationship when direct indexing gets involved?
Anton Honikman: (
Uh, I think it's gonna be very interesting to watch it unfold. Mm-hmm , uh, I think part of it is gonna be driven by economics wealth management firms, as an intermediary, uh, are gonna be faced with, you know, the build versus buy decision in a way, can we build it and deliver it direct to our, to our investor clients, uh, or should we effectively pay a, an SMA manager, um, and effectively that becomes another layer of cost in the, in the value stack. Um, so I do think given given tools, uh, at the disposal portfolio construction, um, data tools at the disposal of wealth management firms, I do think there will be a move to disintermediate asset managers in the direct indexing space. Mm-hmm that being said for many or a number of asset managers have significant inherent advantages, uh, in that they already have well established distribution, either of SMAs, traditional SMAs or models through advisory channels, um, or they have excellent expertise in ESG. They also have teams of people that are effectively providing a service to advisors by helping evaluate client portfolios and, uh, building solutions around them. Many asset management firms are increasingly becoming solution providers. So while wealth managers, I do think will, will disintermediate to some extent, I think some of the leading asset management firms will have a strong legs in the growth of the, uh, direct indexing category.
Justin Mack: (
Definitely. And there's also, like you mentioned that evolution of the asset managers, two solutions providers and for a wealth manager, particularly if you're a newer or smaller RIA, for example, I'm sure that kind of leaving it up to the experts is, is beneficial. If they provide a solution that that's makes sense for you and it's cost effective, I guess there what's the risk in allowing that relationship to continue, even though it might evolve a little bit, a lot of evolution talk today,
Anton Honikman: (
For sure. I think in the RIA category, um, there's more outsourcing. There will be, um, I think receiving direct indexing solutions through their, uh, the temps that they use through the custodians that they use, um, SMA managers that they currently, uh, benefit from. I think when you come to the larger, uh, brokerage firms and banks, that's gonna be more interesting to see whether they, uh, disintermediate the asset managers, if they have the capabilities, the technology to do it themselves, that that's, I think, where it's more likely to, to occur.
Justin Mack: (
Definitely. Yeah. We'll keep a pin in that. And we, we invite you back, uh, in the future a couple years to see how that went. Um, because I, like you said, I'm sure it's gonna be an interesting thing to keep an eye on. Especially as new tech gets developed and, and pitched to wealth managers by asset managers, we'll see how that goes. Um, something else I wanna talk about is terms of evolution is the advisor client relationship, as it relates to direct indexing, I guess, how are things different as far as engagement and reporting and, and why might that require a different approach if you're an advisor working with an investor, um, and they're really focused on di
Anton Honikman: (
Well, I think direct indexing represents it's a very positive step in the evolution of our industry towards something that is far more client centric and less product centric. You know, if you think about a direct indexing solution, you're, you're starting with the client, what are your preferences? What are your values? What are your tax circumstances instead of starting with the product? Here's what I have to sell you. You're saying, tell me about you. And as the industry evolves to be more client centric, so that enhances the advisor client relationship to your question where the advisor is less of a salesperson and more of a partner in the personal circumstances of their client. Direct annexing is a, is a, is a wonderful step in that evolution. I don't think it's the final step, but it's certainly, uh, entirely consistent with that trend.
Justin Mack: (
Mm-hmm definitely. And, and I imagine, as you mentioned earlier, that desire for investments to, to line up with beliefs that will create a scenario where advisors working with this with clients will learn more about their clients just on a very natural way because they find out, Hey, these are, these are the things I'm passionate about. These are the things I'm okay with. These are the things that I don't want part of my investments at all. Do you think that even just going through that process can help a client or an advisor learn more about each other?
Anton Honikman: (
Absolutely. You know, and it's self reinforcing. The more they have solutions which can capture personalized client preferences. The more they'll be engaged with their clients asking about their, their personal preferences and, uh, that will change the nature of the relationship for the better. Uh, it'll be more engaging. Uh, it'll be less focused on traditional measures like benchmark relative performance. Um, I just feel that we're on this, this trend in wealth management and, and ultimately everybody will benefit investors and service providers will all benefit. I do think what's gonna come with all of that is, is lower fees, lower margins. And, um, that may be okay if, uh, volumes are commensurate to keep these, um, service providers, uh, flourishing economically.
Justin Mack: (
All right. And then where do you see direct indexing fitting into the overall investment product set in the future? Um, anything as far as change what it'll do or it'll have on ETFs, uh, anything that you see if you were to look into the crystal ball, any predictions you wanna share with us here on the show?
Anton Honikman: (
Yeah, I mean, I'm, I'm optimistic for the direct indexing category. I think it's gonna grow and, and sort of people far closer to it than I am, are also predicting that they're going to grow as a category faster than mutual funds and ETFs, but I still think let's not, let's not overplay this one. , you know, direct indexing $400 billion category. ETFs are a $10 trillion category. Mutual funds are a 25 trillion category. And you know, now more than half of those are index mutual funds. So, so it's going to be a growing interesting and important category, but it's, let's, let's not overplay it as something that's going to completely take over the ETF industry. I don't think it will, it might cannibalize some of it. Uh, but in general, it's going to be to the benefit of the entire to entire industry.
Justin Mack: (
Absolutely. So, yeah, ETF's doing just fine. And like we mentioned earlier, a lot of change, a lot of evolution still has to take place for, um, a significant or a more significant shift to actually occur. So a lot to keep in mind, a lot for advisors to know, and a lot for you guys to work on. So just kind of wrapping up a little bit, what's next for my vest, not only in the di space, um, but in general, as far as providing solutions, I guess how much has, um, your focus changed in, in recent years? Um, since you guys have been doing your thing, uh, since 2016, um, give me a little bit more about what's next for my vest, what we should keep an eye out for and what advisors should know about solutions you guys are working on for them.
Anton Honikman: (
Well, I'll, I'll talk about that in the context of direct indexing. If I may, I, I think what what's next for direct indexing in my vests is certainly, um, a participant in this, uh, is less thinking about direct indexes as products and more thinking about them as experiences. And by that, I mean, if you think about the full anti end life cycle of an investor's experience of a direct index solution, it starts with the sort of onboarding in a way. And I don't mean traditional sort of account opening. I mean, more capturing preferences and personal circumstances of the investor. That is an experience. How do we extract personalizations? How do we extract preferences? How do we reflect values? How does the advisor engage with their client to make sure that biases aren't represented when they're reflecting those preferences? All of that can be enhanced through digital experiences.
Anton Honikman: (
Then I think direct indexes play an important role in transition management. If advisory organizations are bringing over, uh, held away accounts, legacy positions, um, that have sort of high embedded gains and are transitioning into a direct index solution over time. How do we think about that direct index as a target? How do we transition over time in a tax optimal way? How do we report back to the investor on the experience of that transition and on the benefits of that transition? And then I think reporting in general is, is going to change towards something that is more experiential instead of just traditional quarterly performance reports. What about reflecting the impact of those personalizations? If I say that I want to invest with my values, how do you corroborate that? I did. What is the impact of my, my influences on my portfolio? How are you telling me about that?
Anton Honikman: (
When are you telling me about that as circumstances change in their underlying securities, which cause them to be evaluated differently, should they come out of my direct index and why? I think it's a really interesting shift away from a very traditional sort of periodic performance reporting type framework towards something that's much more focused on outcomes and impact, um, over time. So, so while direct indexing is gonna push us all there, I think all of those are, are features of advisor, client experiences that will, uh, permeate all categories. And MyVest is excited to be on that journey. And we're investing in those areas, um, you know, capturing preferences, transition management, outcome based reporting, and delivering all of those through delightful digital experiences. That's where it's at. That's where our attention is focused. That's what direct indexing is hopefully gonna bring to all of us as it evolves. And, and as I mentioned earlier on, I think everybody will benefit from that as, uh, industry becomes far more client centric,
Justin Mack: (
Right? Well, hard to find a better place to jump off than, than everyone benefiting, because heck why not? That sounds great. So I want to thank you so much for sharing your insight. We're excited to follow along with the work that MyVest is doing, and also keeping an eye and, and checking back with you to get more insight from you as DI changes and evolves much like we've spoken about today. And I want to thank everyone for taking the time to listen to the financial planning podcast. This episode was produced by Arizent with audio production by Kevin Parise. Special thanks again to our guest, MyVest CEO, Anton Honikman. Rate us, review and subscribe to all of our content at www.financial-planning.com/subscribe. From financial planning, I'm Justin L. Mack, thanks for listening.