Optimal Asset Management Adds Direct Indexing Service for Advisors

On Aug. 21, Optimal Asset Management announced a direct indexing service through its Factor Allocator platform that allows institutions and investment advisors to directly invest in the holdings of four S&P Dow Jones indexes along with some of OAM’s factor indexes.

Instead of owning an index through a pooled intermediary such as a mutual fund or ETF, in direct indexing the investor directly holds the exact proportion of underlying securities that make up the index, using fractional shares as needed.

The vehicle for this direct investing is a separately managed account, which means the client benefits from the tax advantages of holding individual securities, which can include fractional shares.

The use of fractional shares is made possible, according to OAM founder and CEO Vijay Vaidyanathan, because broker-dealers are now “willing to expose their [trading] operations to a modern API,” allowing a firm like OAM to bundle together individual client trades as if they were from one account.

The genesis of the Optimal approach, said Vaidyanathan, came from his frustration that “the way the best investors invest is largely unavailable to people like you and me.” Yes, we can invest in ETFs, which are “fantastic and have transformed investing,” he said, but it’s hard to achieve diversification through approaches like factor investing or smart beta through ETFs.

“These mass-market products only work if there’s a mass market for them, while I’m much more interested in how to customize” the ETF approach while making that approach available to a broader range of investors, said Vaidyanathan, who holds a Ph.D. in finance from EDHEC Business School in France, has three master’s degrees and previously was president of EDHEC-Risk Indices and Benchmarks, North America.

OAM, which has $750 million in assets under management that “we run ourselves and $2 billion in products we designed for other people,” says Vaidyanathan, was founded in 2012; the Factor Allocator platform was launched last year.

Here’s how Vaidyanathan describes the benefits of his platform for an advisor’s clients. Assume the advisor has a high-net-worth client who has worked for Apple for years “and has a ton of Apple in his account.” To build the right portfolio for that client that gives him exposure to the broadest market indexes, “you want him to hold the S&P 500 ex Apple. But you can’t” with an ETF or index mutual fund. However, “if you’re an institution, it’s routine to do so.” Through Optimal’s platform and a minimum investment of $100,000, the advisor can make that investment.

“Mass customization has never been a priority” for the asset management industry, Vaidyanathan charged. “We haven’t done it well as an industry,” he said, but instead “we’re very product-centric.”

Speaking of Optimal’s new platform, he said “this is not a cookie-cutter product; it’s a way of building solutions.”

Vaidyanathan says advisors can also play a role in encouraging the broker-dealers they use to offer fractional shares and links to their APIs on their legacy platforms. “There’s no incentive today” for those broker-dealers to do so, unless advisors push them.