Morningstar Launches Direct Indexing Investment Offering

What You Need to Know

Morningstar expects demand for direct indexing to grow quickly in the next few years.
The new offering will allow advisors to offer their investors more personalized portfolios.
Morningstar Direct Indexing is one of the first major product launches from the new Morningstar Wealth division.

Morningstar on Tuesday became the latest company to launch a direct indexing investment offering, part of an industrywide trend.

Direct indexing replicates an index of securities by purchasing the underlying equities instead of an exchange-traded fund or mutual fund. The strategy, which allows for more customized portfolios than can be found in index ETFs or mutual funds, can enable investors to tailor their holdings to their values.

Direct indexing also makes direct ownership of underlying securities practical for more individual investors, allowing them to select additional services including tax-loss harvesting, tax-lot consideration, and holding period management, Morningstar said.

Morningstar Direct Indexing is one of the first major product launches from Morningstar Wealth. The new Wealth Management Solutions group was announced by Morningstar Feb. 3. Direct Indexing portfolios will be made available through the Morningstar Wealth Platform initially, the company said.

Morningstar Direct Indexing “draws from industry-leading research, technology, and insights across the Morningstar organization to help deliver greater personalization, automation, and tax efficiency for advisors and their investors,” according to Morningstar Wealth.

“Advisors are looking for ways to meet client interest in new investment options, particularly those that allow customization and personalization,” Daniel Needham, Morningstar Wealth president, said in a statement.

He added that the offering enabled advisors and clients to “intuitively and effectively tailor portfolios in several different ways and have transparency into the impact of those choices.”

The Pilot

“For almost a year we have been engaging with a council of advisors who have helped us shape Morningstar Direct Indexing,” according to Cindy Galiano, head of product, Investment Management, Morningstar Wealth.

“Their practical insight and experience with clients guided our road map and development,” she added.

In June, the company launched a pilot program that put Morningstar Direct Indexing into practice, she noted. “Interest in the pilot program reached more than three times our initial targets,” she said.

Participating in the pilot were financial advisors using Morningstar’s Wealth Platform, offered by Morningstar Investment Services, a company spokesperson told ThinkAdvisor. “We’ve continued to add additional enhancements and features throughout the program, all while getting advisors’ feedback during all stages of development — from concept to launch.”

Morningstar also offers investment management services through its investment advisory subsidiaries, with about $239 billion in assets under advisement and management as of Sept. 30, it said.