Fidelity Offers Direct Indexing Products Touting More Personalized Investment Options

Fidelity Investments said Monday it has expanded its direct index offerings with the launch of a separately managed account (SMA) lineup available for wealth management firms and institutions.  

The Fidelity Institutional Custom SMAs lineup includes 10 tax managed equity strategies that can be catered for customers, the firm said. The offerings are currently only available for Fidelity Institutional clearing and custody clients, with access likely for registered investment advisers (RIAs), broker/dealers, and family offices in 2023, the firm said. 

“Financial advisers are increasingly looking to help improve client outcomes and deliver personalized investment solutions, and we see custom SMAs as an opportunity to address these needs with scalable, yet highly customizable, solutions,” said Gary Gallagher, head of Fidelity Institutional Wealth Management & Advisory Solutions. 

The product lineup comes amid continued demand for packaged investment solutions that helped drive assets in managed accounts up approximately 24% in 2021, reaching a high of $10.7 trillion, according to recent research from Cerulli Associates.  Direct indexing, in which an investor buys the underlying equities in an index fund, has been a driver for managed account growth as a way to gain tax advantages as well as adjust holdings to personalized needs or values.  

The launch also comes after Fidelity completed an acquisition with Geode Capital Management in March for its $3 billion customized SMA business for family offices. The Geode business specializes primarily in index investment management, allowing Fidelity’s Quantitative Research and Investments division to offer “highly customized, tax managed portfolios through SMAs,” the firm said. 

In a recent research paper, Fidelity championed the value of customized SMAs in wealth management. The firm said in the report that “the potential to generate 100 bps or more of after-tax outperformance—while maintaining an exposure that’s comparable to an index fund—has genuine appeal at a time when any kind of outperformance can be hard to come by.”

“Fidelity sees quantitative and systematic investing, which uses technology, data science, and empirical research, as a game changer in the asset management space,” said Neil Constable, head of Fidelity’s Quantitative Research and Investments (QRI) division. 

The current bear market for equities—including an over 20% drop in the S&P 500 in 2022—does have some questioning direct indexing as the best option. In a recent research paper, Bank of America advocates for “outdexing,” or creating an actively managed portfolio that uses factors to pick stocks as opposed to a set index.