First Trust buys Veriti to seize direct indexing vacuum after big players bought similar startups early, then never did much marketing to follow

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Note from Brooke: Remember that radical period when Morgan Stanley, BlackRock, Schwab, JPMorgan and Vanguard bought direct indexing shops. Then, not much happened. First Trust and Veriti also noticed and believed they could partner to capture some of the uncertainty and lack of engagement with RIAs and other advisors. You may have barely heard of either, but they both have strong followings and very pure third-party middleman mindsets. So this “last” direct indexing deal might not be the least in terms of its long-term evolution.

First Trust Capital Partners has reached a deal to add 0.5% more assets to its AUM, but the deal could be 100% material for its future – to take advantage of slow adoption by other ETF leaders deployment of direct indexing.

The Wheaton, Ill.-based asset manager, with $200 billion in assets under management, outstripped and surpassed a host of contenders who sought favor from the billion-dollar direct-indexing startup for finance it, partner or buy itVeriti Management.

Jim Dilworth: It’s not like selling someone who speaks a good game.

First Trust has become the latest in a series of major companies to buy a fledgling direct indexer. Terms of the 10-employee company, founded in 2018, were not disclosed.

The purchase is part of a phenomenon that Veriti co-founder and managing partner Jim Dilworth says is full of cautionary tales as well as validating moments.

“[Other than giants Aperio and Parametric] nobody really put their foot on the pedal,” he says from his home in Tennessee.

“I don’t see any aggressive marketing going on [from fellow upstarts or their corporate acquirers]. This is where we can make noise”

Vanguard Group, JP Morgan and Charles Schwab Corp. have bought major direct indexing startups – Just Invest, Open Invest and Motif, respectively – over the past two years to make raucous headlines. See: After the rise of the RIA pilot test, Vanguard Group buys Just Invest, to counter disruption offers from rivals in the direct indexing game.

Limited packages

Companies of similar size and brand power to those big three have approached Veriti, Dilworth says, but they have presented limited business plans to get direct indexing off the ground.

First Trust has made it clear that it has thought about the implementation of direct indexing and Veriti in particular before entering into negotiations, it adds.

“It’s not like selling to someone who speaks a good game. They knew exactly what they wanted,” he says.

“It’s really an advisor-focused organization — much more so than other companies,” he continues.

“They have 400 people on the ground for advisers, events and conferences. They see a huge opportunity.”

Round and not square hole

First Trust was founded in 1991 and was a small, rickety Midwest ITU [unit investment trust] seller. He added ETFs 17 years ago.

A bit late in the ETF game, it has nonetheless grown to $130 billion in ETF assets under management and #6 among ETF makers in claiming a niche of factor-based ETFs, in using its highly relational sales and service approach.

More recently, Avantis and the king of factor investing, Dimensional Fund Advisors, have belatedly crowded into this niche of factor ETFs. See: After the serial poaching of five fellow (now ex) DFA executives, Eduardo Repetto launches Avantis ETFs and brings American Century to life.

After the transition from UITs to ETFs, First Trust knows its field staff won’t worry about cannibalizing legacy products, according to the company.

“We won’t put a square peg in a round hole,” says Ryan Issakainen, senior vice president, ETF Strategist at First Trust.

He adds that clients have been asking for direct indexing for two years, and DI is expanding the market that First Trust can address.

“We have relationships that last for years, even decades,” says Issakainen.

The transaction is expected to close on July 31.

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