This story first ran in Financial Advisor IQ's sister publication, Ignites.
BNY Mellon will roll out its direct indexing offering by year-end, a company executive said Tuesday.
The technology that the firm acquired late last year will be available by November or December to clients of its Pershing X platform, said Jim Crowley, chief executive officer of the technology platform, during the Barclays Global Financial Services Conference.
Direct indexing will be part of the Pershing X platform, which aims to be an all-in-one technology tool for advisors, Crowley said. Pershing X will be the first fintech from a custody bank to offer direct indexing services on an advisory platform, he said.
The Pershing X platform will be multi-custodial, and will support any custodian the advisor chooses, not just Pershing, a company spokesperson said.
Pershing has not yet disclosed many details about its forthcoming direct indexing service.
In December 2021, Pershing bought Optimal Investment Management, a $1.2 billion direct indexing provider. Terms of the deal were not disclosed. When the deal was announced, the firm said that the technology would be folded into Pershing X.
“This adoption would further reinforce that direct indexing and customized SMA programs are quickly becoming table stakes for platforms that want to compete at the highest level,” said Scott Smith, director of advice relationships at Cerulli Associates. “I do, however, think we need to temper our expectations a bit – the growth of assets in these programs will be an evolutionary rather than disruptive process.”
Assets in direct indexing are poised to grow faster than assets in ETFs or mutual funds, according to a 2021 Cerulli report. Direct indexing assets are set to grow at an annualized rate of 12.4% over the next four years, compared to 11.3% for ETFs and 3.3% for mutual funds.
Several other industry companies have recently bought direct indexing shops. First Trust Capital Partners, for example, announced in July that it would scoop up Veriti Management.
And last year, Morningstar, Franklin Templeton, Vanguard and JPMorgan Chase also bought companies with direct indexing capabilities.
Pershing X has 1,200 potential clients at the ready, Crowley said, including “some who are going to take advantage of it from a direct indexing perspective, [and we] have one that will be using the multi-custodial aspect of it,” he said.
The firm expects more features will be rolled out next year.
“We’re making sure we’re making certain that we’re keeping promises we made to the marketplace and to our clients,” Crowley said.
Eventually, Pershing X will include tools that help financial advisors with customer relationship management, financial planning, proposal generation, trading, rebalancing, billing and reporting aspects, he said.
The platform will also include Albridge’s wealth reporting and data aggregation tool, Crowley said.
Companywide, BNY Mellon’s expenses totaled $6.1 billion during the first half, up 8.7% from the year-ago period, the company’s latest earnings report shows. Roughly half of that spending went toward staff. Such expenses totaled $3.3 billion during the first half, up 6.6% from a year earlier.
Overall, the firm spent $804 million on software and equipment during the first six months of 2022, up 10.6% from the first half of 2021, the earnings report says. The filing does not state how much of that went to Pershing X.
BNY Mellon planned to increase its technology expenses this year by up to 5.5%, in part due to the launch of the Pershing X startup, said Emily Portney, chief financial officer, during the conference.
The firm said in February that it planned to spend $3.5 billion on technology improvement and new service this year. At the time, some analysts criticized the expense projections as hefty.
The firm is on track with that spend, Portney said.
A company spokesperson declined to comment on where it plans to invest within Pershing X.
“Given the macroeconomic backdrop, we are incredibly laser-focused on discretionary spend,” Portney said. “And [we’re] looking in all areas and ensuring we are delivering efficiencies.”
And though the rise in expenses is “moderating,” Portney said, “clearing fees, expenses, onboarding our stronger pipeline and the normalization of return to office” have all kept spending high.