As part of sale to J.P. Morgan, OpenInvest is orphaning RIA clients and laying off the startup's direct-indexing sales force

In a shocking move, OpenInvest has put RIAs on notice to 'sunset' their accounts with the managed indexing specialist as part of its new partnership with JP Morgan, which wants the company's technology all to itself. 

"We're sunsetting existing money management ... They're have been upset RIAs and institutions," says OpenInvest co-founder and chief strategy officer Joshua Levin.

"We'll help them one-by-one" to move their assets to other money managers, he adds.

Fresh off announcing its deal with J.P. Morgan (JPM), the San Francisco manager of $105 million in direct index assets disclosed that it will, in effect, become a technology pod within the $4 trillion company.

The company's existing clients will be gone by summer's end.

Broad ambition

The fresh objective at OpenInvest proper is to infuse the whole J.P. Morgan corporate book of business with ESG prerogatives rather than to try to build from the ground up -- a condition of the deal that took its founders time to accept. Right now the company considers $2.4 trillion of its $4 triilion to be ESG integrated.

"We spent a good amount of time specifically with Mary Erdoes [CEO of J.P. Morgan Asset and Wealth Management]," Levin adds. "She had independently arrived at our philosophy. This is her No. 1 priority."

"It took a while for us to get our heads around it," he says. "But we came to understand their ambitions up and down the ladder -- wealth management, investment management and probably all the way out to credit cards."

Credit cards are a natural fit, and an ESG Chase app could very like have a charity function, says Wally Okby, a Tampa ESG researcher for Boston consultancy, the Aite Group.

"Charity goes hand in hand with sustainable investing and half of U.S. donations come from everyday donors," he says.

Raising the bar

Levin says he underwent a similar mindset shift in leaving the World Wildlife Fund to get into the investing arena, knowing larger reservoirs of resources exist in the profit sector than at an NGO.

J.P. Morgan is getting more than an en masse human talent download into its system, Levin adds.

"It's an explicit top priority," he says. "If they wanted to hire people, they'd hire people."

Various sources pointed out that the deal at least superficially bears resemblance to Charels Schwab Corp.'s purchase of Motif where the people came aboard and the assets went elsewhere. See: To leapfrog ahead in direct indexing, Schwab to buy Motif technology and hire Hardeep Walia and much of his staff

Levin hopes that RIAs will one day benefit from his company's ostensible turn from their channel.

"If we succeed, it will help RIAs because it raises the bar and sets new norms."

Cutthroat

Getting J.P. Morgan's backing was a massive coup for OpenInvest, says Okby. There are actually a significant number of VC-backed startups in this field that are vying for attention, he explains.

"It's pretty cutthroat so the fact they got JP Morgan at this early stage speaks volumes about the appeal of their alternative data sets," he continues. 

Okby adds that ESG leader BlackRock made a similar move earlier this year when it invested in Clarity AI and created Aladdin Climate. See: BlackRock may build the biggest, baddest RIA platform yet as 'Boy Wonder' begins 'Aladdin-izing' FutureAdvisor

"The point of that acquisition was to onboard to Aladdin the alternative data of Clarity AI," he says.

Yet though the philosophies of the New York bank and San Francisco startup may bear similarities, the motives may diverge significantly, says Will Trout, director of wealth management at Pleasanton, Calif.-based consultancy, Javelin Strategy & Research.

"I think from the JPM perspective, it’s less about being ‘woke’ and more about positioning the bank to profit from the generational change in mores, and, specifically, all that money in motion," he says.

 "But JPM does -- per the [Exxon CEO] Lee Raymond kerfuffle -- need to protect its flank in terms of ESG. It’s not just the firms who are spewing carbon (read Exxon) that are in the spotlight; it’s the firms that finance their undertakings that are hearing from activists, board members and regulators."

"The mission was to mainstream. It doesn't get any more mainstream. We're focused on the installed base," says Levin.

Tackling ESG

What OpenInvest developed in its short history as a mouse might well capture the attention of a Wall Street elephant trying to make the leap out of commoditized financial services, says Trout.

"I’m guessing the secret sauce here is to put customers in control by allowing them to customize the services they access. It’s a different, and more viable, approach than forcing righteousness down their throats," he says. 

In peering under the OpenInvest covers, I was impressed by the degree to which they put the end-user in control via a real-time, punchy interface," he adds.

Levin explains the philosophy as tackling ESG at the process level rather than product delivery.

"Why buy a product?" he asks. "You should be able to push a button as advisor or client and have software do portfolio construction and manage it over time," he explains.

J.P. Morgan plans to keep most of the 47 OpenInvest staffers but has already let the sales staff know that they will be let go as part of the transition away from money management. It is keeping the brand, too, for now.