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Morningstar buys a $30-million stake in SMArtX, gets two board seats -- and a puzzle piece to launch direct indexing later this year -- in the bargain

The Chicago money manager of $251 billion previously said it was supplanting InvestCloud's APL with a SMArtX rental; now it's purchasing a piece of the success it'll help assure

Wednesday, May 4, 2022 – 2:54 AM by Brooke Southall
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Dan Needham: We seek out companies like SMArtX that are breaking through the boundaries of traditional technology.

Morningstar likes SMArtX so much it bought into the TAMP software company, and now it's ready to use it to launch direct indexing, which gives investors more autonomy over an index mutual fund or an index exchange-traded fund (ETF).

The Chicago investments and software firm bought an undisclosed portion of the West Palm Beach, Fla., firm for $30 million in a Series D round where it was the sole investor. It also enjoyed the spoils of exclusivity -- nabbing two of the seven board seats.

Evan Rapoport
Evan Rapoport: 'We believe we'll replace APL in market.'

The SMArtX plan is to run the table and replace APL's software wherever it's used, according to its CEO and co-founder  Evan Rapoport.

"We believe we'll replace APL in market," he says.

The two companies launched a strategic collaboration last November and announced that SMArtX would power Morningstar's turnkey asset management platform.

At the time, Morningstar revealed it had invested an undisclosed sum in SMArtX through a convertible note. The note was the first $5 million of the $30-million D raise.

Morningstar's three previous rounds amounted to just $6 million, according to Crunchbase. The valuation was not disclosed.

The latest investment marks confirmation that Morningstar is all in.

SMArtX, which manages $19.3 billion, is accepting the capital from Morningstar's investment arm, which manages about $251 billion.  

Easy sell

SMArtX not only manages assets but sells its software to other TAMPs. Initially, Morningstar is using SMArtX's software to run its $30-billion AUM managed-portfolios business.

Morningstar attained critical mass -- including about $32 billion in its TAMP--by using software from InvestCloud's APL. But many industry analysts regard that as semi-antiquated. That $32 billion or so will soon become AUM on the SMArtX ADV, according to SMArtX.

Now that Morningstar has vetted and purchased a stake in SMArtX, Rapoport says his sales pitch is landing that much more business.

The two biggest reasons it's an easy sell, he says, relate to its real-time trading -- which replaces batch trading -- and its API (application programming interface) which allows TAMPs to construct their own tech stack rather than being stuck dealing with a monolithic bundle.

"You can't trade a day or two later," he says. "It's franken-model.

"When a client says, 'Get me out' and it takes days, the market can already be down 8%," he says.

Solving a pain point

Morningstar controls the desktops of roughly 180,000 advisors who use its Office and Workstation.products.

Michael Holt, Morningstar
Morningstar Chief Strategy Officer Michael Holt, will take a SmartX board seat.

It's plan is to substitute SMArtX to sell and deliver a roster of third-party money managers that can be sliced and diced into advisor-built portfolios without wild toggling and a sheaf of contracts -- namely by using unified managed accounts (UMAs) for the first time.

UMAs solve a key pain point for advisors, because they can include multiple outsourced investment strategies, under multiple managers in one account, but run them under one contract.

“We seek out companies like SMArtX that are breaking through the boundaries of traditional technology to bring innovative new solutions to market,” said Daniel Needham, president of Morningstar's Wealth Management Solutions group and one of two SMArtX directors.

The second SMArtX director is Michael Holt, chief strategy officer at Morningstar.

Becoming a standard

Morningstar's also revealed that its about to launch direct indexing.

Morningstar bought Moorgate Benchmarks, a 2018 indexing startup, back in September to launch direct indexing. SMArtX was also founded in 2018 and its technology will be a componentn of the offering.

For SMArtX, the partnership means it can move faster and reach higher to become a "standard" for such TAMP technology -- something that a few months of working together made apparent, says Rapoport.

“Morningstar has already demonstrated their ability to be a strong collaborator as we work together to set the standard for managed account technology,” he said in a release. 

“We continue to build the engine that will help grow Morningstar’s TAMP by consolidating its data, research and analytics capabilities into a platform designed for today’s advisor.”  

Morningstar comes to the turnkey asset management platform (‘TAMP’) business both as a big incumbent and as a new entrant.

It has critical mass of managed money but it is not known as a TAMP in the same breath with Assetmark, SEI, Envestnet, Brinker and others.

“SMArtX has a track record of building products that offer greater flexibility, advisor choice and personalization at scale, which aligns with our mission of empowering investor success,” Needham says.

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February 3, 2022 – 8:13 PM

With $4 million VC raise fresh in hand, SMArtX takes next step to shed Black Diamond shadow by hiring a president/COO who casts his own

.Jonathan Pincus took overseen assets at Northern Trust from $3 billion to $70 billion at his Chicago firm and learned about SMartX after in his old role

May 22, 2020 – 9:36 PM

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April 10, 2019 – 11:05 PM

Mentioned in this article:

SMArtX Advisory Solutions
Top Executive: Evan Rapoport

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