First Trust buys Veriti to seize direct indexing void after big players made early purchases of similar startups, then never did much marketing to follow through

First Trust Capital Partners did a deal to add .5% more assets to its AUM, but the deal may be 100% important to its future--to cash in on the slow uptake of fellow ETF leaders in rolling out direct indexing.

The Wheaton, Ill., asset manager with $200 billion of AUM out-hustled and out-pitched a bevy of suitors who sought the favor of the $1-billion direct-indexing startup  to fund, partner or buy itVeriti Management. 

First Trust became the latest in a series of larger firms to buy a fledgling direct indexer. Terms for the10-employee company, founded in 2018, were not disclosed.

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

"[Other than giants Aperio and Parametric] nobody has really put their foot to 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]. That's where we can make some noise"

Vanguard Group, J.P. Morgan and Charles Schwab Corp. bought prominent direct indexing startups -- Just Invest, Open Invest and Motif, respectively-- in the past couple of years to noisy headlines. See: After RIA pilot test soars, Vanguard Group buys Just Invest, to counter disruption bids by rivals in the direct indexing game.

Limited plans

Firms of similar size and brand power to those Big Three approached Veriti, Dilworth says, But they presented limited business plans to make direct indexing take off.

First Trust made clear it had thought through it implementation of direct indexing and Veriti, specifically, before entering negotiation, he adds.

"This isn't like selling to somebody who talks a good game. They knew exactly what they wanted," he says. 

"They really are an advisor-facing organization -- much more than other companies," he continues. 

"They have 400 people in the field for advisors and events and conferences. They see a huge opportunity."

Round hole not square peg

First Trust was founded in 1991 and was a small wonky Midwestern UIT [unit investment trust] vendor. It added ETFs 17 years ago.

A little late to the ETF game, it nonetheless grew to $130 billion of ETF AUM and No. 6 among ETF makers by claiming a niche--factor-based ETFs, using its highly relational sales and service approach.

More recently, Avantis and factor-investing king, Dimensional Fund Advisors, piled belatedly into that factor ETF niche. See: After serial poaches of five fellow (now ex) DFA execs, Eduardo Repetto launches Avantis ETFs and pumps life into American Century.

After the transition from UITs to ETFs, First Trust knows is  field staff won't worry about cannibalizing legacy products, according to the firm.

"We won't put a square peg into 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 broadens the market that First Trust can address.

"We have relationships that last years and even decades," Issakainen says.

The transaction is expected to close on July 31.