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Direct indexing to play 'important role' in Charles Schwab's future, CEO says


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Direct indexing to play 'important role' in Charles Schwab's future, CEO says

Charles Schwab Corp. CEO Walt Bettinger II predicts direct indexing will play a "very important" role in the company's future.

A burgeoning investment strategy with roots that trace back decades, direct indexing allows investors to gain the exposure of a particular index while retaining the ability to customize their individual holdings through a separately managed account. That marks a key distinction from the exchange-traded fund model that has become a force of nature on Wall Street over the last 26 years, given that investors cannot pick and choose which particular stocks, bonds or other assets are included in an ETF.

Now, as investors pay more attention to environmental, social and governance factors; tax-loss harvesting; and their existing exposures, Schwab's top executive says the customizable model of direct indexing will only rise from here.

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Charles Schwab CEO Walt Bettinger II
Source: Charles Schwab

"With or without zero commissions, we would have expected direct indexing to grow," Bettinger said Oct. 18 during a business update call with analysts. "I would suggest that direct indexing will play an important role in our company's future serving clients both on the retail side and potentially through the [registered investment adviser] channel."

Direct indexing has primarily been used by wealthier and larger investors due to the scale that is required to own the thousands of securities that are included in some indexes.

A number of asset managers have been pushing to open direct indexing to a wider swath of the investment community in recent years, though. To do that, industry experts have said asset managers and broker/dealers would need to allow their clients to hold fractional shares of high-priced stocks such as those of Alphabet Inc., Inc. and Berkshire Hathaway Inc.

Bettinger's remarks came a day after The Wall Street Journal reported that Chuck Schwab, the company's founder and chairman, said in an interview that his company was planning to roll out fractional-share trading soon.

A spokesperson for Schwab said the company did not have any specifics to share on that proposal "right now" when asked about it after the report was published Oct. 17. But they did add that the company is "always evaluating and working on new services to improve how people can invest."