Follow one dollar of fees on a direct-indexing account bought through an independent adviser. About 125 basis points a year leave the client, 115 of them as stated fees and about 10 as custodian revenue that never appears on a statement. Here is who catches them.
| Layer | Keeps | What the money buys |
|---|---|---|
| Adviser | 65 bps | The relationship, the plan, location and giving decisions, the trust. The largest line at every account size |
| Platform | 25 to 60 bps | The plumbing that connects adviser, engine, and custodian; down from 75 to 100 a decade ago |
| Harvesting engine | 9 to 20 bps | The software that trades the 500 stocks. 9 at retail, 18 to 20 on adviser platforms, 35 to 70 in a big broker’s managed account |
| Custodian | about 10 bps, implicit | Not a fee. Earned on cash balances and order flow while holding the assets |
| Index provider | about 0 | Direct-indexing engines replicate from price data and mostly pay no license |
What the 2020 to 2021 buying spree tells you
Asset managers and brokerage houses paid billions for harvesting engines in 2020 and 2021: about $1 billion for one at 2.9% of its assets, and a much larger sum for another inside a bigger deal. The buyers were buying distribution, not code. Every acquired engine now sits behind a captive sales force, and the top five providers hold 87% of the assets.
The code has since been rebuilt and repriced. The 9-basis-point retail price is the market’s estimate of what the software alone is worth. Everything above it is the cost of the channel.
The layer nobody owns
Three jobs fall between the layers and belong to no one: checking wash sales across the whole household, deciding which account should hold what, and reconciling the harvesting activity with the tax return. The engine sees one account. The platform sees the adviser’s accounts at one custodian. The custodian reports wash sales only within one account and one security. The tax return is done by someone else again.
That gap is a fact about the industry, and it is the reason a household has to do some of this bookkeeping itself.