The data is clear, and the debate is largely settled: indexing and passive investing are on the rise for very good reason. Most active managers fail to beat their passive benchmarks. When investors also consider fees being paid, the underperformance of active management becomes even more striking.
As a result, retail investors saving for retirement are increasingly using low-cost index funds and index ETFs to secure their portfolio. But what about ultra-high-net-worth (UHNW) investors and family offices? Wealthy investors are taking up indexing at a slower pace. Why?
Family office investors are notoriously lagging when it comes to indexing. Even in public equities, where the data consistently demonstrates that active management doesn’t pay, and where family offices utilizing active public equity significantly underperform benchmarks, there still remains a strong psychological and cultural draw toward active management within family offices.
For family offices that are explicitly values-aligned, this friction is even more pronounced.
The Values-Aligned Dilemma in the Ultra-High-Net-Worth Space
Values-aligned investors live their wealth with purpose. They see their capital as a reflection of their worldview, believing there is far more to wealth than their own material consumption. These families naturally incorporate philanthropy into their broader financial architecture. They care deeply about making impact and want their investment portfolios to seamlessly support their convictions.
Yet, while many of these families actively deploy capital into private impact investing, exceptionally few incorporate index funds or index ETFs into their public equity portfolios. There are several structural, practical, and financial reasons for this hesitation.
Operational Realities and “Fat Finger” Risks
For an investor with upwards of $100 million allocated to a public equity strategy, its simply not practical or prudent to manage it using a discount brokerage account. The operational risk of a “fat finger” execution on an institutional-sized trade is far too large. Furthermore, it’s impractical to call a standard retail trading desk to execute multi-million-dollar blocks of an ETF.
The Custody Fee Hurdle
When UHNW investors use full-service wealth management platforms to execute their ETF strategy, they hit a fee wall. Many investment advisors attempt to charge asset-under-management (AUM) fees just to custody ETFs. In Canada, for example, it is incredibly difficult to find a full-service brokerage firm willing to charge lower than 20 basis points (0.20%) in a fee-based account, regardless of how large the account size is. Paying 20 basis points just for custody and basic administration largely erases the cost advantage that makes passive indexing attractive in the first place.
Navigating Custodial Arrangements
It is possible to navigate these hurdles, but it requires creativity. Its possible to work with some brokers willing to hold ETFs in a no-fee account with low transaction fees (such as a $300 flat fee per trade) rather than an AUM percentage. Maybe the trade-off is the investor also holds a HISA (which pays a trailer) in the same account.
Alternatively, arrangements can occasionally be struck with select Canadian portfolio managers: if a family office holds a portion of the manager’s proprietary funds in a custodial account, that manager may agree to transact on ETFs within the same account on the family’s behalf. However, these types of custom arrangements remain relatively rare and tricky to find.
Three Ways Values-Aligned Investors Can Use Passive Indexing
For families looking to capture the mathematical advantages of passive investing without compromising their ethical standards, here are three distinct avenues that have emerged in the public equity space.
Route 1: ESG ETFs
The most straightforward approach is utilizing screened ESG ETFs. Chief among these is BlackRock’s specialized suite built on MSCI Advanced Indexes, including:
- iShares ESG Advanced MSCI USA ETF
- iShares ESG Advanced MSCI Canada Index ETF
- iShares ESG Advanced MSCI EAFE ETF
The Mechanics & Cost: These ETFs provide broad benchmark exposure while applying screens to eliminate most controversial industries (e.g., fossil fuels, weapons, tobacco). They are cost-efficient, since pricing ranges from just a few basis points for US-listed versions to roughly 17 basis points for the MSCI Advanced Index ETFs listed on Canadian exchanges.
As mentioned above, investors can hold ETFs within any brokerage account. They just want to be sure they are not being subject to a layer of fees (avoid fee-based accounts). Investors will either need to make a custom transaction fee arrangement with a brokerage firm or find a PM to execute on their behalf within a custodian account.
Route 2: Custom Direct Indexing
Direct indexing is rapidly gaining traction among Canadian wealth management firms for UHNW families. Instead of buying a bundled ETF, the investor directly owns the underlying stocks that comprise an index, managed via automated software.
The Mechanics & Cost: A direct indexing portfolio typically holds anywhere from 50 to a few hundred individual securities, precisely calibrated to track benchmarks like the S&P 500 or TSX Composite. Investors can customize screens to exclude specific sectors or emphasize companies that align with the family’s values. Fees generally range from 40 basis points for accounts between $20M and $40M, scaling down to 20 basis points for portfolios exceeding $100M.
The Tax Alpha Advantage: The primary benefit of direct indexing over ETFs is tax efficiency. Because the family owns individual securities rather than a single bundled ETF, they can “cherry-pick” specific positions for tax purposes. This allows for more efficient tax-loss harvesting (selling individual underperforming stocks to offset capital gains) and the direct donation of highly appreciated securities to the family’s foundation and DAFs. Bundled ETFs keep underlying gains and losses trapped within the fund structure, limiting an investor’s ability to execute certain tax strategies.
Mainstream wealth management firms are offering direct indexing. But, for the most cost effective options, investors will need to deal with specialized groups catering to UHNW investors such as family office teams or capital market desks.
Route 3: Smart Beta Funds with Active Shareholder Engagement
For families who want index-like market coverage but also a more rigorous, proactive approach to ESG than major index providers offer, specialized firms like Advantage Capital Strategies provide a compelling third path.
The Mechanics & Cost: ACS has designed “Responsible Beta™” funds (such as their Canadian, US, and International Equity Funds) that seek to replicate or improve upon broad market index characteristics while executing a sophisticated double-mandate of divestment and engagement. Their management fees range from 45 basis points for Canadian and US strategies to 65 basis points for international strategies.
The Exclusionary & Customization Advantage: Beyond standard industry exclusions (fossil fuels, gambling, weapons, tobacco, cannabis, etc.), ACS conducts in-house, revenue-tested research. This allows them to capture nuances and specific factors that broad market ESG data providers like MSCI often overlook. They can identify and react to emerging sustainability threats or corporate supply chain issues long before they register on a major index’s radar.
The Activism Advantage: Unlike traditional ETFs or passive direct indexing, which act as silent owners, ACS actively leverages its position as a shareholder to drive positive real-world outcomes. They participate in shareholder activism and engagement such as voting proxies intentionally for ESG values and financially supporting investor associations that collectively advocate for systemic climate and social policy changes.
These funds can be held by the firm’s custodian or any 3rd party custodian of the investor’s choice. Investors can execute transactions just like they would in any account managed by an investment counsellor. This makes the mechanics of custody easier compared to finding a back door to using ETFs when dealing with large amounts.
Comparing the Approaches: A Framework for Family Offices
When evaluating how to deploy capital into passive public equities, family offices should weigh these three options across four distinct lenses:
| Feature | Institutional ESG ETFs (e.g., iShares Advanced Suite) | Custom Direct Indexing | Smart Beta Funds (e.g., ACS Responsible Beta™) |
|---|---|---|---|
| Underlying Fees | Ultra-Low (a few bps to ~17 bps) | Moderate (20 bps to 40 bps) | Moderate-High (45 bps to 65 bps) |
| Tax Optimization | Low (bundled structure limits individual stock movement) | Maximum (ideal for tax-loss harvesting & security donations) | Moderate (fund-level efficiency, withholding tax risks for exempt investors and registered accounts holding US stocks) |
| Screening & Customization | Standardized (reliant on major index providers) | High (fully customizable client-specific screens) | Deep & Proprietary (captures nuances major providers miss) |
| Shareholder Activism | None | None | High (proactive proxy voting & systemic advocacy) |
Aligning Wealth and Value Without Conflict of Interest
Navigating various investment options for values aligned family office investors considering indexing requires absolute objectivity. One of the structural realities of the wealth management industry is that the implementation choice is frequently dictated by how an advisor gets paid, rather than what is best for the family.
Our family office operates on a structurally unique model: we enable values-aligned investors to fully capitalize on innovative passive indexing strategies, and we do not take fees for investment advice. By entirely decoupling our operational model from asset-under-management (AUM) advice fees, we maintain absolute neutrality. Whether a client’s personal values and financial structure are best served by low-cost institutional ETFs, a highly tax-efficient direct indexing structure, or an activist smart-beta fund, our sole mandate is proper execution and absolute alignment. We will make the arrangements for the most optimal holding structure, and we’ll also fill out forms and gather info for reporting so you can incorporate all your investments into a wholistic view of your wealth. For families who view their wealth as an instrument of purpose, ensuring that your advisory structure is as uncompromised as your values isn’t just an advantage, it is a necessity.
