Ethic, a venture capital-backed investment firm that specializes in building personalized portfolios based on a client’s values, is succeeding at what many asset managers are dying to do: work with more family offices.
The startup, founded in 2016, has added more than $4 billion in assets under management over the past three years and more than doubled the total since the beginning of 2023. It now manages more than $5 billion, with a big portion from ultra-wealthy private investors.
About 80 percent of Ethic’s growth in net new assets has come from single family offices, multifamily offices, and institutions. Out of the approximately 200 organizations that use Ethic’s platform, 40 of them are family offices and institutions and they account for most of the money invested, Doug Scott, co-founder and CEO of Ethic, told Institutional Investor. (Most of the organizations that use Ethic are independent wealth management firms.)
Ethic’s success in attracting family offices is straightforward, according to Scott.
Stocks make up about a third of family office portfolios or more, but in-house investment teams are boosting their allocations to alternatives. As a result, they’re looking for ways to easily manage that and meet the demands of their clients, according to Scott.
Many family offices are invested in index funds to get exposure to stocks. But many families want their investment portfolios to reflect their values and ask for some degree of personalization, which is where Ethic comes in. For a single family office, Ethic might only be managing a single separately managed account. In other cases, one family might require accounts for various family members and foundations.
Multifamily offices have scale and larger investment teams, but they are also gravitating toward the platform for simplicity.
“We create something bespoke to a principle, or a set of principles, around the things that matter to them and build across public equities. We’re now doing some multi-asset as well, which is exciting [and] also creates some operating leverage for them, which is an important component because when you’re managing really complex investments it’s operationally cumbersome,” Scott said.
Separately managed accounts are hardly new. Family offices have many billions of dollars invested in stocks through rival SMA platforms. Ethic is much smaller than competitors but its fees are similar (20 to 40 basis points) and its youth and approach give it an advantage, Scott says.
Newer infrastructure and technology have helped Ethic incorporate clients’ values into their portfoliox — whether that means avoiding fossil fuel and private prison companies or only investing in corporations with a certain percentage of women on their boards. Ethic also provides financial reporting and insights into the impact of those investments. For example, Ethic says its portfolios have 62 percent less carbon dioxide emissions compared to each client’s respective benchmark, a total savings of 327,664 metric tons of carbon dioxide. That’s the equivalent of fully powering 42,731 U.S. homes for a year or the amount of carbon sequestered by 382,558 acres of U.S. forests in a year.
As younger generations of investors begin to inherit assets or take on responsibilities they want to reshape portfolios and Ethic is a tool they are using to do that. It’s also proving to be a good way to engage family members who aren’t very interested in investment management. “We’ve built trust with different [families] and we end up doing many different pockets of capital,” Scott said.
Scott said no single family or institution accounts for a significant share of the new assets at Ethic and that the company has room to grow with existing family office clients and a huge universe of potential ones. There are an estimated 10,000 or more single family offices globally.
Often times, new asset managers are launched with a short list of big private investors who are also clients. Ethic has raised venture and growth equity capital so the assets it manages are spread across a diverse group of organizations and accounts.
“We’re a technology business and we’re an investing business, whereas most investment managers, they have to fund it through clients,” Scott said.
Ethic raised a $50 million Series C round of funding in 2022. Its investors include Jordan Park Group, Sounds Ventures and investment arms of Fidelity and UBS. The New York-based company has about 70 employees.
