Animal Spirits Podcast | Talk Your Book: How Custom Indexing Works

Hosts: Michael Batnick & Ben Carlson
Guest: Aaron Stanhope (Chief Investment Strategist, Canvas Custom Indexing)
Date: September 8, 2025

Episode Overview

This episode of Animal Spirits dives deep into the evolution, mechanics, and practicalities of custom (or direct) indexing, focusing especially on the Canvas platform by O’Shaughnessy Asset Management (now under Franklin Templeton). Michael and Ben host Aaron Stanhope to explore how custom indexing is changing the investment industry, its unique use cases, and what advisors and clients need to know to make the most of this trend.

Key Discussion Points & Insights

1. The Genesis and Evolution of Custom Indexing

• Direct Indexing’s Inflection Point

  • Canvas’s model shifted from being a quant factor shop to offering a customizable research platform in 2019, coinciding with the elimination of transaction costs.
  • This democratized direct indexing, which formerly only made sense for ultra-high-net-worth investors due to trading costs.
  • "The inflection point was really 2019... transaction costs went away and that was really the watershed moment for direct indexing." — Aaron Stanhope [05:24]

• Market Context and Rapid Industry Maturation

  • Massive market gains since 2020 led to rapid expansion but also new problems (e.g., portfolios with no harvestable tax losses left).
  • The space has grown rapidly, but education lags behind: many advisors are still unfamiliar with or hesitant about direct indexing.
  • "It was a shocking number of advisors who still were sort of on the fence and didn't really get and understand it." — Ben Carlson [04:30]

2. Branding: Should "Custom Indexing" Have a Better Name?

• Industry Terminology Struggles

  • Michael questions whether "custom indexing" or "direct indexing" accurately captures the platform’s expanded capabilities.
  • "What you all are doing is really, it’s not really that, you know." — Michael Batnick [12:42]

• Beyond Replicating an Index

  • Aaron notes Canvas is much more than index replication: it’s about model management, customization, and workflow solutions at scale.
  • "It’s kind of more around model management of the entire book than it is just about custom indexing." — Aaron Stanhope [12:49]

3. Tax Management and Use Cases

• Tax Loss Harvesting Nuances

  • Tax loss harvesting is a headline benefit, with flexibility to manage withdrawals/inflows that change the tax calculus for most real clients.
  • "We see clients transacting in their accounts... that changes the whole calculus of tax management." — Aaron Stanhope [08:03]

• 351 Exchanges and Portfolio Workdowns

  • 351 exchanges (and similar tools) are useful for appreciated positions, but not silver bullets due to their own complexities and limitations.
  • "There’s kind of like hair on everything." — Aaron Stanhope [08:03]

• Common Use: Working Down Concentrated Positions

  • Highly appreciated and concentrated portfolios are still common; Canvas offers multiple options for diversified, tax-efficient transitions.
  • "This is probably like the megatrend that exists in our industry right now." — Aaron Stanhope [16:59]

4. Advisor Education and Platform Complexity

• Training and Workflow Emphasis

  • Custom indexing demands robust training: investment offerings, operational setup, understanding platform “levers” like tax budgets and tracking error.
  • "We have a pretty robust system. A training program is honestly how it works. And it’s multiple hours..." — Aaron Stanhope [11:15]
  • Not a set-and-forget product: ongoing monitoring and adjustments are essential.

• Scaling Custom Solutions

  • Canvas enables advisors to offer individualized solutions at scale with templates for different client risk profiles or outputs (conservative, income, growth, etc.).

5. Technology and Firm Culture

• Tech DNA as a Differentiator

  • OSAM’s tech-driven culture enabled Canvas’s success, further bolstered post-acquisition by Franklin Templeton.
  • "If we didn’t have that in our culture, we wouldn’t be able to deliver on Canvas the way that we are." — Aaron Stanhope [23:59]

• Maintaining Culture After Acquisition

  • Despite fears, integration with Franklin Templeton preserved Canvas’s core philosophy, autonomy, and accelerated its growth and resources.
  • "I do feel like the acquisition went from, from an employee perspective, about as well as a corporate acquisition could occur." — Aaron Stanhope [26:34]

6. Practicalities: Onboarding, Operations, and Ideal Partners

• Onboarding Timeline

  • Implementing Canvas is a multi-month process involving investment training, operational integration, and mapping over client accounts.
  • "It is definitely a multi-month process." — Aaron Stanhope [29:32]

• Ideal Advisors and Firms

  • Canvas is best suited for advisors willing to deeply integrate the platform as their firm’s investment operating system.
  • Not designed for “one-off” accounts or those chasing hot trends.
  • Deep engagement correlates with above-average firm growth.
  • "Canvas partners that have been with us are generally growing at about 2x the industry average." — Aaron Stanhope [30:20]

7. Future Outlook

• Continuous Feature Expansion
  • New strategies and features are constantly being added—managed options, individual bonds, more alternatives—driven by real client demands.
  • "If we can solve a problem for one client that then gets put on the platform, that adds value to everyone." — Aaron Stanhope [27:53]

Notable Quotes & Memorable Moments

• On the evolution of direct indexing:

  • "The inflection point was really 2019... transaction costs went away..." — Aaron [05:24]

• On why custom/direct indexing isn’t a “set it and forget it” tool:

  • "There’s dials you can turn up and turn down and you have to kind of set budgets and understand when it makes sense to use certain tools..." — Ben [13:41]

• On working down big, concentrated positions:

  • "This is probably like the megatrend that exists in our industry right now is this idea that there’s been tremendous appreciation and then all of a sudden what do I do..." — Aaron [16:59]

• On technology culture at OSAM/Canvas:

  • "If we didn’t have that in our culture, we wouldn’t be able to deliver on Canvas the way that we are." — Aaron [23:59]

• On successful M&A with Franklin Templeton:

  • "We sit within an entity within Franklin that’s dedicated towards innovative solutions and technology..." — Aaron [26:34]

Timestamps: Essential Segments

| Timestamp | Topic | |-----------|---------------------------------------------------------------| | 01:04 | Canvas’s early adoption and post-acquisition culture | | 04:30 | Canvas’s history and how direct indexing took off | | 08:03 | Tax loss harvesting & managing concentrated positions | | 11:15 | The training/education required for advisors | | 13:41 | Role of advisors and ongoing management | | 16:59 | Solutions for concentrated/low basis portfolios | | 18:47 | Tax loss harvesting implications in bear vs. bull markets | | 20:25 | “Map over” process for onboarding portfolios | | 22:12 | Adding investment strategies, expansion into bonds/alternatives| | 23:59 | Tech roots and transition from asset manager to platform | | 26:34 | Life under Franklin Templeton | | 27:53 | Platform evolution and future ethos | | 29:32 | What onboarding looks like for new firms | | 30:20 | Ideal advisor/firm profile for Canvas |

Conclusion

For Advisors:

• Custom indexing offers flexibility, tax benefits, and deep personalization but requires engagement, education, and operational setup.
• Its best fit is for firms ready to make Canvas their investment backbone, not just another account aggregator.

For Clients:

• Real opportunities exist in reducing taxes, managing concentrated stocks, and customizing portfolios far beyond ETFs or mutual funds.

For the Industry:

• The line between asset manager, tech provider, and solutions platform is blurring—Canvas is a leading example of that shift.

Want to Learn More?

• Aaron directs listeners to: canvas.osam.com