Investors with over $250,000 are increasingly turning to separately managed accounts, allowing them to handpick municipal bonds with professional guidance. These accounts now hold $987 billion in assets, surpassing mutual funds, which hold about $769.7 billion.

This shift has significantly boosted business, with Franklin Templeton seeing a 50% increase in assets under management over the past year and a half. Lowering the minimum investment to $250,000 has made these accounts more accessible, though still beyond the reach of most Americans. 

However, advancements in technology are driving further accessibility, with potential for minimums to drop to $100,000 in the near future. With artificial intelligence breaking down barriers by making management for portfolio quicker to digest the minimums are bound to fall. 

Finsum: The SMA explosion is here to stay in the fixed income market and managers should watch the evolution. 

Over the last year, there has been an increase in the accessibility and availability of direct indexing solutions. Still, the category continues to be dominated by high net worth or ultra high net worth investors. According to Anton Honikman, the CEO of MyVest, there is about $400 billion managed by direct indexing strategies. He anticipates that the next stage of growth for direct indexing will depend on younger and less affluent investors. 

Initially, the primary advantage of direct indexing was that it allowed investors to extract tax alpha. He forecasts that as direct indexing becomes democratized over the next few years, providers and advisors will have to make some adjustments.

He notes that custodians will have to offer fractional share support for the technology to work for smaller investors, as implemented by Schwab and Fidelity, which now offer direct indexing to investors with lower minimums. 

Typically, there is some premium involved with direct indexing over investing in low-cost ETFs. Given the increase in ETF options over the last couple of years, he believes that it marginally erodes the use case of direct indexing for many investors. Over the longer term, he sees the direct indexing premium compressing in order to remain viable vs. a portfolio of low-cost, targeted ETFs. Further, he believes that the next wave of direct indexing will be driven by younger investors who want to align their portfolios with their values rather than optimize their tax situation. 

Finsum: At one time, direct indexing was only available to high or ultra high net worth investors. As it becomes democratized, here are some considerations for providers and advisors. 

Separately managed accounts (SMAs) are ascending in wealth management as they enable advisors to offer clients nearly unlimited options for customization and can lead to more efficient tax management. 

Another feature of SMAs is better economics in terms of aligning goals and incentives between both parties, especially compared to other structures. With SMAs, management fees are based on capital that is deployed rather than committed, which leads to better deal flow and attention from managers. There is also more ability to negotiate fees to incentivize long-term performance and foster more durable relationships. Further, SMAs can be set up to optimize the tax situation of individual clients.   

Overall, SMAs are gaining traction due to more flexibility and choice, which can lead to better outcomes in terms of performance and governance. The SMA agreement can also be adjusted if necessary, rather than having to create an entire new vehicle. 

For investors, SMAs also offer more protection and oversight beyond simply aligning incentives between investors and managers. More active and involved investors may prefer a non-discretionary SMA in which the investor approves each investment before capital is deployed. Additionally, investors get input into matters such as distributions, valuation, expenses, and reporting. 

Finsum: SMAs are rapidly gaining traction. Here are some of the advantages they offer investors and advisors.  

Unlike mutual funds or ETFs, personalized indexing permits harvesting losses at the security level, offering more opportunities for ultra-high-net-worth investors to capture additional tax advantages. Tax-loss harvesting involves selling an investment at a loss and reinvesting the proceeds into another asset, a key benefit of direct indexing. 

Direct indexing strategies involve selling stocks below their cost basis and instantly repurchasing correlated replacements to avoid wash-sale rule violations. Since investors own individual stocks in their portfolios, losses can be captured even when the index gains value. DI experts exemplifies this strategy by selling underperforming securities during market gains, using harvested losses to offset capital gains and taxable income up to $3,000 annually, with the option to carry over losses to future years. 

Maximizing tax alpha depends on the frequency of portfolio scans for harvesting opportunities, with daily scanning potentially improving after-tax returns by 1% to 2% or more. Commitment to direct indexing underscores its importance in tax-efficient investing. 

Finsum: The frequency through which a portfolio can be scanned for tax-loss harvesting is making the case extremely compelling for direct indexing.

Becoming a Registered Investment Advisor (RIA) offers control, independence, and specialization opportunities regardless of client assets, but also entails assuming home office responsibilities. Competition can be tough however, with an average of 15.42 years in the industry, and must differentiate themselves, often requiring additional education like an MBA or by leaning on modern technology like AI. 

Leveraging technology is crucial for meeting evolving investor demands and streamlining operational tasks to focus more on client engagement. Research demonstrates that investors are overwhelmed with many financial products and face decision paralysis due to anxiety. 

RIAs can specialize in areas such as tax needs and goal-based financial planning, aligning with investor preferences. By adopting a flexible business model, RIAs can tailor services and remain competitive in the market. Automation of time-consuming tasks like trade execution and reporting can further enhance their ability to serve clients effectively.

Finsum: RIA’s need to lean into technology now more than ever to meet their clients’ needs and grow their business.