Displaying items by tag: direct indexing

Your table’s ready, direct indexing. The food’s hot, the beverages refreshing cold.

What else would you expect, considering that in the financial industry, direct indexing’s all that and more – as in the next big thing, according to comparebrokers.co.

Who’s it idyllic for? Those who are calling it a day in the workforce. Under those circumstances, they can unload holdings that impact taxes the least.

If you want to separate yourself from your peers, direct indexing strategies could be your answer, according to advisorperspectives.com.

They can dispense tax effective ways to manage any cash windfalls that might be on the horizon among high net worth investors. Not only that, they can shore concentrated stock positions.

In a recent interview at IMPACT, Daniel Needham, president of Morningstar Wealth Management Solutions, said his firm considered direct indexing an “important investment option for advisors to be able to deliver great advice to their clients.

“That’s the primary reason we decided to enter the market,” said Needham. “We think that direct indexing is a good way for clients to be able to have their financial capital personalized, including their values, beliefs and preferences, as well as to be tax-managed for a lot of households. Tax management should happen for every household.”

In an article for AdvisorPerspectives, Jack Van Dyke of Russell Investments shared some strategies for advisors to attract high net worth investors with direct indexing. 

For most advisors, most strategies or tactics to grow their practice revolve around generating additional revenue from existing clients or adding new high net worth clients. And, the key to accomplishing these goals is to have a unique and differentiated offering. 

Direct indexing fits the bill as it can help reduce a clients’ tax bill, retain the benefits of indexing, and allow for effective customization. While most advisors are aware of this innovation, they have not yet begun offering it to clients. 

Therefore, it’s essential to start the conversation with your prospects and clients. Van Dyke recommends that advisors begin by asking questions to determine whether direct indexing is a good fit for them. These include whether or not they are expecting a large windfall in the future, their current tax liabilities from investments, and whether they have a concentrated stock position. 

These questions are effective conversation starters that you can transition into a discussion about why direct indexing can help them reach their financial goals while giving them more control over their financial destiny.

Finsum: The key to a financial advisory practice is to grow their business and/or increase revenue per client. Direct indexing is one way that advisors can achieve these goals.

Alphathena, a personalized investing platform and direct indexing startup, won the ‘Best in Show’ award at the 2023 Morningstar Fintech Showcase Conference and was covered by Benzinga. Alphathena is attempting to use AI and automation to create solutions and tools for RIAs and Wealthtech platforms with a specific focus on customized direct indexing, automated tax-loss harvesting, and lifecycle management solutions. 

The conference featured 25 fintech startups that were geared towards financial professionals. Some of the major themes included AI, personalization, and improving the client experience. Another discussion point is how the wealth management industry is poised for the Great Wealth Transfer as demographics predict a tidal wave of assets from Baby Boomers to Millennials. 

In regards to Alphathena, Lawrence Johnson, the Head of Emerging Fintech at Morningstar remarked, "Alphathena, with its elegant platform and powerful engine, is an example of a growing field of innovators that have learned to harness frontier technologies to deliver better outcomes for investors."

The judges spoke highly of Alphathena’s innovative approach, potential for disruption, and strong value proposition. Currently, it can customize portfolios with ETFs and factors for personalization and performance. Its longer-term ambition is to be the solution for wealth advisors when it comes to managing the entire lifecycle of personalized investing.

Finsum: Alphathena, a startup in the direct indexing and personalization space, won the ‘Best in Show’ award at the 2023 Morningstar Fintech Conference.

In an article for ETFTrends’ Direct Indexing Channel, James Comtois shared some thoughts from Vanguard executives about direct indexing. In essence, the company sees it as having a bright future and offering significant benefits in the terms of tax-loss harvesting.

With traditional ETFs, investors aren’t able to reap the benefits of tax-loss harvesting. However, direct indexing allows investors to get the benefits of an ETF like diversification and low costs, but they can also sell securities at a loss to offset taxable gains in profitable securities. Subsequently, the sold securities can be replaced with securities that have similar factors to maintain diversification.

These benefits also compound with more frequent scans. So, daily or weekly scans will lead to better outcomes than monthly or quarterly scans. Previously, there were constraints to more frequent scans as an advisor couldn’t monitor portfolios so frequently. But with automated, direct indexing strategies, these services are available to a wider swathe of investors. Overall, more frequent scanning can add between 20 and 100 basis points to a portfolio.

Finsum: Direct indexing offers specific benefits to investors especially when compared to investing in ETFs.

In an article for ETFTrends, James Comtois laid out the 2 major benefits provided by direct indexing as opposed to investing in index funds. Until recently, direct indexing was only available to ultra high net worth investors. Now, it’s increasingly available to a wider swathe of investors.

Direct indexing allows investors to gain the benefits of index investing such as low costs and diversification but allows for greater customization and reduction of taxes. With direct indexing, tax losses are harvested on an interim basis and can be used to offset gains.

According to Morningstar, about $260 billion has moved into the category as of the end of 2022. And, this trend is only expected to strengthen in 2023. 

According to Morningstar, “Investing directly in the underlying stocks of an index in lieu of a mutual fund or ETF tracking the same benchmark allows for individually tailored tax management.” Another factor cited is that it allows investors to modify indexes based on their specific values to account for environmental, social, or governance factors. Additionally, investors can prioritize any specific factor they want to emphasize such as value or growth. 

Finsum: Direct indexing has seen massive growth over the last couple of years as it’s become increasingly available to a wider clientele. Two major benefits are a lower tax bill and increased customization.