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. 

In March, inflows into active ETFs reached a new monthly record of $26 billion. It’s somewhat counterintuitive given the strong performance of global equity markets, which tend to favor flows into passive funds. 

For the first quarter, total inflows into active ETFs reached $64 billion, a new quarterly record. YTD, 32% of ETF inflows have been into active ETFs, despite accounting for only 7% of total ETF assets. Based on the current pace, active ETF inflows should exceed $200 billion this year, a more than 50% increase from last year’s record of $130 billion.

A key factor behind the growth of active ETFs is a desire to reduce exposure to mega cap tech stocks, which account for an increasingly large share of popular market-cap, weighted indices. And this has only been exacerbated in Q1, with these stocks tacking on double-digit gains. 

Additionally, there are concerns that financial markets could get choppier given uncertainty around monetary policy and the economy. This is leading many market watchers to believe that we are shifting to a new market environment, which should favor lagging stocks and stock-picking strategies over passively holding indices. According to Noah Damsky of Marina Wealth Advisors, “We think a more active approach is appropriate as we anticipate more choppy markets with upcoming rate cuts by the Fed. We’re making active tilts in our portfolio to laggards such as health care, and over time we anticipate increasing exposure to utilities as rate cuts draw nearer.”

Finsum: Inflows into active ETFs reached new records in March and the first quarter. Active ETFs account for only 7% of total assets. So, it’s impressive and telling that 32% of ETF inflows were into active ETFs in Q1.  

Many investors may be looking to diversify their portfolios given recent gains in equities. While there are many options, leveraged index annuities can reduce portfolio risk while still offering some growth potential.  

Leveraged index annuities are typically bought upfront with a single payment. The interest earned on these products is not taxable until it is withdrawn, which also makes them an effective vehicle for saving.  

These annuities are leveraged to a major market index like the S&P 500. Interest is earned when the underlying index appreciates; however, there is no loss of principal in the event that the index suffers losses. 

The tradeoff is that interest earned on the annuity is capped depending on the terms of the annuity agreement. For instance, the maximum earnable rate of interest could be set at 12%. This means that in a year like 2023, when the S&P 500 was up 24%, the annuity owner’s earned interest would be capped at 12%. On the other hand, the annuity owner would have seen no loss of principal when the S&P 500 was down 19% in the previous year.  

This combination makes leveraged index annuities ideal for investors who want to diversify and de-risk their portfolios while still growing their wealth.

Finsum: Leveraged index annuities are a way for investors to reduce risk and increase diversification while still allowing for appreciation. 

Broadridge Financial Solutions, a financial technology infrastructure provider, expects total assets in model portfolios to exceed $11 trillion by the end of 2028. This would represent more than a doubling of assets over the next 5 years from $5.1 trillion at the end of last year. This forecast is slightly more optimistic than Blackrock’s prediction that model portfolio assets will reach $10 trillion over the next 5 years.

Model portfolios are increasingly being utilized by financial advisors as the industry shifts to a greater focus on planning and client service vs. investment management. In addition to freeing up valuable time and resources for advisors, research has also shown that they tend to outperform, especially during volatile markets, and lead to greater client satisfaction.

For asset managers, model portfolios are a source of growth for ETFs. Currently, 63% of model portfolio assets are in equities, with 32% in fixed income. ETFs comprised 51% of assets in model portfolios, compared to 26% for mutual funds. According to Andrew Guillette, Broadridge’s VP of Global Insights, “We expect ETFs to continue to take share from mutual funds inside model portfolios, driven primarily by their attributes as low-cost and tax-efficient portfolio-building blocks.”

Finsum: Broadridge Financial is forecasting that model portfolio assets will more than double over the next 5 years. It’s expected to drive growth for various asset managers’ ETFs and help advisors focus on client service and building their practices.