Ben Hammer, the Head of Client Development for Vanguard, recently spoke to an audience of financial advisors about direct indexing. The asset manager clearly sees it as a major growth avenue especially as most advisors and investors remain unfamiliar with the concept and its benefits.

According to surveys of investors and advisors, the most appealing part of direct indexing is the potential tax savings which is not possible with traditional passive investing. By recreating indexes within an individual investors’ account, losing positions can be sold while stocks with similar factor scores are added in substitution to maintain consistency with the benchmark. Another benefit is customization as investors can adjust a portfolio’s holding based on their own situation, values, or preferences. 

Hammer also stressed that direct indexing wouldn’t be available to a wide swathe of the investing universe because of its cost and complexity. However, these issues have been solved by technology as trading costs have plummeted, while software handles the regular scans for tax loss harvesting opportunities and rebalancing.

Still, direct indexing is probably not necessary for most investors. It can be the perfect solution for those who want more tax savings and customization while retaining the benefits of passive investing. 

Finsum: At a recent conference for financial advisors, Vanguard’s Ben Hammer spoke about the evolution of direct indexing and its growth prospects.

For advisors, there are many benefits to working with high net worth clients. They have more investable assets and also tend to have a better grasp of what constitutes a fruitful advisor-client dynamic. Of course, there is intense competition to land these clients. Here are some tips to increase your chances of success.

The first step is to understand their needs and goals. It’s also important to be aware that these prospects have seen many sales pitches and tend to be quite savvy. Therefore, any approach should be transparent in terms of purpose and intentions. Instead of being vague, it’s more helpful to focus on a specific topic like retirement planning, charitable giving, tax strategies, succession planning, etc, where you can demonstrate your expertise. 

The second step is to remember what makes you and your practice unique and to focus on these differentiators. Having a specialization can help you stand out especially if the client is looking for that particular service. This can also help you come up with a message around your brand which communicates your value. 

The final step is to spend time and energy into making sure that your prospects are aware of your practice whether this is digital or analog. This means defining your ideal prospect and figuring out where they spend time and attention, physically and virtually.. 

Finsum: Getting a high net worth client has many benefits for advisors, but the landscape is quite competitive. Here are some tips to increase your chances of success.

One of the consequences of tighter monetary policy is to curtail housing demand by squeezing affordability. As a result, all sorts of housing activity has cooled such as mortgage applications, new home construction, renovations, and house flipping. While there are all sorts of losers, it’s presenting an opportunity for many private real estate funds who are finding a buyer’s market.

 These funds raise money with multi year holding periods so are less affected by the change in the funding environment at least in the short and intermediate-term. Another factor in the real estate market is that many regional banks are pulling back from extending credit given their balance sheet concerns. Overall, it’s a risk for the broader economic outlook but a unique opportunity for private real estate investors.   

And, more money is being allocated to real estate - public and private. In the first-half of the year, 43% of institutions surveyed, increased their allocation to real estate by an average of 76 basis points. Sovereign wealth funds also increased real estate exposure from 6.9% to 7.9%. In terms of geography, private real estate continues to be dominated by North American investors.

An informed consumer is an…. Yep; you get the idea

That brings us to direct indexing, which yields a host of benefits for investors, according to avaloninvest.com. By toting a firm grasp of directing indexing’s concept, what can investors do? Why, make informed decisions about their portfolios and the most of their returns, that’s what.

Meantime, preferences and goals are always nice and with direct indexing, investors can customize their investments based on both of those elements. Not only that, investors can leverage direct indexing to generate exposure to specific companies within an index. That can come in especially handy among investors who believe deeply in specific companies or sectors.

Investors are opting more and more for direct indexing to spark customized portfolios, according to etftrends.com.

Delving a bit deeper, with direct indexing accounts, such as, for example, Vanguard Personalized Indexing, which offers screens and tilts. They allow advisors to customize the portfolios of their clients, not to mention positions advisors – on the behalf of their clients -- to request custom options.

“You can help clients express environmental, social, and governance (ESG) or socially responsible investing (SRI) preferences,” according to Vanguard. “You can tilt their portfolios toward stocks with certain characteristics like momentum or value, known as factors.”

In the wealth management arena, direct indexing is one of the fastest growing areas and presents a unique opportunity for investors and advisors. Demand for these services is likely to grow due to more awareness of the benefits, desire to lower tax bills, lower costs, and easier implementation.

According to Cerulli Associates, direct indexing assets under management (AUM) are likely to grow at a faster rate than traditional categories like ETFs, mutual funds, and SMAs over the next five years and reach over $1 trillion by the end of the decade. Despite these bullish trends, less than 20% of advisors are familiar with the strategy and recommend it to clients. 

For investors, the biggest appeal of direct indexing is the potential to lower the tax bill and use harvested losses to offset gains in other parts of the portfolio. Continued adoption and awareness at the investor and advisor level are likely to be the biggest growth drivers over the next few years.

Direct indexing is a form of passive investing except investors are able to access the increased customization and tax loss harvesting benefits of active investing. This is done by recreating an index in a personal portfolio with appropriate adjustments to account for an individual’s situation or financial goals. 

Finsum: Direct indexing assets under management is on pace to exceed $1 trillion by the end of the decade. Here are some of the major growth drivers.