Displaying items by tag: direct indexing

Every year, there are countless innovations in wealth management but only a few prove to have staying power and become a disruptive force. It’s increasingly clear that direct indexing is here to stay given its massive growth over the last couple of years.

It also serves a unique niche, because it offers the benefits of index investing with more customization and tax savings. According to a report from Cerulli Associates, direct indexing is expected to continue growing at a similar pace over the next decade due to these reasons. And, it’s especially useful for investors who want to prioritize tax loss harvesting and ESG. 

The report also shows that there’s considerable room for growth given that only 14% of advisors are aware of it and recommending it to their clients. However, the firm is confident in its growth especially as fee-based models continue to take market share. It forecasts 12.3% growth over the next 5 years.

Given its usefulness and newness, direct indexing is one way that advisors can differentiate themselves. It can also help create a more personalized experience for clients which can lead to more loyalty and retention. 

FinSum: Direct indexing is expected to continue rapidly growing over the next decade, and it’s particularly beneficial for tax loss savings and ESG investing. 

Published in Wealth Management
Saturday, 27 May 2023 04:45

FINRA Fines 5 Brokers for Reg BI Violations

Regulation Best Interest (Reg BI) was passed by the SEC in 2019 and implemented in 2020. It essentially requires brokers to only recommend products to customers that are in their best interest. It also requires that brokers must inform clients of any potential conflicts of interest and financial benefits they may accrue. 

Until recently, enforcement of Reg BI has been lacking, but this is clearly now changing as authorities are stepping up. The most recent incident is FINRA fining five broker-dealers for failing to comply with regulations including Reg BI and Form CRS. 

These firms were cited for a lack of guardrails and protocols that would lead their registered brokers to adhere to Reg BI. Relatedly, these firms were also penalized for missing deadlines related to Form CRS and/or providing incomplete information. Form CRS is an overview of a broker’s services, fees, conflicts of interest, prior disciplinary action, and other information to increase transparency and minimize fraud risk. 

The five firms did not admit or contest FINRA’s decision. Like previous Reg BI enforcement, the penalties and citations were minor. In contrast, the SEC has only filed one major Reg BI case, but it pursued much harsher penalties. 

Finsum: Reg BI is a new regulation which mandates that broker-dealers must inform clients of any conflicts of interest and recommend products that are in their best interest. Recently, regulatory authorities are stepping up enforcement. 


Published in Wealth Management
Tuesday, 23 May 2023 17:06

2 Components of Direct Indexing

In an article for WealthManagement, Iraklis Kourtidis shared his persepctive on direct indexing and what it precisely means. He says that there are two components to direct indexing. The first is that it helps an investor create a custom and personalized index. The second is that it can help with portfolio management to ensure that it tracks a specific benchmark. 

With direct indexing, investors hold the actual securities themselves in a portfolio rather than an ETF or mutual fund which tracks an index. One advantage of this is that it enables an investor to create their own index. Previously, this wasn’t possible as index investing was only possible through ETFs and mutual funds which follow well-known indexes.

Some investors want the benefits of index investing in terms of diversification and low costs. But, they need greater personalization. One approach is to modify an existing index. Another is to create an index from scratch. 

In terms of portfolio management, there are some additional challenges. For one, index holdings need to be constantly rebalanced especially when tax losses are being harvested to offset gains in other parts of the portfolio or when factor scores change. 

Finsum: There are two parts of direct indexing, and each is crucial for success. One involves constructing a custom index, and the second is portfolio management.

Published in Wealth Management
Friday, 19 May 2023 10:46

Direct indexing and to the point

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.”

Published in Eq: Financials

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.


Published in Wealth Management
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