Displaying items by tag: direct indexing

For ThinkAdvisor, John Manganaro discusses how advisors are increasingly seeing that direct index offerings are essential for high net worth clients given the enhanced after-tax returns. However, it has typically been only used with equities but there are also similar opportunities with fixed income. 

By now, most are familiar with direct indexing for equity portfolios. Essentially, it offers the benefits of index investing such as diversification and low costs while allowing for more customization and potential tax savings. 

On the fixed income side, direct indexing can allow investors to customize bond portfolios along their desired parameters such as income, duration, geography, or tax profile. There is also the potential for tax-loss harvesting during periods of volatility or bear markets to offset capital gains in other areas. 

It’s estimated that direct indexing assets will grow from $260 billion at the end of last year to $825 billion by 2026. Typically, direct indexing adds 30 to 50 basis points of excess returns although the amount can be greater in years with more volatility. For advisors, it’s a way to offer a value-added, low-cost service with greater personalization.

Finsum: Direct indexing assets are forecast to nearly triple over the next couple of years. Most are familiar with its use for equities but it is also being increasingly applied with fixed income.

For ETFTrends, Tom Lydon explains how direct indexing can aid advisors with retaining and recruiting clients. Both of these are integral to growth for any thriving advisor practice while unsatisfactory performance in these areas can compromise success. So, advisors need to apply constant effort in these areas.

With direct indexing, advisors can forge a stronger connection with clients especially those who are more knowledgeable and self-educated. This group is more likely to appreciate the benefits especially in regards to tax savings and greater customization while retaining the benefits of passive investing. 

Direct indexing achieves this because clients will own the actual components of an index in their own separately managed account. However, the components of the index can be adjusted based on the needs or desires of the client. For instance, a client who is passionate about the environment may want to exclude fossil fuel companies from their holdings. These can be replaced with different stocks that have similar factor scores in order to continue tracking the benchmark. 

In terms of retention and recruitment, direct indexing leads to more conversations about a clients’ values, tax situation, and financial position. By optimizing these factors, advisors can add more value for clients and increase their chances of reaching their financial goals. These qualitative benefits are on top of the additional 1 to 2% of alpha that direct indexing adds to portfolios.

Finsum: Direct indexing has many benefits for clients. But an underrated one for advisors is that it can assist with client recruitment and retention.

For ETFTrends, James Comtois discusses the pros and cons of direct indexing as opposed to the traditional approach of investing in open-ended funds such as ETFs and mutual funds. Currently, direct indexing is in the midst of a surge in adoption due to technology and providers making it available to a wider swathe of investors beyond only those with a high net-worth. Another factor is increasing familiarity from advisors and clients.

Despite these positive trends, it’s still warped by traditional investing in ETFs and mutual funds which is how the vast bulk of advisors and investors manage their portfolios. While both methods are intended to track the performance of an underlying benchmark, the key difference is that with direct indexing, the investors actually buy the individual holdings of an index.   

This means that investors have an opportunity for more customization based on a clients’ values or personal situation. For instance, a client may feel strongly against investing in companies that manufacture firearms, so these stocks can be excluded and replaced with different stocks that have similar factor scores. 

Another benefit is that direct indexing can lead to tax-loss harvesting opportunities which aren’t available with investing in close-ended funds. Losing positions can be sold and offset gains from other positions, leading to a lower tax bill. This has been proven to result in increased alpha and better performance especially in years with more volatility.

Finsum: Direct indexing is a recent innovation. For certain investors, it is a better option than investing in close-ended funds due to tax-loss harvesting and the ability to customize portfolios.

Direct indexing is increasingly becoming a core offering for many financial advisors. Maybe the best indication of its growth is that there have been 12 major acquisitions by wealth management firms of direct indexing providers over the past couple of years.

Although its ubiquity and availability to all sorts of investors is a recent development, direct indexing has been around for many years albeit only for high-net-worth investors. In a recent SmartAsset interview of Vestmark’s SVP of Direct Indexing, Dave Gordon, he discussed what financial advisors need to know, and why wealth management firms are so bullish on the trend. 

Gordon cites the growth of direct indexing due to clients demanding more customization and lower tax bills while wanting to retain the benefits of low-cost index investing. Direct indexing is a way for clients to have their cake and eat it as well due to technology which is making it possible for firms to offer these services to all types of clients. 

However, there are some differences in terms of direct indexing offerings and approaches. For instance, some direct indexing providers will rebalance losing positions into sector or index ETFs for a temporary period to maintain factor scores and then re-invest in the same securities while others will choose to invest in different securities with similar factor scores. 

Overall, he believes that direct indexing is more about data and technology than it is about securities and investing. Therefore, he believes in finding the providers with the best platform and resources.

Finsum: Direct indexing is here to stay, and wealth managers are betting big on the trend. Here are some important things for advisors to understand. 

At Morgan Stanley’s US Financials, Payments, & Commercial Real Estate conference, CEO James Gorman shared some thoughts on the bank’s future, and why he’s particularly bullish on its wealth management arm.

According to Gorman, the bank continues to look for opportunities to expand its asset management business through acquisitions. He believes there is more growth opportunity in this area especially compared to investment banking, lending, or sales & trading due to the industry being ‘non-consolidated’ unlike other parts of the financial world. He is also open to making deals in new geographies. 

While Morgan Stanley has traditionally been a Wall Street-based bank, Gorman has sought to increase its presence in wealth management during his 14 year tenure. Some of his most notable acquisitions include Eaton Vance, Calvert Research and Management, and direct indexing provider Parametric Portfolio Associates. 

He was particularly positive on direct indexing, since it has resulted in ‘huge positive flows’, and it has seamlessly fit with the rest of its wealth management division. Overall, wealth management is the fastest-growing part of its business albeit the smallest with $1.3 billion in revenue in the first quarter. 

Finsum: Morgan Stanley CEO James Gorman has made a successful bet on wealth management as a key growth driver for the bank. He continues to believe in this strategy and is looking for expansion opportunities.