Displaying items by tag: direct indexing

A familiar mantra of financial advisors and tax planning experts is that it’s not what you earn; it’s what you get to keep that matters. This principle underscores the significance of effective tax management strategies within a taxable investment portfolio. An essential technique in optimizing after-tax returns is tax-loss harvesting, which involves selling investments at a loss to offset taxable gains in the same year.

 

A powerful tool for executing this strategy is direct indexing. Unlike product structures like mutual funds, direct indexing accounts allow investors or their advisors to buy and sell individual securities. This granular control enables them to recognize losses for tax purposes while maintaining their investment strategy.

 

However, timing is crucial. Establishing a direct indexing account early in the taxable year affords the account holder increased flexibility later. This positions them to maximize the opportunities for tax-loss harvesting as they accumulate over the year. By doing so, advisors can proactively manage the portfolio to leverage potential tax savings, which can be particularly beneficial when preparing for year-end financial discussions with clients.

 

Essentially, the sooner an advisor sets up a direct indexing account for their client, the more they can potentially benefit from tax-loss harvesting strategies during the year.


Finsum: Advisors can help their clients keep more of what they earn by utilizing direct indexing accounts to harvest tax losses throughout the year.

 

Published in Wealth Management
Thursday, 28 December 2023 03:11

Findings From Direct Indexing Focus Groups

Direct indexing is seeing a surge in popularity as it appeals to many investors due to its tax benefits and customization abilities while still offering low costs and diversification. Hearts & Wallets conducted a focus group in 3 cities across the US with investors to get their thoughts on the emerging strategy.

 

Direct indexing is essentially a variant of traditional index investing through low-cost ETFs or mutual funds. However, the major difference is that investors replicate the index within a separately managed account. This means that they own the actual constituents of the index which means that there are additional opportunities for tax-loss harvesting and personalization.

 

The focus groups were overall very favorable to the concept and more so than in previous years. Respondents seemed to be most attracted to its potential tax savings. In contrast, many were less enthused about customization given that it added a layer of complexity and seemed time-consuming. A small minority did appreciate the option of being able to avoid companies they don’t like.

 

Another interesting finding from the focus group is that it’s appealing to investors with less assets as well as high net-worth investors specifically for its tax savings. According to the firm, two-thirds is in taxable accounts, and this continues to grow at a faster pace than money in nontaxable accounts. Thus, advisors are likely to have the most success by stressing this benefit of the strategy. 


Finsum: Hearts & Wallet conducted a focus group of investors in 3 cities about direct indexing. It revealed that investors were most receptive to the strategy’s tax benefits. 

 

Published in Wealth Management
Wednesday, 20 December 2023 03:06

The Pull of Personalization for Millennial Investors

Schwab conducted a survey among its ETF-investing clients. Among the takeaways is that Millennial investors are quite partial to ETFs, relative to other generations. 37% of their portfolios are allocated to ETFs. 89% said ETFs were their investment vehicle of choice, while 25% of Millennials plan to increase their exposure to ETFs next year. 

 

Another interesting finding from the survey is that Millennials also have a strong interest in more personalized investment options. 88% said that they are somewhat or very likely to personalize their portfolios. 78% want their investment to align with their personal values. This is much higher than older generations. 

 

The survey also showed substantial interest in direct indexing among Millennials. This isn’t too surprising considering that 65% of Millennials said it’s extremely important to have more control over investments, 61% want greater ability to customize their investments, and 61% want their investment to be managed to optimize taxes. 

 

Currently, 87% of Millennials are familiar with direct indexing, an increase from 80% in last year’s survey. Additionally, 53% of Millennials are extremely interested in learning more about direct indexing, while only 34% of Gen X and 22% of Boomers feel the same way. 69% of ETF investors, not investing with direct indexing, said that they are likely to invest in one next year. For Millennials, 80% feel this way.


Finsum: Schwab conducted a survey among its ETF-investing clients. Among the findings, Millennials are partial to the asset class and also have strong interest in direct indexing. 

 

Published in Wealth Management

Direct indexing has been around for 30 years but was once only accessible and viable for ultra-high net-worth investors. Now, technology and lower transaction costs have made it available for a much wider swath of investors who are able to benefit from direct indexing’s tax-loss harvesting and customization abilities.

 

Interestingly, the strategy is finding particular favor among millennial investors who are interested in tax optimization and personalization which are not possible through traditional passive investing. Advisors can customize holdings in a way that reflects a client’s values and preferences such as prioritizing ESG criteria or adjusting a portfolio based on a client’s risk profile. Holdings can also be customized to account for a clients’ unique financial situation, which is also not possible through investing in ETFs or mutual funds. 

 

For advisors, it presents an opportunity to differentiate themselves in a competitive landscape by offering personalized and optimized solutions. Direct indexing is likely to continue growing as it’s becoming increasingly available through many online brokerages and wealth management firms. It’s also consistent with many younger investors’ desired preference to have their personal holdings reflect their values and beliefs. 


Finsum: Direct indexing is growing at a rapid pace, and it’s finding favor with Millennial investors due to its tax optimization and personalization.  

 

Published in Wealth Management

According to a report from Cerulli Associates, direct indexing will grow faster than ETFs, mutual funds, and separately managed accounts (SMA) over the next 5 years. Currently, it’s estimated that total assets under management for direct indexing strategies will exceed $800 billion by 2026 from $462 billion at the beginning of last year. 

 

Another factor that should support direct indexing’s growth is that only 14% of financial advisors are aware of direct indexing and actively recommend it to clients. It’s estimated that 63% of advisors have a client with over $500,000 in investable assets, while 14% of advisors focus on clients with over $5 million in assets. Direct indexing offers the most clear advantages for high net worth clients. For advisors, it’s an opportunity to offer a differentiated service especially as tax management and customization are highly valued by many prospects. 

 

Direct indexing is growing in popularity as it allows investors to retain the major benefits of index investing while accessing greater personalization and unlocking certain tax advantages. With direct indexing, clients own the actual components of an index as opposed to an ETF or mutual fund. This leads to more potential for tax loss harvesting and customization to suit a clients’ particular needs or construct a portfolio that aligns with their values. 


Finsum: Direct indexing is forecast to grow faster than many ETFs, mutual funds, and SMAs over the next 5 years. Here are some of the key reasons for its growth, and why advisors should pay attention.  

 

Published in Wealth Management
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