Displaying items by tag: direct indexing

While direct indexing might be ready for added use this year, according to one expert, it’s hasn’t quite hit prime time when it comes to the majority of the wealth management industry, reported fa.mag.com.

“I’m not necessarily of the view that 2023 will be the year that direct indexing becomes broadly democratized,” said Anton Honikman, CEO of MyVest. “There’s a different discussion about bringing direct indexing to a broader market. What’s hindering that is the need for more of an experience with direct indexing.”

He continued: “I’m a fan of direct indexing,” said Honikman. “I think it will continue to grow, and I think it’s emblematic of an inexorable trend towards more personalized solutions.” That said, he also noted it’s “emblematic of the real interest and desire for more tax management -- particularly among the affluent and high-net-worth investors. For those reasons, I’m really positive about its future.”

But this year, however, when it comes to wealth management, direct indexing won’t be omnipresent.  Thing is, the technology that will abet the ability of direct indexing to maximize its potential isn’t in place, he noted. The personalization of financial plans and portfolios at scale would be enabled with such technology.

Rather, this year’s game plan will see technologists and wealth management firms remain on the road toward investing in overcoming issues evolving around personalization, added Honikman.

Based on a report by Cerulli Associates, over the next five years, direct indexing’s assets are expected to spike by more than 12% annually, according to investmentnews.com.

Jonathan Foster, president, and CEO of Angeles Wealth Management, recently penned an article on MarketWatch where he listed the benefits of direct indexing for retail investors. Foster noted that while direct indexing is primarily used by high-net-worth investors that are seeking to optimize their after-tax returns, the widespread elimination of brokerage trading fees and the growing availability of fractional share trading have led to greater adoption of direct indexing. According to Foster, the advantages that direct indexing can bring to a portfolio include ‘dirty money,’ outmoded mutual funds, and personalization. Foster says that ‘dirty money’ refers to investors expressing concern about how the companies they invest in make money. For instance, direct indexing offers advisors the ability to craft portfolios that exclude what their clients believe to be “dirty money.” Foster uses tobacco as an example. In this instance, direct indexing can help an investor craft a tobacco-free portfolio. Outmoded mutual funds refer to investors using mutual funds in taxable accounts and not having the benefit of starting with their own individualized cost basis, which can lead to distributable annual taxable gains. With direct indexing, investors can take advantage of tax-loss harvesting. Direct indexing can also offer investors an opportunity to customize portfolios with strategies such as ESG.

Finsum:A wealth management executive recently wrote an article on MarketWatch advocating for direct indexing due to benefits such as excluding certain securities, employing tax-loss harvesting, and customizing a portfolio for certain strategies.

Direct indexing? It seems you’re on.

It’s the next large splash in the financial industry, according to comparebrokers.co. And, get this: it’s under consideration as the future. In investing, that is.

Direct indexing’s been around the blocks a few times, of course. It’s been available in this country for, well, decades, according to nucleuswealth/com. Sparked by factors such as affordability and the personalization of portfolios, direct indexing’s popularity’s burgeoned.

Rather than tooling through a motherlode of available ETFs, you can personalize passive investments with direct indexing.

Damien Klassen, Chief Investment Officer at Nucleus Wealth, says: “Direct indexing is the next generation of exchange-traded funds – ETFs 2.0. Direct indexing involves the investor owning the individual shares that make up an index in a separately managed account.

“Because the investor directly owns each of the shares in their own account, they can (customize) their superannuation or investments. “Where an index mutual fund, an index ETF or traditional superannuation fund merely tracks the index, direct investing allows investors to control their investment decisions. Investors can modify their portfolios by creating ‘tilts’, which is the ability to remove or add certain holdings or sectors according to personal preferences.”

Last June, Kiplinger reported, as far as adoption among investors, direct indexing’s had gained the upper hand over both ETFs and mutual funds. Unique benefits that can’t be mirrored in a traditional ETF or mutual fund structure available through direct indexing, and that’s especially so around personalization and tax management. 

While direct indexing might be ready for added use this year, according to one expert, it’s hasn’t quite hit prime time when it comes to the majority of the wealth management industry, reported fa.mag.com.

“I’m not necessarily of the view that 2023 will be the year that direct indexing becomes broadly democratized,” said Anton Honikman, CEO of MyVest. “There’s a different discussion about bringing direct indexing to a broader market. What’s hindering that is the need for more of an experience with direct indexing.”

He continued: “I’m a fan of direct indexing,” said Honikman. “I think it will continue to grow, and I think it’s emblematic of an inexorable trend towards more personalized solutions.” That said, he also noted it’s “emblematic of the real interest and desire for more tax management -- particularly among the affluent and high-net-worth investors. For those reasons, I’m really positive about its future.”

But this year, however, when it comes to wealth management, direct indexing won’t be omnipresent.  Thing is, the technology that will abet the ability of direct indexing to maximize its potential isn’t in place, he noted. The personalization of financial plans and portfolios at scale would be enabled with such technology.

Rather, this year’s game plan will see technologists and wealth management firms remain on the road toward investing in overcoming issues evolving around personalization, added Honikman.

Based on a report by Cerulli Associates, over the next five years, direct indexing’s assets are expected to spike by more than 12% annually, according to investmentnews.com.

Allan Roth, founder of Wealth Logic LLC recently penned an article for etf.com where he provided his opinion on direct indexing vs. ETFs. While direct indexing is forecasted to attract assets at a faster pace than ETFs, according to a recent report by Cerulli Associates, Roth believes that direct indexing is not better than ETFs. While he does mention the benefits of direct indexing such as tax advantages, customization, and low annual costs, he asked, “But is direct indexing better than ETFs?" He added, "Generally they are not, in my view, at least not compared to the best ETFs.” He uses the S&P 500 as an example. Vanguard’s VOO ETF has a 0.03% annual expense ratio, while direct indexing typically has an annual fee of at least 0.40% annually. Roth does say that the 0.37 percentage point differential could be made up from the benefit of tax-loss harvesting in the early years, but he believes it likely won’t continue. That is because the stock market “generally moves up in the long run, so each year there is less and less tax-loss harvesting. Yet the fees continue.” In addition, after a few years, he says that “the tax benefit is minimal, and all that is left are fees and complexities.”

Finsum:Financial planner Allan Roth recently wrote an article for etf.com where he stated that direct indexing is not better than ETFs since direct indexing is more expensive and its tax benefits are minimal after a few years.