Displaying items by tag: direct indexing

Recent developments in the wealth management space are expected to fuel the adoption of direct indexing by advisors over the next few years. We previously reported that direct indexing is expected to grow at an annualized rate of 12.3%, according to Cerulli Associates. In a separate survey by FTSE Russell in conjunction with Aite-Novarica, 80% of wealth and asset management firms expressed major interest in offering direct-indexing products to advisors, with 76% ranking the strategy as a top priority over the next year. Developments such as zero-commission trading and fractional shares are expected to help fuel the adoption of direct indexing among advisors. For instance, Charles Schwab and Fidelity both launched direct-indexing offerings last year with low investment minimums at $100,000 and $5,000, respectively. This could potentially bring these strategies into the mainstream. In addition, Fidelity's strategy incorporates fractional shares, while Altruist launched a direct-indexing product last April with a $2,000 minimum. Plus, according to an FTSE Russell spokesperson, “More large custodians and other players entering the space could fuel adoption among registered investment advisors.” Ninety percent of firms polled by FTSE Russell ranked RIAs as a major opportunity for the adoption and distribution of these strategies.

Finsum:Recent developments such as low investment minimums, fractional shares, and more players entering the space are expected to help fuel the adoption of direct indexing among advisors.

Principal Asset Management recently announced that it is enhancing its fintech-enabled model portfolios by incorporating individual bonds as an option for the portfolios. The company collaborated with YieldX and Smartleaf Asset Management to offer the only full portfolio direct indexing solution, enabling advisors to expand the capabilities of direct indexing beyond equities to individual bonds. Principal launched fintech-enabled model portfolios last year in collaboration with Smartleaf to make it easy to construct and manage custom portfolios. As part of the announcement, Jill Brown, Principal's managing director of U.S. Wealth Platform, stated, “We are the first asset manager to work with YieldX to incorporate individual bonds into model portfolios, making the combinations of mutual funds, ETFs, individual equities, and now individual bonds available through our 37 model portfolios even more powerful.” Adam Green, CEO of YieldX added “Through the addition of capabilities from YieldX, advisors will now have the option to include individual fixed-income securities.”

Finsum:Principal collaborated with YieldX and Smartleaf to offer individual bonds as part of its direct indexing model portfolios.

Direct indexing was a hot topic last year as personalization gained steam. It is expected to continue to gain popularity with investors still dealing with inflation and recessionary concerns. Investors want an investment strategy that not only combats market volatility but also addresses their personal situation. According to a 2021 McKinsey study, consumers don’t just want personalization, they demand it more than ever. Investment advisors are recognizing this and looking for ways to incorporate personalization into their clients’ portfolios. Based on the results of Schwab’s 2022 Independent Advisor Outlook study, more than half the advisors surveyed anticipate clients to expect more personalization of investment portfolios. Millennial investors are leading this trend. While personalized portfolios were historically designed for ultra-high-net-worth investors due to high account minimums, advancements in financial technology have brought these offerings to investors of all means. With personalization, investors can have more control over their holdings matching their specific views. Plus, it might also lead to better investment outcomes. Poor investing behavior such as making decisions based on emotion can lead to poor results. With a personalized portfolio, investors are more likely to stick to their strategy when markets get volatile.

Finsum:As inflation and a potential recession remain on investors’ minds, advisors expect their clients to ask for more personalized portfolios.

In a recent interview with ESG Clarity, Morningstar CEO Kunal Kapoor offered his thoughts on direct indexing and how custom features could lead to more people being interested in investing. Kapoor mentioned that while separate accounts were always touted as providing customization, in reality, most separate accounts did not provide much customization. That’s why he is so excited about direct indexing. He stated that, “the cool thing about building a direct index is that at the start, the adviser’s having this conversation with the client, not only about the risk profile, risk tolerance, time horizon – but suddenly the conversation is about preferences.” He believes that these preferences get clients engaged with their advisors. He said, that it can “allow an adviser to really drill into an individual’s preferences in an educated way – really walkthrough for the individual what the pros and cons are of implementing those preferences in a portfolio.” Kapoor also compared direct indexing to passive investing. He believes that while passive investing can be good for most people, it can take the fun out of investing. Direct indexing, on the other hand, has many of the benefits of passive investing, but it brings back the fun of making choices.

Finsum:Morningstar CEO Kunal Kapoor believes that direct indexing creates more engagement between advisors and their clients since it requires them to discuss preferences.

While investors remain spooked by market volatility, Goldman Sachs believes direct indexing may benefit from the volatility. In its recent Market Know-How report, the firm wrote, “Direct indexing involves purchasing the underlying shares of an index, rather than owning an index fund. This investment strategy prioritizes tax-loss harvesting, which builds tax savings through capital losses while attempting to keep tracking error tight to the benchmark. Tax-loss harvesting works not only in down years but also in up years, historically, as individual constituents can still see intra-year declines.” The firm also listed the benefits of direct indexing beyond the tax-alpha achieved from harvesting losses. For instance, the firm lists benefits such as the ability to liquidate concentrated stock positions, reduce active risk in portfolios, and help offset significant taxable events such as the sale of a business or real estate. These can all be achieved through building a “war chest of capital losses.” In addition, Goldman also wrote that “owning individual securities instead of an index fund allows investors to achieve these potential benefits while expressing preferences, such as sector tilts.”

Finsum:In a recent report, Goldman Sachs stated that direct indexing may benefit from market volatility since the strategy prioritizes tax-loss harvesting, and historically, tax-loss harvesting works in both up and down markets.