Displaying items by tag: tax loss harvesting

Tuesday, 04 June 2024 07:54

Some Advisors Slow to Embrace Direct Indexing

A survey of 631 financial advisors conducted by RIA Channel and FTSE Russell reveals that 79% of financial advisors do not currently use or offer direct indexing, although nearly half plan to begin adoption within the next five years. 

The survey shows that direct indexing’s growth remains in its infancy despite more awareness among advisors and clients. It also shows that many advisors are unfamiliar with direct indexing and unprepared for the shift in wealth management towards more personalized offerings. 

Among the respondents who offer direct indexing, 64% cited ‘tax loss harvesting’, 56% noted ‘tax efficient transitions’, and 40% acknowledged 'reducing concentration risk’ as major benefits of the strategy. Notably, 34% of advisors don’t feel confident talking to clients about direct indexing, despite offering the service.

In fact, the survey shows that 28% of advisors “don’t understand the benefits over other investment options,” while 27% believe the same goals can be reached with a portfolio of ETFs, and 20% see it as equivalent to separately managed accounts. 

In terms of obstacles, 34% said there was a ‘lack of client demand’, and 29% noted a lack of ‘understanding and knowledge of direct indexing’. Other factors cited were an absence of ‘organizational focus’ and ‘cost’.

Clearly, more needs to be done to educate advisors about the opportunity embedded in direct indexing to provide a personalized experience and help clients optimize their tax situations.

Finsum: Direct indexing is becoming increasingly ubiquitous; however, there is still a big gap when it comes to education. Here are some insights from a recent survey on what is preventing some advisors from adopting the strategy. 

Published in Wealth Management
Thursday, 30 May 2024 11:37

Pros and Cons of Direct Indexing

A major trend in wealth management is the rise of customized products and services. Direct indexing is essentially a personalized equity or bond index. 

In terms of benefits, direct indexing gives more control over the timing of realizing capital gains for maximum tax-efficiency. Unlike ETFs or mutual funds, tax losses can be harvested and then used to offset capital gains with direct indexing. According to research, this can boost after-tax returns between 1% and 2%. 

It also allows clients to invest in a way that aligns with their values and/or unique financial situation. This could mean not including stocks from a particular industry, such as tobacco or firearms. It also allows for better risk management, as exposure to certain stocks or sectors can be more effectively managed. 

In terms of drawbacks, a major chunk of direct indexing’s benefits are due to tax savings. However, this is less relevant in a retirement account. Another complication is that short-term losses cannot offset long-term gains. 

Another is the ‘wash sale rule’ which means that investors cannot sell and then repurchase the same security within 30 days. One workaround is to buy securities with similar factor scores to remain consistent with the underlying benchmark. 

Finally, direct indexing has become available to a wider group of investors in recent years due to technology and low-cost trading. However, it’s still most impactful for investors in a higher tax bracket, long-term capital gains, and large, concentrated positions. 


Finsum: Direct indexing is increasingly popular, especially as it’s becoming available to more investors. However, the strategy is most applicable for investors in a higher tax bracket, large concentrated positions, and long-term capital gains. 

Published in Wealth Management
Tuesday, 14 May 2024 10:19

Untapped Opportunities With Direct Indexing

Direct indexing has many advantages, such as lower costs, boosting after-tax returns, and providing more flexibility to clients. However, some advisors are failing to properly implement the strategy, which means some portion of the benefits are not being realized. 

According to Barret Ayers, the CEO of Adhesion Wealth, advisors should offer direct indexing through unified managed account (UMA) frameworks. Currently, only 2% of direct indexing assets are managed through UMAs, with the majority in separately managed accounts (SMAs) or as a standalone model.

By going through a UMA, tax-loss harvesting strategies can be fully implemented and optimized. With standalone accounts, or SMAs, it’s burdensome to manage rotations out of losing positions or transfer holdings when necessary. As a result, many losses cannot be captured due to penalties or restrictions on wash sales. 

Another benefit of direct indexing through a UMA is that advisors can most effectively leverage core-satellite strategies to build a portfolio. This entails a core portfolio allocated to indexing with smaller pockets of higher-risk, higher-return investments in inefficient asset classes. Within a UMA, this strategy's efficacy can be maximized as it allows for efficient rebalancing, changes in asset allocation, and reduced time spent on administration.

Finsum: While direct indexing is surging in popularity, many clients and advisors are failing to fully take advantage of its benefits. Here’s why direct indexing in a UMA is the best approach.

Published in Wealth Management
Saturday, 11 May 2024 08:04

Tax Advantages of SMAs

A feature of separately managed accounts (SMAs) is that investors directly own securities, compared to an ETF or mutual fund. This makes them more tax-efficient, as investors have more opportunities to harvest tax losses and capitalize on volatility. In contrast, mutual funds, or ETFs, offer much more limited opportunities.  

With SMAs, tax losses can be harvested even in years with positive returns, as securities that are down can be sold. These losses can be used to offset gains and reduce an investor's overall tax bill. Positions can be rebought after 30 days to avoid wash sale restrictions, or stocks with similar factor scores can be purchased instead. 

Unlike mutual funds, SMAs are not subject to embedded capital gains. Embedded capital gains mean that an owner of a mutual fund is liable for capital gains depending on a position’s cost basis. This means that an investor in a mutual fund could be liable for capital gains, even if they have a loss on the position. 

In stressful markets, mutual funds can see distributions of capital gains if there is a surge of redemptions, adding to the risk of a capital gains tax bill in concert with a losing position. With SMAs, this risk is nonexistent since securities are directly purchased. Instead, there is more flexibility to pursue the most tax-efficient strategy.

Finsum: Separately managed accounts offer certain tax advantages to investors over investing in ETFs or mutual funds. Over time, the boost to after-tax returns can be quite significant, especially for high-net-worth investors. 


Published in Wealth Management

Last year, assets in passive mutual funds and ETFs overtook assets in active mutual funds and ETFs. This is remarkable considering that passive funds accounted for 31% of total assets in 2015. The trend has been gaining steam since 2008 due to the strong performance of market-cap, weighted indices, and a greater preference for lower fees. 

In 2023, only 47% of active managers outperformed their passive benchmarks. Over the last decade, only 12% of active managers have survived and outperformed their benchmarks. Due to this, it’s not surprising to see that passive strategies are being adopted in separately managed and unified accounts. Currently, it accounts for 32% of assets in these accounts and is forecast to grow at a 12% rate over the next 4 years, faster than growth in ETFs and mutual funds. 

Direct indexing is a customizable, passive investing strategy. It’s designed to track a benchmark but allows for customization for tax purposes or to align investments with a client’s values. According to research, direct indexing can add between 85 and 110 basis points to a portfolio’s after-tax returns. 

Direct indexing also allows advisors to offer clients more personalization while retaining the benefits of passive investing. Already, asset managers and custodians are responding by offering direct indexing solutions at scale to advisors. 


Finsum: Passive strategies have overtaken actively managed strategies in terms of their share of assets. Direct indexing is one factor, as it is a way for advisors to retain the benefits of investing in an index with greater customization and tax efficiency

Published in Wealth Management
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