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Every year, there are countless innovations in wealth management but only a few prove to have staying power and become a disruptive force. It’s increasingly clear that direct indexing is here to stay given its massive growth over the last couple of years.

It also serves a unique niche, because it offers the benefits of index investing with more customization and tax savings. According to a report from Cerulli Associates, direct indexing is expected to continue growing at a similar pace over the next decade due to these reasons. And, it’s especially useful for investors who want to prioritize tax loss harvesting and ESG. 

The report also shows that there’s considerable room for growth given that only 14% of advisors are aware of it and recommending it to their clients. However, the firm is confident in its growth especially as fee-based models continue to take market share. It forecasts 12.3% growth over the next 5 years.

Given its usefulness and newness, direct indexing is one way that advisors can differentiate themselves. It can also help create a more personalized experience for clients which can lead to more loyalty and retention. 

FinSum: Direct indexing is expected to continue rapidly growing over the next decade, and it’s particularly beneficial for tax loss savings and ESG investing. 

Published in Wealth Management
Tuesday, 23 May 2023 17:06

2 Components of Direct Indexing

In an article for WealthManagement, Iraklis Kourtidis shared his persepctive on direct indexing and what it precisely means. He says that there are two components to direct indexing. The first is that it helps an investor create a custom and personalized index. The second is that it can help with portfolio management to ensure that it tracks a specific benchmark. 

With direct indexing, investors hold the actual securities themselves in a portfolio rather than an ETF or mutual fund which tracks an index. One advantage of this is that it enables an investor to create their own index. Previously, this wasn’t possible as index investing was only possible through ETFs and mutual funds which follow well-known indexes.

Some investors want the benefits of index investing in terms of diversification and low costs. But, they need greater personalization. One approach is to modify an existing index. Another is to create an index from scratch. 

In terms of portfolio management, there are some additional challenges. For one, index holdings need to be constantly rebalanced especially when tax losses are being harvested to offset gains in other parts of the portfolio or when factor scores change. 

Finsum: There are two parts of direct indexing, and each is crucial for success. One involves constructing a custom index, and the second is portfolio management.

Published in Wealth Management

In an article for AdvisorPerspectives, Jack Van Dyke of Russell Investments shared some strategies for advisors to attract high net worth investors with direct indexing. 

For most advisors, most strategies or tactics to grow their practice revolve around generating additional revenue from existing clients or adding new high net worth clients. And, the key to accomplishing these goals is to have a unique and differentiated offering. 

Direct indexing fits the bill as it can help reduce a clients’ tax bill, retain the benefits of indexing, and allow for effective customization. While most advisors are aware of this innovation, they have not yet begun offering it to clients. 

Therefore, it’s essential to start the conversation with your prospects and clients. Van Dyke recommends that advisors begin by asking questions to determine whether direct indexing is a good fit for them. These include whether or not they are expecting a large windfall in the future, their current tax liabilities from investments, and whether they have a concentrated stock position. 

These questions are effective conversation starters that you can transition into a discussion about why direct indexing can help them reach their financial goals while giving them more control over their financial destiny.

Finsum: The key to a financial advisory practice is to grow their business and/or increase revenue per client. Direct indexing is one way that advisors can achieve these goals.


Published in Wealth Management

Alphathena, a personalized investing platform and direct indexing startup, won the ‘Best in Show’ award at the 2023 Morningstar Fintech Showcase Conference and was covered by Benzinga. Alphathena is attempting to use AI and automation to create solutions and tools for RIAs and Wealthtech platforms with a specific focus on customized direct indexing, automated tax-loss harvesting, and lifecycle management solutions. 

The conference featured 25 fintech startups that were geared towards financial professionals. Some of the major themes included AI, personalization, and improving the client experience. Another discussion point is how the wealth management industry is poised for the Great Wealth Transfer as demographics predict a tidal wave of assets from Baby Boomers to Millennials. 

In regards to Alphathena, Lawrence Johnson, the Head of Emerging Fintech at Morningstar remarked, "Alphathena, with its elegant platform and powerful engine, is an example of a growing field of innovators that have learned to harness frontier technologies to deliver better outcomes for investors."

The judges spoke highly of Alphathena’s innovative approach, potential for disruption, and strong value proposition. Currently, it can customize portfolios with ETFs and factors for personalization and performance. Its longer-term ambition is to be the solution for wealth advisors when it comes to managing the entire lifecycle of personalized investing.

Finsum: Alphathena, a startup in the direct indexing and personalization space, won the ‘Best in Show’ award at the 2023 Morningstar Fintech Conference.


Published in Wealth Management

In an article for ETFTrends’ Direct Indexing Channel, James Comtois shared some thoughts from Vanguard executives about direct indexing. In essence, the company sees it as having a bright future and offering significant benefits in the terms of tax-loss harvesting.

With traditional ETFs, investors aren’t able to reap the benefits of tax-loss harvesting. However, direct indexing allows investors to get the benefits of an ETF like diversification and low costs, but they can also sell securities at a loss to offset taxable gains in profitable securities. Subsequently, the sold securities can be replaced with securities that have similar factors to maintain diversification.

These benefits also compound with more frequent scans. So, daily or weekly scans will lead to better outcomes than monthly or quarterly scans. Previously, there were constraints to more frequent scans as an advisor couldn’t monitor portfolios so frequently. But with automated, direct indexing strategies, these services are available to a wider swathe of investors. Overall, more frequent scanning can add between 20 and 100 basis points to a portfolio.

Finsum: Direct indexing offers specific benefits to investors especially when compared to investing in ETFs.


Published in Wealth Management
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