Now more than ever, advisors need to be careful about not passing along more expenses to clients whenever and wherever possible. One approach to help offset fees is to decrease product costs while increasing after-tax value through an investment approach known as “direct indexing.”

Direct indexing involves replicating the behavior of a stock index by purchasing all, or a representative sample of, the individual securities within the index. This is done by identifying the factors that drive index behavior then applying those factors to a smaller subset of securities.

Historically, the only way to purchase an index has been through the use of a pooled vehicle such as a mutual fund or exchange-traded fund (ETF). Of course, the downside of purchasing a single mutual fund or ETF is that tax management and personalization become impossible with a single security.

But recent technological advances, such as innovations in digital investment platforms that allow for automated, highly advanced optimization capabilities, have made individual security ownership of an index broadly accessible to retail investors. What used to take days or even weeks to build index-based investment strategies can now be done in minutes, giving advisors the ability to replicate exposure to the risk and reward characteristics of an index at click-button pace without losing the ability to customize portfolios—all from a single platform and with tax-aware upsides.

Direct indexing is an extremely valuable tool for advisors that are looking to incorporate the risk and reward predictability of an index into a multi-asset class portfolio. And when used within a Unified Managed Account (UMA) where other individual securities are held, the tax benefits can be significant. A direct index is utilized within a UMA by enabling active tax-loss harvesting, gains deferral for withdrawals as well as the ability to absorb legacy holdings and positions sold by other managers – into the direct index. And at the cost of a typical passive investment, a direct index can sometimes be a cost-efficient way to preempt fee compression conversations with clients all while offering a differentiated solution that showcases an advisor’s unique value.

Furthermore, our Index Series can help serve several portfolio construction mandates, including providing a core module inside of a larger core/satellite portfolio and as a suitable way to express a client’s personal values though personal indexes preferences that could not be expressed through a pooled vehicle like an ETF or a mutual fund.

Direct indexing capabilities like these will not only help you keep your clients’ investment goals aligned across market conditions more easily and effectively, they can also help you to build trust across your client base and solidify your value-add.

C24-20943 EXP 2-28-2024