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Trends & Insights: Direct Indexing & The UMA – A Perfect Match

By Kevin McCrossin, Senior Director, Business Development

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These days, it’s almost impossible to read through an industry publication without being inundated by advertisements for direct index products and strategies. But all the attention makes sense—in a financial landscape where investors continue to demand more customization and lower costs, the ability to deliver a direct index strategy may create a multitude of benefits for end clients. They include:

  • potentially reduced costs
  • individual tax lot ownership
  • increased tax efficiencies

And in some cases, platforms can even offer direct indexes with some degree of personalization, so the investments reflect the unique needs and lifestyle demands of the investor. In those cases, the benefits also include:

  • screening for personal preferences
  • greater portfolio customization

I had a conversation recently with an asset manager that got me to thinking: In a way, our professional world exists because an end investor decided to work with an independent financial advisor. And behind the thinly veiled curtain of the advisor/client relationship, we continually try to evolve with products like ETFs and direct indexing in attempts to stay relevant—and profitable—in this world. In the process, hopefully we can ward off the threat of mega firms pushing the industry towards direct-to-consumer.

As our conversation steered toward the growing interest in direct indexing, she was touting the explosive growth over the past fifteen months of their index strategy that comes with components like ESG screening and tax harvesting overlay management. She mentioned that the strategy has seen most of its growth offered as a separately managed account (SMA) available directly from the custodian via dual contract.

Now, I’m a huge fan of direct indexing. It enables independent advisors to help their clients invest in accordance with their personal values by way of a low-cost, tax-efficient solution. But what I’m not a big fan of is going halfway or falling short on true potential. To me, implementing an index strategy inside an SMA or as a standalone advisor model – while allocating the client with other managers in different accounts is just that - selling the strategy’s true potential short. My excitement is growing now that Adhesion has expanded its direct index solution with the recent launch of Personal Indexes. With Personal Indexes, our intent was to solve the shortcomings of single-account Direct Indexes without sacrificing the personalization demanded by investors.

Getting the Most Out of Your Direct Index Strategy

But back to my conversation with the asset manager…She was telling me about how much the active tax loss harvesting kicked in last year given the ample opportunity we witnessed with severe market fluctuations.

“Many of our clients are using us as a core and hire other managers around our strategy,” she said.

I asked, “How many of your advisor’s clients complained about wash sales?”

“Our methodology helps prevent wash sales in their accounts,” she said.

“But what about across the other managed accounts?” I asked.

“Well, we can’t see them, so they’re not in consideration…”

For me, this conversation crystallized my opinion that deploying this strategy in an SMA underperforms for both the advisor and client by not realizing the full potential of personalized indexing. At Adhesion, we think an index strategy should be delivered in a single multi-manager account via a Unified Managed Account (UMA) framework and implemented through an overlay manager to help realize the full benefits.

I’ll put it this way: If a client has a pool of money allocated over various managers in separate accounts, one hand won’t know what the other hand is doing because they can’t see over the “walls” that those account numbers create. Manager A, who is doing a lot of active harvesting, can’t see what Manager B has just bought or sold. This frequently results in disallowed losses due to wash sales, and actually ends up penalizing the investor. The full impact of the disallowed losses will not be understood until either presented by the custodian at year-end, or when your client is working with their tax preparation firm – who for many advisors is an also important ally in their business development network.

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Is It Time to Check Your Tech?

Obviously, asset managers and fintech providers are doing their best to equip advisors with the necessary tools to keep the industry thriving, while keeping the end client happy. There are products and services that catch fire and start trends that ultimately end up disrupting what was once commonplace. Direct indexing (and, we think, our Personal Indexes) is shaping up to be one of those disruptive trends. I mean, who would have guessed back in 1993 when the first ETF was traded that the mutual fund industry would face such immense pressure and competition for decades to come?

The sad truth is that we as an industry make it very difficult for advisors to navigate the solution sets that we make available to them. Think back to the last major custodian conference you attended—how many monitors displaying flashy interfaces were there in the room? But were they intuitive? Were they easy enough for the average advisor to understand and implement immediately? If not, they were probably bypassed and forgotten very quickly.

I find myself on countless calls with advisor groups looking to make transitions or transformations in their practices, but the due diligence process on their technology capabilities can be overwhelming. Advisors are always looking for new strategies like direct indexing to include in their offering, but deployment of those strategies requires a proper assessment of your tech (and your platform provider’s tech) to streamline portfolio management and deliver maximum value.


Is your current tech stack helping you meet your full potential?
If not, let’s talk.


Kevin McCrossin is Senior Director of Business Development at Adhesion Wealth. He can be reached by email at: kmccrossin@adhesionwealth.com.

By Kevin McCrossin, Senior Director, Business Development