America's Best Direct Indexing Buyers Guide 2024 - 3

2024 DIRECT INDEXING BUYERS GUIDE
EXECUTIVE SUMMARY
D
SCOTT MARTIN
EDITOR-IN-CHIEF
DIRECT INDEXING BUYERS GUIDE
Anyone watching the way direct index
frameworks are transforming the
wealth management landscape will
find it hard to argue that we aren't
watching a revolution play out in real
time. After all, when you say you want
a " revolution, " you often mean a return
to the origins, clearing out a lot of
coping systems to reengage with the
basics.
And in wealth management, buying
and selling individual securities
directly on your clients' behalf
qualifies. That's how this business
started, before pooled portfolio
products emerged to provide a
reasonably competitive experience
without all the complications. Most
clients couldn't even notice the
transition. They didn't complain.
But there is a difference. Now that
the market structure has shifted,
owning individual securities makes
sense again. Technology eliminated
the complications. Now we can
deliver what the clients thought they
were getting all along: better end-toend
outcomes than a cookie-cutter
portfolio, an experience built for them
alone. The revolution is here.
irect indexing allows wealth
managers to replicate the
performance of an index
like the S&P 500 or the S&P
U.S. Aggregate Bond Index
by purchasing the individual securities
that make up that index. Traditionally,
investors use mutual funds or ETFs to
track an index, but with direct indexing,
you buy a proportional amount of each
stock within the index. This means a
client portfolio can closely mimic the
index's performance while allowing for
customization.
Until recently, this approach required a
significant amount of capital because
buying all the individual stocks in an
index was expensive and imprecise.
Transaction costs were high. In the
absence of fractional holdings, weights
got skewed and tracking errors
multiplied. And this was only to build the
portfolio: rebalancing positions to keep in
line with the index's changes also carried
high trading costs. This complexity
limited the strategy to wealthier investors
whose advisors had the intellectual and
organizational resources to keep up.
However, several changes have made
direct indexing more accessible. Fractional
holdings now allow investors to purchase
stocks and even bonds in smaller lots,
making it easier to replicate an index
precisely without needing large sums
of money. Additionally, the growing
availability of zero-commission trades
has reduced the costs of rebalancing
and adjusting portfolios, enabling more
advisors to consider this approach without
creating unnecessary drag for their clients.
One of the key benefits of direct indexing
is the ability to personalize client holdings.
Unlike ETFs or mutual funds where a thirdparty
manager selects and weights the
securities in the portfolio, direct indexing
lets you deviate from the model to achieve
differentiated outcomes.
This flexibility also allows for short- and
long-term tax optimization, reopening
traditional opportunities to harvest tax
losses and generate meaningful post-tax
returns over time. The power to outperform
the underlying index after the IRS and state
authorities have taken their cut is precious
to many advisors whose clients can
recognize the added value instantly.
Direct holdings also enable advisors to
allocate around concentrated exposure
and legacy positions, integrating the
client household's history into the
forward-looking investment program for
true diversification and a more efficient
approach to the efficient frontier.
Finally, a direct approach creates
opportunities that go beyond raw
investment performance. Exposure
to fixed-income securities in a pooled
portfolio prevents principal return on
maturity, for example, whereas even
fractional direct holdings provide the
psychological comfort and fiscal cushion
that bonds have historically supported.
And when the client responds to extrafinancial
considerations ( " impact " or
ethics-oriented motivation), deviating
from the index allows for ethical
overweight, underweight or elimination
from the portfolio entirely.
All these capabilities enhance the investor
experience and the advisor relationship.
With the right technology and the right
partners in place, the complexities they
create can be overcome. The advisor
simply needs to embrace the new
approach, understand its potential (and
its limits) and deploy it in circumstances
that make sense.
That's what this book is about.
Your Competitive Edge
Direct indexing is gaining a lot of attention
because many major players in the
industry see this as a crucial approach
to wealth management and want to
capitalize on its future potential. You are
their target customer.
But while it's clear that direct indexing
is a popular bit of jargon supported by
significant marketing budgets, all that
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America's Best Direct Indexing Buyers Guide 2024

Table of Contents for the Digital Edition of America's Best Direct Indexing Buyers Guide 2024
