America's Best Direct Indexing Buyers Guide 2024 - 4

2024 DIRECT INDEXING BUYERS GUIDE
money has failed to give advisors like you
a clear explanation of what is really going
on here, why it matters, what types of
clients can benefit and whether it makes
sense for you to pivot your practice.
After all, advisors tend to be problem
solvers. When a new approach to
managing money fails to clearly identify
the problems it was designed to solve,
advisors find it hard to recognize
the new approach as anything
like a " solution. " If anything, it's a
complication or at best a distraction
from more pressing problems in search
of more immediate solutions.
When we polled our audience of
wealth managers, nearly all (90% plus)
remembered hearing something about
direct indexing in the past year. The
term resonated. Everyone knew it's a
factor in the modern industry.
Barely 30% felt confident enough about
this stuff to be able to define it in their
own words. These are the smartest
advisors on the planet. That's a problem.
But it's also a competitive opportunity if
you're in that elite 30% of the industry
who knows what's going on, how to
deploy these capabilities on behalf of
various client segments and the right
way to communicate why it's better.
Most advisors are behind the curve.
When they read this book, they'll have
a better grasp on how to stay relevant
in a world shaped by the dominance
of index funds. Either way, you all want
help finding a partner who can streamline
your operations instead of making the
investment process exponentially harder.
Cut through the noise. Get moving.
Direct Indexing: What Is It?
We use " direct indexing "
interchangeably with " custom indexing, "
" personalized portfolios " and other
terms frequently employed across the
industry. People are still defining this
category and how it works.
Whatever we call it, this is the practice
of directly investing in the individual
securities that make up an index,
such as the S&P 500, with added
customization based on the investor's
preferences, such as risk tolerance,
ESG concerns or tax optimization
strategies.
Through direct indexing, investors can
own the underlying index securities and
hold them in a separately managed
account (SMA) or a unified managed
account (UMA). This structure not only
provides exposure to the index's overall
market performance but also offers the
flexibility to build a tailored portfolio.
For example, investors have the option
to exclude certain securities or adjust
their allocations to meet their specific
goals, ethical standards, or personal
circumstances.
One elementary form of direct indexing
is a variation on the " smart beta "
strategy, where diversification is
achieved by holding a smaller selection
of carefully chosen securities rather
than a comprehensive list of hundreds
or thousands of individual positions.
Despite its simpler appearance, such a
portfolio can still reflect the risk and return
characteristics of the broader index.
This approach contrasts with traditional
fund structures like exchange-traded
What Is Direct Indexing?
* Direct indexing allows
an investor to build a
portfolio that tracks
an index by buying a
subset of the index
holdings
* Use portfolio
optimization software
to build a portfolio that
tracks the index with
a lower number of
holdings
Investor B
Investor A
Open-End Fund
or ExchangeTraded
Fund
(ETF)
INDEX
Holdings
Stock A
Stock B
Stock C
Stock D
Stock E
Stock F
%
7.32
6.91
4.31
2.65
2.27
1.56
Hypothetical example for illustrative purposes; actual index allocation may vary.
Courtesy of Morningstar, 2024
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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
