America's Best Direct Indexing Buyers Guide 2024 - 5

2024 DIRECT INDEXING BUYERS GUIDE
Direct Indexing Presents a Number of Benefits
over More Traditional Fund Structures
Comparison among Direct Indexing, Exchange-Traded Funds (ETFs) and Mutual Funds (MFs)
Courtesy of Celent, Oliver Wyman analysis, 2024
funds (ETFs) or mutual funds, which
pool securities into a single investment
vehicle, offering all investors the
same fixed combination of holdings.
While these funds can be actively or
passively managed, they ultimately
represent a " one-size-fits-all " strategy
where investors are tied to the asset
manager's choice of investments.
ETFs are easy to research and
transact, with sometimes minimal fees
on purely indexed vehicles and tangible
tax advantages over traditional mutual
funds. However, your clients are now
more sophisticated and can buy and
sell their own ETFs . . . or deploy a
friendly robot to do the work for them.
The simplicity becomes a trap.
This is why more wealth managers
are shifting client assets from passive
products toward direct ownership.
According to projections from Oliver
Wyman-Morgan Stanley, direct indexing
assets under management could reach
approximately $1.6 trillion globally by
2025, primarily by drawing market share
from the passive approach.
Nothing Ventured, Nothing Gained:
Where's the ROI?
When done correctly, direct indexing
can be as straightforward as working
with ETFs. However, many common
approaches to implementing direct
indexes appear inefficient or overly
complex to advisors who are already
struggling to manage their existing
platform and attract new accounts.
The objections are well known: people
assume that forcing the advisor to
directly manage investments that mirror
an index creates complexity and risk
that overshadow the benefits. Keeping
an eye on every client's tax situation
is a full-time job in itself, even when
a relationship with the accountant
ensures complete transparency there.
Since many direct index solutions revolve
around separately managed accounts
(SMAs) managed by third parties, this
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approach can also translate into an
ETF-like solution where customization is
minimal or ignored entirely, only with the
added headache of tracking hundreds or
thousands of positions per client.
And inertia plays a role in explaining why
every advisor in the business isn't using
this approach already. Most advisors
claim they're satisfied with the solutions
they currently recommend to clients.
The platform is " good enough " and
evolution means disruption, especially in
the wake of recent years.
But it's hard to say that part out loud
where clients can hear. Our pain is
not their problem. Refusing to even
consider changing your practice
because the potential costs of that
pivot (money, attention, effort) outweigh
the client benefits betrays an inherent
conflict of interest.
A fiduciary will rarely settle for " good
enough " when " better " is available.
Automation and modern market
America's Best Direct Indexing Buyers Guide 2024

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