Ask yourself this question: What’s on track to grow faster than both ETFs and mutual fund flows in the next 5 years?
The answer: direct indexing.
In case you haven’t heard, Cerulli predicts that assets in direct indexing strategies are expected to increase at an annualized rate of over 12% over the course of the next five years.¹ And they aren’t alone in their predictions. FinancialPlanning.com suggests that in just the next 2 years, direct indexing assets will grow to over $1 trillion.²
All of this means is that if you aren’t on the direct indexing bandwagon yet, you may be letting a massive opportunity pass you by.
Direct indexing offers investors the ability to replicate the performance of an index by purchasing the underlying shares of that index to create a customized portfolio. In the last few years, technology has made it more accessible and scalable, giving some weight to those growth expectations.
Advisors are leaning into direct investing for both the client benefits and as a scalable way to offer more value to clients and grow their business.
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Personalized Investing for Personalized Goals
Direct indexing enables investors to passively track an index — such as the S&P500 or the Russell 2000 — through the purchase of the underlying positions. Personalization comes from the ability to customize the subset of underlying to meet the client’s preferences and goals.
This personalization is particularly valuable to advisors with clients with ESG or other values-based investment needs. With the ability to select individual securities they like and avoid those they dislike, advisors are able to provide clients with a uniquely personalized investment experience.
Investors can avoid or swap positions that do not fit within their preferences, unlike with mutual funds or ETFs. Environmentally minded investors can choose to invest in more sustainable companies and avoid those that do not meet carbon emission standards, for example. Or they can avoid certain types of companies, such as weapon manufacturers or tobacco companies, depending on their investing preferences.
Tax Management for Everyone
79% of investors believe their advisor should be focused on minimizing their tax obligations.³
One of the biggest benefits of direct indexing is the tax benefits it offers. Because investors own the underlying positions directly, there are multiple opportunities for proactive tax management, including the ability to harvest losses to offset gains within the portfolio.
Mutual funds and ETFs enable investors to sell and replace shares at the fund level. But that means that in some cases, they are also potentially giving up allocations to positive performers. Direct indexing enables users to zero in on underperformers and use those losses to offset gains elsewhere within the portfolio, helping to smooth out gains and losses. And those losses can be held and carried forward to offset future gains.
Plus, direct indexing allows investors to include or omit positions based on their tax implications. For example, positions that are underperforming can be sold and replaced with similar holdings that are expected to perform better and the loss can then be used to help offset a gain.
Advisors with clients with substantial tax concerns, such as business owners, high net worth clients in higher tax brackets, or clients who have large unrealized gains within their portfolio, should take a closer look at direct indexing to help provide better after-tax returns, lower the tax burden, and to help manage gains within their portfolio.
Operational Opportunities
The mechanics behind direct indexing are fairly straightforward. Digital investing platforms and fractional share trading make it possible for a broader number of financial firms and advisors to offer direct indexing to their clients.
By leveraging direct indexing technology to streamline processes and reduce manual operations, advisors can be more productive and spend more time with clients.
The technology handles tasks such as trading and reporting with greater accuracy and efficiency than most advisors can do themselves. It reduces the time-consuming processes of manually harvesting losses and rebalancing for tax optimization while increasing transparency and meaningful client engagement through personalized proposals and reports. Plus, direct indexing simplifies account maintenance by using a sleeved account instead of a separate account. With the time saved, advisors have more time to focus on business building and client outreach.
Growth — But Make it Scalable
As we discussed in previous posts at Orion, direct indexing is a valuable differentiator for advisors to position their service offering and deliver personalized experiences. In the past, the ability to offer personalized portfolios and tax optimization might have only been offered by larger institutions with the resources (translation: budget) to do it effectively. Or these strategies may have only been offered to clients above a certain asset threshold. Today, direct indexing gives advisors a tech-enabled path to scalable growth within their business.
How to Make it Easy
Orion Custom Indexing makes it easy to offer high-value, tax-efficient portfolios that are customized according to the unique needs, values, and goals of your clients. Orion Custom Indexing starts with the selection of a target investment mandate that aligns most closely with your client’s values, goals, and objectives. From there, you can customize the portfolio across a wide array of options including tax transitioning, setting capital gains budgets, and applying social screens or security restrictions, among a number of other options.
With just a few clicks, Orion Custom Indexing enables you to:
- Align portfolios with your client’s personal needs or beliefs, including ESG, SRI, and faith-based screening, concentrated positions, and meet sector/industry preferences
- Partner with CFA Credentialed Portfolio Managers to optimize and monitor client portfolios on a continuous basis at a lower cost.
- Attract high-net-worth clients by delivering proactive tax management, ultimately growing your bottom line.
- Create engaging conversations by presenting a client’s tax savings in an easy-to-understand manner
- Increase transparency by helping investors see their progress when transitioning their portfolio
- Visually demonstrate the instrumental value created by proactive tax-loss harvesting over time
- Save time and streamline trading, reporting, and account maintenance by implementing custom indexing via a sleeved account at the custodian of your choice (available with Orion’s premier technology suite)
- Access proactive and ongoing tax loss harvesting, tax-effective transitions, and set capital gains budgets
Orion Custom Indexing is the only solution that brings together everything you need to tap into the $362 billion opportunity.¹
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