Not all trends are worth chasing.

Some flare up fast and flame out even faster—like Beanie Babies in the 1990s.

Other trends make a mark and last a lifetime, like the continued digitization of movies and music.

The tough thing about trends is that we can never be entirely sure if they’ll turn into something enduring or not until after a suitable amount of time has passed to make that kind of judgement.

In investing, it might seem like direct indexing is the latest trend. In reality, though, it’s not an all-new initiative, like bitcoin.

Direct indexing has been used for years to serve high-net-worth individuals, but technology advancements have reinvigorated its popularity among advisors at large. 

In this blog, we’ll look at why and how you can implement direct indexing in your RIA firm.

What is Direct Indexing?

Before we get too far, let’s quickly define direct indexing so we’re all working with the same understanding.

Direct indexing is the process of replicating a broad market index by directly purchasing the individual securities that make up that index. 

Contrary to some beliefs, direct indexing does not require that an investor hold every single security in an index. It does, however, seek to replicate the risk and return profiles as the desired index if not all securities are owned. In that sense, an investor could hold 500 securities or 50—so long as the profile matches and those securities are directly owned, not owned indirectly through an ETF or mutual fund.

Who Does Direct Indexing Benefit?

Traditionally, direct indexing was used to benefit high net worth investors. As you can imagine, the process of purchasing hundreds of securities directly, and then tracking those closely against their index, was an intensely time consuming and manual process.

However, with recent technology improvements like Orion’s ASTRO and Eclipse trading tools, advisors can now bring the advantages of direct indexing to a much broader set of investors. 

In fact, a technology-enabled approach to direct indexing means that this unique investment strategy can now be profitability used for any investor of any account size.

Why Should Advisors Consider Direct Indexing?

Direct indexing offers financial advisors numerous advantages. In this section, we’ll cover two of the most important. 

The first and most table advantage is that direct indexing puts advisors in control of their clients’ investments. Instead of relying on another manager’s rebalancing decisions, advisors can pinpoint each client’s needs with timely accuracy.

Advisors can use direct indexing to capitalize on tax-loss harvesting opportunities that can’t otherwise be taken advantage of to the same degree when assets are held in ETFs or mutual funds.

The second-most sought after advantage is in the ability to directly control the holdings a client owns. With an increasing awareness around socially responsible investing, consumers are more apt than ever to look at how the securities they own reflect their personal values.

Direct indexing allows an advisor to directly purchase, or avoid, any stocks requested by a client. 

How to Add Direct Indexing to Your Advisory Firm

While any advisor with a spreadsheet and limitless time can begin with direct indexing, that’s far from the optimal way to add direction indexing strategies to your firm.

Instead, look for technology that lets you offer its many benefits to your clients so you don’t have to spend all your time away from your clients just to manage their portfolios of directly held securities.

Orion Portfolio Solutions makes the decision to get started with direct indexing even easier with a set of tax-managed models. These models are designed for everyday investors who want the personalization and tax-loss harvesting opportunities that direct indexing provides.

Each model is benchmarked against the Morningstar US Large Cap index:

  • US High Dividend Yield Tax Managed
  • US Quality Value Tax Managed
  • US Low Volatility Tax Managed
  • US Momentum Tax Managed
  • US Large Cap Market Beta Tax Managed
Additional models are also available.

If you're an advisor who wants total control, though, you can leverage Orion’s ASTRO tool along with Eclipse trading to build your own custom direct indexing strategies quickly and easily.

Want to learn more about the power of direct indexing? Download our guide to see if this strategy is right for you.

 

1327-OPS-04/19/2021

The Morningstar U.S. Large Cap Index is an index that measures the performance of U.S. large-cap stocks. These stocks represent the largest 70% capitalization of the investable universe.  You cannot invest directly in an index.