Experts From Angeles, Seeds Investor And Veriti Share Their Views On The Evolution Of Direct Indexing This Year
The Dow Jones Industrial Average, a technology we still use today, originated in the times when ticker tape parades used actual ticker tape. Financial mathematics advanced, giving rise to a plethora of indexes.
The next stage in index evolution brought us index funds, which enabled investments to easily track indexes. Now a third evolution is occurring via direct indexing, in which investors directly purchase the underlying assets of an index to mirror it without utilizing index funds.
Forwarded by technological advances, negligible trading fees and adaptation to new purposes, direct indexing is advancing rapidly. To learn where this year’s trends will take it as a wealth management tool, we spoke with several industry experts:
- Jonathan Foster, President and CEO of Angeles Wealth Management
- Zach Conway, Co-Founder and CEO at Seeds Investor
- Jim Dilworth, Managing Partner of Veriti Management
We asked this panel of experts the following question:
“How will the conversation change for direct indexing in 2023?”
Here are their views:
Jonathan Foster, President and CEO, Angeles Wealth Management
Direct indexing originally started as a way to “own” an index by creating your own cost basis, thereby avoiding the attendant tax liability of an aged index mutual fund. The product has been reengineered and improved at a breathtaking pace.
Now, you can own a subset of the index components yet replicate the index. You can harvest tax losses. You can build an index portfolio that reflects your personal values. Most importantly, the cost is dropping rapidly via no-commission trading and fee compression.
Many of the items above will soon become table stakes. If a vendor doesn’t offer all of them, they become a dinosaur – but these improvements cost. Every direct indexing vendor will need a deep-pockets partner. Fees will compress while service, flexibility and presentation quality expectations go up.
Other innovations will follow. Direct-index portfolios with a tax-loss harvesting mandate eventually run out of steam and leave the investor with a basket of greatly appreciated securities, and the search for added value at this point brings up numerous questions, such as whether the portfolio should flip into an extremely low-cost static-index portfolio for no fee, or into a charitable giving program where the tax basis is unimportant.
Another question: Should the aged, static, direct-index portfolio be contributed to an exchange fund creating even better diversification or gifted to children as part of an estate plan?
For direct indexing, this year will usher in a period of augmented deliverables and lower prices. It will be a great time to be a user, for both advisors and clients.
Zach Conway, Co-Founder and CEO, Seeds Investor
Direct indexing has certainly increased in popularity both in the media and with investors. However, this trend will intersect with another one that clients have constantly demanded – a better experience.
According to New York Life Investments, more than 80% of investors over the age of 40 are show an interest in ESG investing. With the 24- to 39-year-old demographic, that number is over 90%. Investors are telling us what they want not only with their words but also their dollars, and advisors need to prepare for a conversation with the client about their values – and listen.
But direct indexing is a means to an end. Delivering a personalized experience involves much more than mere stock selection and should be infused into every stage of the client journey. Advisors who lean into this reality will be better positioned to unlock the true value of this technology.
Clients want to be understood – they want someone who will take the time to advise where they should invest based on their lifestyle, viewpoint and ethics and make those decisions with them.
Jim Dilworth, Managing Partner, Veriti Management
In 2023, the conversation for advisors regarding direct indexing will shift from, “Should I consider it?” to, “How do I get up to speed quickly and use direct indexing to differentiate, grow and positively impact my practice and my clients?”
We focus on educating advisors about the mechanics of direct indexing and positioning them to identify and implement this strategy for the appropriate current and prospective clients. Advisors who understand how direct indexing can be used will remain ahead of the curve, but not without a strong foundational understanding.
A successful client experience starts with an advisor’s clear understanding of how a particular product or strategy is going to positively impact their portfolio and goals. By utilizing a bespoke approach to create a customized basket of stocks to track a benchmark, many benefits can be attained, including tax-loss harvesting and reflecting one’s personal values within that portfolio.
The industry is gravitating toward mass customization – in other words, customization at scale. Advisors who leverage the power of direct indexing to the benefit of their clients will remain at a strong competitive advantage. This requires a certain level of understanding, and the commitment of time to gain the skills necessary to deliver the most value.
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at email@example.com