Wealth Advisor Magazine September 2024 Edition - 31

Direct Indexing Can Be a Key Advisor Tool
DIRECT INDEXING BUYERS GUIDE
T
he wealth management industry
was built on a promise:
advisors can structure assets
better than what individual
investors can achieve themselves
with off-the-shelf products and
create better outcomes.
At first, keeping that promise was
easy. But as those products and the investors
themselves evolved, it got harder
and harder to stand out in a world of
increasingly sophisticated but passive
competitors.
Deconstructing the index liberates
advisors to once again live up to the
foundational promise. We can once
again construct more efficient portfolios
that deliver a better experience after
taxes are paid and client assets are
aligned with their values.
The goal is not to reinvent the wheel
that drives the market. One way or
another, what direct indexing does
is refine it, tailoring it to every client
without forcing you to divert scarce
professional resources in the process.
Time to follow through on that
promise. After all, we all want to deliver
truly personalized investment experiences
to a wider pool of client households
without blowing out our operating
margins.
Like the marketing materials say,
" scale " is the question. We need to be
able to offer that once-rarefied level of
care to more people . . . without blowing
out our operating margins in order to
make it happen.
Individualized service costs money.
Managing a unique portfolio of hundreds
if not thousands of stocks for dozens if
not hundreds of clients will eat you alive.
The more you can automate the process,
the better you can control those
costs. Sound good? Read on.
INDUSTRY TAILWINDS
Direct indexing is gaining traction in
retail portfolio management, offering
CONTINUED ON PAGE 32
In an era where
investors are
increasingly
looking for
more than just
convenience and
low costs, direct
indexing offers a
pathway to
greater value.
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 A
Open-End Fund or
Exchange-Traded
Fund
(ETF)
INDEX
Holdings
Stock A
Investor B
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
THEWEALTHADVISOR.COM
SEPT/OCT 2024 | 31
http://www.THEWEALTHADVISOR.COM
Wealth Advisor Magazine September 2024 Edition

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