Displaying items by tag: direct indexing

At Morgan Stanley’s US Financials, Payments, & Commercial Real Estate conference, CEO James Gorman shared some thoughts on the bank’s future, and why he’s particularly bullish on its wealth management arm.

According to Gorman, the bank continues to look for opportunities to expand its asset management business through acquisitions. He believes there is more growth opportunity in this area especially compared to investment banking, lending, or sales & trading due to the industry being ‘non-consolidated’ unlike other parts of the financial world. He is also open to making deals in new geographies. 

While Morgan Stanley has traditionally been a Wall Street-based bank, Gorman has sought to increase its presence in wealth management during his 14 year tenure. Some of his most notable acquisitions include Eaton Vance, Calvert Research and Management, and direct indexing provider Parametric Portfolio Associates. 

He was particularly positive on direct indexing, since it has resulted in ‘huge positive flows’, and it has seamlessly fit with the rest of its wealth management division. Overall, wealth management is the fastest-growing part of its business albeit the smallest with $1.3 billion in revenue in the first quarter. 

Finsum: Morgan Stanley CEO James Gorman has made a successful bet on wealth management as a key growth driver for the bank. He continues to believe in this strategy and is looking for expansion opportunities.

In a piece for ETFTrends, James Comtois covers how Vanguard successfully helped its clients reduce their capital gains tax bill. This was especially salient in 2021 when many early-stage investors in companies that went public reaped massive profits as they cashed out during the IPO process. 

Some advisors placed the capital gains of these clients into direct indexing. With direct indexing, investors own the actual holdings of the index rather than a fund. This means that tax losses can be regularly harvested and accumulated to offset capital gains and reduce a clients’ tax bill. Such a strategy is not possible with investing in traditional funds.

Further, investors can continue to track their benchmark as the positions that are sold can be replaced by different positions that have similar factor scores. Research shows that harvesting tax losses can boost portfolio performance but more benefits accrue with more consistent scanning. 

These capital gains can be deferred for a couple of years into the future. Similarly, tax losses that are harvested can also be deferred for when the tax liability emerges. Overall, these strategies can provide considerable benefits to a select group of investors,

Finsum: Direct indexing provides significant benefits to investors that have a large tax bill now or in the future.

Talk about that feeling of being left out. You know; as in hit the road, Jack.

With direct indexing, investors can include – or turn their backs on -- specific stocks from an index, according to etftrends.com. Not only that, entire sectors can be similarly left out. Yep, not exactly star treatment.

What’s more, leveraging guidance from an advisor, investors can do a gaggle of things; let’s say, for example, align their portfolios with their values and sustainability objectives. 

Sure, it dispenses tax loss harvesting opportunities. But there’s more. With direct indexing services like Vanguard Personalized Indexing, advisors can build customized portfolios. That accommodates their client’s individual investment goals.

While, in recent years, one of the ready for prime time features, direct indexing not only boasts positives, but downsides as well, according to comparebrokers.co.

In the financial industry it’s tabbed as the foreseeable future, optimal for investors who are big believers in customizing the portfolio. For those who’ve retired, it’s the rage.

In an article for ETFTrends, James Comtois discusses how direct indexing can help investors reduce their tax bill by harvesting tax losses which then can be used to offset capital gains in other accounts. The proceeds from these sales are used to make investments in assets with similar factor scores to ensure consistency with benchmarks.

However, tax-loss harvesting is not a strategy that can be used by investing in an ETF or a mutual fund. In fact, direct indexing is one of the main ways that investors can maximize tax-loss harvesting. This is because with direct indexing, investors own the actual components of an index. It also allows for greater customization as advisors or investors can choose to alter the holdings to suit their personal situation.

At regular intervals, the portfolio is scanned for tax-loss opportunities. By automating the process, it ensures that opportunities aren’t missed to lower an investors’ tax bill. Increasing the frequency of these scans also leads to more alpha. According to research, tax-loss harvesting can add between 20 to 100 basis points of performance. 

Finsum: One of the main benefits of direct indexing is that it allows investors to reduce their tax liability while allowing investors to realize the benefits of index investing.

In an article for Wealth Management, Iraklis Kourtidis discusses how the investment industry needs to evolve in order to reduce risk and improve returns. Essentially, it tends to look at the past to make assumptions about the future, specifically regarding correlations between asset classes. 

He believes that too much time and energy is spent on discussing how investments have performed in the past which doesn’t make sense in a world with efficient markets. Instead, investors and advisors need to pay more attention to the future. And, this is even more important with the advent of direct indexing.

Kourtidis believes there are better questions to ask with direct indexing such as will these investments adhere closely to my values? Another is will this strategy properly weigh the tradeoffs between tracking errors, tax efficiency, and personal values? Finally, investors and advisors need to determine whether the additional cost and effort of direct indexing will yield better results than a traditional approach, specifically in terms of tax benefits?

These are forward-looking questions that do have answers unlike questions about the market’s direction, monetary policy, or portfolio returns. Overall, direct indexing means that investors need to consider a different set of questions. 

Finsum: Direct indexing creates an entirely different set of opportunities and challenges for investors and advisors. Here are some things they need to consider that they wouldn’t with traditional investin