Displaying items by tag: clients

In an article for Vettafi, James Comtois laid out some of the benefits of direct indexing for investors. Direct indexing has grown in popularity for certain investors because it leads to greater tax savings and customization than traditional passive and active funds.

In terms of taxes, direct indexing allows investors to sell losing positions and then buy back stocks with similar characteristics. Then, these tax losses can be harvested and used to offset capital gains, leading to a lower tax bill. 

Another beenfit of direct indexing is that it allows investors to have their personal values and preferences reflected in their investments. For instance, an investor may be uncomfortable with companies in a certain industry and can exclude them from being considered for investment. 

Many investors may also be in a unique situation such as having large exposure to a particular company due to stock options or family holdings. Direct indexing allows them to construct a portfolio that reduces this particular exchange, leading to a more resilient portfolio and financial situation.

Finsum: Direct indexing is growing in popularity as it offers some advantages of traditional funds. However, it’s likely not appropriate or necessary for most investors.

About 14% of advisors are aware of and recommend direct indexing solutions to their clients which is the primary reason that its forecast to grow faster than ETFs over the next decade. In a recent article by Allen Roth of WealthLogic, he discusses the pros and cons of direct indexing and compares it to ETFs.

Direct indexing has many of the same characteristics as ETFs such as allowing exposure to broad categories and having low costs. However, it allows for greater customization that can allow for portfolios that are more tailored to a client’s needs. 

Another distinct  advantage of direct indexing are that it allows for tax-loss harvesting which can offset capital gains. This strategy can allow for an additional 0.2 to 1% of returns and is more beneficial in down years. 

In terms of disadvantages, many of the most popular ETFs have less costs than direct indexing. For example, the most popular S&P 500 ETFs have annual expenses of 0.03%, while most direct indexing fees are in the 0.4% range. 

While this won’t make a different in the near-term, it will matter in the long-term especially as tax-loss harvesting benefits erode over time. Additionally, the slight tax benefits may be outweighed by the tax complications as each trade needs to be accounted for.

Finsum: Direct indexing is expected to grow at a faster rate than ETFs over the next decade. Yet for many investors, ETF remain the better choice.

A recent article from Morningstar’s John Rekenthaler discussed the tax benefits of direct indexing. Direct indexing is a strategy that involves directly buying the stocks of an index rather than through a fund. 

This confers several benefits such as allowing investors to gain the benefits of indexing while still being able to customize their portfolio to reflect their values and better fit their needs. Due to this, the category has exploded and gone from a niche offering solely for high net-worth investors to being offered by retail brokerages to customers for as little as $5,000.

However, the strategy is not necessarily for everyone, but it can be particularly useful for those with sizeable assets due to the potential tax benefits. This is because direct indexing results in capital losses in a separate account when stocks drop below their cost bases. The proceeds are then re-invested in stocks with similar profiles. 

This strategy can be particularly useful for investors with high federal and state taxes, large amounts of money invested in direct indexing vs other investments, short-term capital gains, and dealing with a volatile market environment. 

FinSum: Direct indexing comes with several benefits for clients but the most substantial one is the tax savings. However, it’s only worthwhile for a particular group of investors.

Until recently, customized portfolios were only available to high net worth individuals. But, this is now changing due to the advent of direct indexing which is giving these tools to a much wider swathe of investors according to an article from Michelle Lodge. 

Direct indexing allows investors to have more control over their money while still allowing them to benefit from the positives of indexing such as diversification, tax efficiency, and low costs. This will allow their investments to better reflect their life situations, values, and convictions. 

It’s particularly useful for those with outsized exposure to a company or an industry or those with a large base of taxable assets. For instance, a tech employee with a large number of shares and stock options could use direct indexing to purchase the S&P 500 but reduce exposure to technology stocks.

According to BlackDiamond Wealth CIO Ken Nutall, “We have two main use cases: clients who have an old portfolio of appreciated assets but want to migrate to another strategy of tax efficiently, or [those who] work at a bank and don’t want any more bank exposure in their portfolio.” 

Finsum: Direct indexing is one of the fastest growing areas of wealth management. It gives investors the benefits of index investing, while allowing customization to help clients achieve their financial goals..

There is no magic solution when it comes to growing your client base as a financial advisor. Instead, you should adopt a variety of strategies which include understanding your strengths as a financial advisor, defining your ideal client, developing a branding strategy, and pursuing effective partnerships.  

Rebecca Lake, CEPF, wrote an article for SmartAsset on how to expand your client base. First, she counsels that advisors should not make the mistake of sacrificing quality of service in the pursuit of adding more clients. Advisors should always ensure that they are providing adequate attention and services to clients to ensure retention and loyalty.

Next, advisors should get clear and specific on their ideal target client in order to construct an effective marketing plan. They should also consider the ideal type and mix of services that would appeal to this audience. 

Another source of client growth is by leveraging your existing client base and asking for referrals. This can be highly effective as people are more willing to trust personal recommendations, but the request must be made tactfully. Finally, branding is an essential element to differentiate yourself from other financial advisors. Once you settle on your brand, keep it consistent.

Finsum: Financial advisors can grow their client base by picking a specific niche, developing a consistent brand, form partnerships with other professionals, and targeting your ideal client.