Many advisors I speak with have clients who want more personalized investment recommendations. Mutual fund and exchange-traded fund (ETF) portfolios based on a broad investment objective and risk tolerance won’t cut it. That’s when I suggest a direct indexing solution as an alternative. It’s a highly customizable investment strategy that enables advisors to manage portfolios in a fraction of the time it once took, allowing them to build scale and efficiency—and ultimately profitability—into their practice.

What Is Direct Indexing?

Direct indexing solutions are comprehensive strategies aimed at helping advisors manage client investments with greater precision, confidence, and after-tax alpha. They are types of separately managed accounts (SMAs) that invest in the individual securities of a broad market index, such as the S&P 500. Clients can see which securities they’re invested in, while advisors can exclude certain tickers, sectors, or industries. This enables greater customization and alignment with goals, a feature that’s unavailable in pooled vehicles such as mutual funds or ETFs.

Hear from my colleague, Sarah Quinn, about the benefits Commonwealth’s Personalized Indexing solution can bring to your clients and your business.

The Direct Indexing Difference

One of the biggest advantages of direct indexing is that most technology platforms running this strategy can automatically harvest tax losses, a process that’s difficult to achieve at scale when done manually. Unlike mutual funds or ETFs, which allow individual investors to tax-loss harvest only in a down market, with direct indexing you can harvest losses in any underperforming security without significantly changing the portfolio’s allocation. Considering that, on average, 43 percent of stocks in the Russell 3000 Index had negative returns annually between 2013–2023,* this can provide substantial tax savings to clients.

Other tax strategies often used with direct indexing include:

• Tax transitioning. Move securities into a model in-kind, and then systematically sell assets and buy into the model over time without exceeding a capital gains budget.

• Tax overlay. Seek to minimize the tax impact on a client’s portfolio by leveraging strategies such as tax-loss harvesting, gain/loss matching, and deferring short-term gains.

The Ideal Client Profile

The wide-ranging benefits of direct indexing make it a viable investment strategy for clients with varying goals across the wealth spectrum. But, to give you an idea of who may benefit most, I’ve gathered a few scenarios from advisors I’ve worked with recently:

Commonwealth’s Managed Accounts Solution

Here at Commonwealth, our Investment Management and Research team manages our Preferred Portfolio Services (PPS)® Select platform, offering more than 100 portfolio models. You can choose from a diverse range, including active, passive, income, alternative, tax-aware, sustainable, and 10 direct-indexing solutions. This enables you to create the right portfolio for your clients while saving valuable time by outsourcing administrative tasks, such as due diligence, trading, and rebalancing.

Do More for Your Clients in Less Time

Your clients are the lifeblood of your firm. To stay competitive, you’ll likely need to go beyond the traditional role of investment manager to providing financial, estate, retirement, and tax planning services as well. This can add significant time to your day if not managed properly. By tapping into innovative strategies like direct-indexing solutions, you’ll deliver a better experience for clients while guiding them on their journey to financial freedom. And, you’ll gain back valuable time needed to take on additional clients and grow your business.

* Source: Orion.