By Kerri Quinn
Head of Index Solutions
Today we all crave personalized experiences — from streaming services to shopping recommendations. So it’s no surprise that investors expect the same level of customization in their portfolios.
Direct indexing offers a powerful solution, enabling advisors to create tailored investment strategies that align precisely with each client’s unique goals, risk tolerance, and values. By allowing investors to own individual stocks within an index, direct indexing opens up a world of possibilities for personalization.
Yet despite its potential, only 21% of advisors use direct indexing as a key strategy. Let’s explore reasons to accelerate adoption and unlock the full potential of direct indexing.
The Case for Change
Traditional investment approaches often fall short in meeting the diverse needs of investors. Direct indexing provides a way to overcome these limitations by offering:
- Tax-Loss Harvesting: Selling underperforming stocks to offset capital gains, potentially boosting after-tax returns.
- ESG Integration: Constructing portfolios aligned with environmental, social, and governance preferences.
- Custom Factor Exposure: Tailoring portfolios to specific factor tilts, such as value, growth, or momentum.
- Flexible Customization: Adapting portfolios to accommodate specific client restrictions, preferences, or existing holdings.
- Improved Transparency: Providing clients with clear visibility into individual stock holdings and performance drivers.
One compelling use case for direct indexing is addressing the challenge of trapped capital gains. For example, consider an investor with a significant unrealized gain in a highly appreciated stock. Selling this stock would trigger a substantial tax bill.
By utilizing direct indexing, the investor can gradually sell portions of the stock over time, offsetting capital gains with tax losses from other holdings. This strategic approach helps to manage tax implications while maintaining exposure to the desired investment.
Ways to Overcome Direct Indexing Hurdles
While direct indexing offers significant benefits, there are some potential drawbacks, such as:
- Implementing and managing a direct indexing strategy requires specialized expertise and technology.
- Fees associated with direct indexing can be higher than traditional index funds.
- Direct indexing portfolios may deviate slightly from the underlying index’s performance.
However, robust technology solutions can effectively minimize and solve these challenges. To harness the benefits of direct indexing, advisors need a platform that:
- Features API-first architecture that leverages cutting-edge AI.
- Automates portfolio construction and rebalancing.
- Facilitates tax-loss harvesting.
- Provides advanced analytics and reporting.
- Ensures compliance with regulatory requirements.
A Platform That Delivers
Alphathena is a leading fintech platform that empowers advisors and institutions to deliver personalized investment experiences through real-time direct indexing. Our cloud-based solution seamlessly integrates with existing workflows to deliver personalization with features such as tax-loss harvesting and AI-powered portfolio optimization.
With Alphathena, you can:
- Implement a scalable and efficient solution to provide additional alpha to your clients’ portfolios via our tax loss harvesting process.
- Generate additional AUM and revenue. (No longer are large embedded capital gains a roadblock to bringing assets in-house.)
- Offer up a way to allow your clients’ beliefs and values to align with their portfolios
- Brand and promote individual management styles and philosophies within your clients’ investment portfolios.
- And much more.
Contact us today to learn more about how Alphathena’s platform can help you.
