By Kerri Quinn
Head of Index Solutions
Investment trends have come and gone over the years.
But the strategies that deliver monumental benefits to both advisors and the clients they serve tend to stick around.
As the tide once again shifts, with investors demanding more personalization than ever, the benefits of direct indexing cannot be overstated. Advisors who wish to ride the wave to increased client satisfaction, stronger portfolio outcomes, and smarter operational workflows should capitalize on all direct indexing has to offer.
But First, How Have Investment Strategies Transformed?
Fueled largely by investor sentiment and changes in market and economic conditions, technology, and innovative advancements, investment strategies are consistently changing over time.
A brief look back at the 20th century is all we need to get a glimpse of this evolution.
Following World War II, growth investing and value investing strategies became popularized as more Americans began to purchase stock, thanks in large part to the post-war economic boom that persisted throughout the 1950s and 1960s.
During the same time period, Modern Portfolio Theory and the Efficient Market Hypothesis emerged, introducing investors to the ideas of portfolio diversification and market efficiency—which theorize that it is difficult to outperform the market. While the Efficient Market Hypothesis is not without its critiques, both of these concepts had far-reaching implications for investors—and persist to the present day.
Index investing was introduced in the 1970s but became widely popular in the mid-1990s as investors sought low-cost ways to invest passively in the markets while effectively diversifying their portfolios. The rising interest in ETF investing was a natural progression, as these investment vehicles track specific indexes and offer tax-efficient, flexible ways to access and trade investments.
Fast forward to today. More investors than ever are interested in personalization and ESG investing to use their investments to support the environmental, social, and governance factors that are meaningful to them.
This demand for personalization is growing rapidly, which brings us to direct indexing as a strategy that more investors—and their advisors—should pay close attention to.
Benefits of Direct Indexing
As the trend toward deeper personalization continues, direct indexing provides several benefits to both investors and the advisors who serve them.
First and foremost, direct indexing offers the ability to deeply personalize portfolios by investing directly in the securities that make up an index. This allows investors to pick and choose which securities appeal to their values, objectives, and preferences more easily than investing in an index or ETF.
Direct indexing also offers several tax advantages. It allows for more seamless tax-loss harvesting, as advisors can offset capital gains with losses by selling individual securities. And owning individual stocks instead of an entire index gives investors more control over their tax liabilities.
Finally, direct indexing empowers investors to more easily diversify their portfolios. It combines the benefits of broad market exposure with the precision and accuracy of individual stock picking.
Plus, with direct indexing, advisors can more easily rebalance portfolios, manage risk, and address investment tax needs, allowing them to differentiate in a crowded marketplace—if they have the right technology to streamline operations and automate recurring tasks.
Capitalize on the Benefits of Direct Indexing with Alphathena
According to a survey from RIA Channel and FTSE Russell, only 21% of advisors actively use direct indexing today.
That means 79% of advisors are leaving huge potential on the table.
Direct indexing is a game-changing differentiator, allowing advisors to more directly customize clients’ portfolios and harvest their losses, bypassing the traditional approach of investing in funds or ETFs that can miss the mark for getting clients’ investment preferences right.
Discover how Alphathena empowers financial advisors to break free from the limitations of outsourcing and deliver powerful, in-house personalization for your clients with direct indexing.
Unlock the future of personalized financial advisory with Alphathena.
