Frequently Asked
Questions
Find clear and concise answers to the most common questions about Direct Indexing, its benefits, and how it empowers investors with greater control, customization, and tax efficiency.
Direct Indexing 101
What is Direct Indexing (also known as Custom or Personalized Indexing)?
Direct Indexing is a strategy that involves directly purchasing the individual securities that comprise an index, as opposed to investing in index funds or ETFs. This approach allows investors enhanced control over the selection of securities to align with personal values, investment preferences, and specific tax strategies like tax-loss harvesting.
What are the primary benefits of Direct Indexing?
Tax Optimization: Direct Indexing offers potential tax benefits through active tax-loss harvesting. By selling underperforming securities, investors can realize losses to offset capital gains in other areas, potentially lowering their tax liabilities. Such benefits are typically unavailable with traditional index-tracking funds, as investors in those products do not own individual securities.
Personalized Investing: Direct Indexing empowers investors to customize their portfolios to reflect their financial goals and personal values. Unlike index funds, which offer a fixed set of holdings, direct indexing allows investors to exclude or overweight specific securities based on their preferences.
Why does direct ownership of securities matter in Direct Indexing?
Direct ownership provides a high degree of personalization, allowing investors to reflect their unique values and investment strategies. This approach facilitates tax-loss harvesting, which could result in approximately 1% additional tax alpha, depending on market conditions—a level of customization and tax efficiency not matched by traditional funds.
Isn't it easier and more economical to buy an ETF?
The cost-effectiveness of direct indexing has improved due to zero-cost trading and fractional share offerings. These advances make direct indexing accessible without additional costs, while technological platforms handle the complexity of managing diversified portfolios.
Do I need a large capital outlay for Direct Indexing?
No, large capital is no longer a barrier thanks to fractional shares. Platforms may set minimum capital requirements, but offerings can start at as little as $50,000, making direct indexing accessible to a broader range of investors.
Is direct indexing worth it?
Direct indexing can be highly beneficial depending on your individual situation. It offers the potential for significant tax advantages through continuous tax-loss harvesting, which can provide tax efficiencies not typically available with ETFs or mutual funds. Additionally, direct indexing allows for a personalized approach, aligning your portfolio with your preferences, beliefs, and values. This ensures diversification that aligns with your priorities and exposures.
Over time, direct indexing can also be more cost-effective, as it typically incurs lower management fees compared to mutual funds and some ETFs, especially for larger portfolios. Compared to Mutual Funds, it helps avoid inheriting embedded capital gains, reducing unexpected tax liabilities.
Questions from Advisors
What does Alphathena provide?
Alphathena is a cutting-edge software platform for Direct Indexing, crafted for RIAs and fintech partners. The platform simplifies the process of designing and managing direct indexes, enhancing client relationships, and offering features like portfolio customization, effortless rebalancing, tax-loss harvesting, and seamless portfolio transitions.
Do I need to change my back office provider or services?
No changes are necessary. Alphathena integrates seamlessly with your current technology and custodian services, allowing you to retain complete control of your assets.
What indexes/ETFs does the platform support?
Our platform supports over 1,200 ETFs and indexes, encompassing more than 9,000 securities, all licensed for direct indexing, and included in our service cost.
Do I need to transfer control of my clients’ assets?
No asset transfers or subadvisor arrangements are required. Our platform integrates with existing custodians, allowing you uninterrupted control over client assets.
Why should I manage Direct Indexing myself rather than outsourcing?
Managing Direct Indexing in-house enhances service offerings and fosters stronger client relationships. Our platform simplifies portfolio management, providing real-time tools that improve client engagement without significant time commitments.
How much additional work is required from an advisor?
Our platform automates much of the workflow. Advisors typically review DI accounts monthly or quarterly for tax-loss harvesting, with our software reducing the process to five minutes or less.
Who is the platform intended for?
The platform caters to tech-savvy RIAs, TAMPs, fintech platforms, and large enterprises eager to deliver personalized client services through scalable Direct Indexing solutions.
What are the costs?
The platform fees range from 10-20 basis points or per-account fees based on selected services. We customize pricing models to meet client needs; contact us at info@alphathena.com for detailed discussions.
What if my client has existing positions or outsourced Direct Indexing?
Our Transition Engine provides real-time, tax-efficient transition evaluations to seamlessly integrate and optimize existing positions or outsourced Direct Indexing.
Can I manage active models on the platform?
Yes, you can upload or distribute models via our API, offering flexibility in managing diverse investment strategies.
How does the platform handle tax-loss harvesting across client accounts?
The platform supports household-level tax management, coordinating tax-loss harvesting across multiple accounts while adhering to wash sale rules to maximize tax savings.
Can I use the platform for model delivery to third-party platforms?
Yes, our platform enables model creation and delivery to third-party systems via our API, allowing strategy scalability and potential new revenue streams.
What if managing the lifecycle is too time-consuming?
If lifecycle management is overwhelming, our trusted partners offer Outsourced Custom Indexing (OCI) services, ensuring optimal portfolio maintenance without increasing your workload.
Contact us at info@alphathena.com for recommendations.
Why should I use a tech-enabled solution v/s just outsource directly to a subadvisor?
There are several advantages to using a tech-enabled solution over an outsource subadvisor model.
Alphathena | SMA/Outsourced DI | |
Index Coverage | 1200+ | Limited |
Personalization | Instant, 30+ Dimensions | Limited |
Incorporate Household level TLH | Yes | Limited |
Real Time | Yes | No |
Personalized Investor Experience | Yes | No |
Strong Advisor Association | Yes | No |
Requires Advisor Time | Minimal | None |
Real Time Proposal Generation | Yes | No |
Tax Efficient Transition | Instant | Manual and longer turn around |
Retain Complete Asset Ownership | Yes | Limited |
Custodians | Agnostic. You can retain assets at your preferred custodian. | Need to move assets to specific custodians |
Cost | Flexible feature-based SaaS pricing and/or AUM fee | AUM fee only |
Enterprise Level Whitelabeling | Yes | No |
API Services to embed DI natively | Yes | No |
Ideal Fit For | Tech savvy, hands-on, growth-focused advisors | Advisors who prefer hands-off outsourced models |
