As a financial advisor with over two decades of experience working with high net worth individuals and families, I've witnessed the evolution of investment strategies firsthand. One approach that has gained significant traction in recent years is direct indexing. This innovative strategy offers a level of customization and tax efficiency that traditional index funds and ETFs simply cannot match. In this blog post, I'll dive into the ways you can invest in direct indexing and how it can benefit your portfolio.

1. Work with a Wealth Management Firm that Offers Direct Indexing

One of the most straightforward ways to invest in direct indexing is to partner with a wealth management firm that specializes in this strategy. Many leading firms, such as Morgan Stanley, BNY Mellon, and Parametric Portfolio Associates, have developed robust direct indexing solutions for their high net worth clients ^{15 17 12}.

These firms leverage their expertise in portfolio management and indexing to create customized, tax-efficient portfolios that align with your unique goals and preferences. By working with a dedicated advisor, you can benefit from their knowledge and experience in implementing direct indexing strategies ¹⁰.

When selecting a wealth management firm, look for one with a proven track record in direct indexing, a commitment to personalized service, and a deep understanding of your financial situation and objectives.

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2. Utilize a Technology-Enabled Direct Indexing Platform

The rise of technology has made direct indexing more accessible than ever before. Several fintech companies and robo-advisors now offer direct indexing platforms that streamline the process of creating and managing customized portfolios ¹⁴.

Platforms like Orion's Custom Indexing and Pershing X's Wove enable advisors to efficiently build and manage direct indexing portfolios for their clients [11][17]. These platforms often incorporate sophisticated tax optimization tools, allowing for automated tax-loss harvesting and other tax management techniques ¹⁴.

By leveraging these technology-enabled solutions, you can access the benefits of direct indexing without the need for significant in-house expertise or resources. However, it's essential to work with a knowledgeable advisor who can guide you through the platform and ensure your portfolio aligns with your overall financial plan.

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3. Consider a Separately Managed Account (SMA)

Separately Managed Accounts (SMAs) have long been a popular choice among high net worth investors seeking personalized portfolio management. SMAs allow you to own individual securities directly, providing greater transparency and control over your investments ¹².

Many wealth management firms and asset managers now offer direct indexing strategies through SMAs ¹⁶. By investing in a direct indexing SMA, you can benefit from the customization and tax efficiency of direct indexing while maintaining the professional management and expertise of a dedicated portfolio manager.

When evaluating direct indexing SMAs, pay close attention to the manager's experience, investment philosophy, and track record. Look for a manager who can demonstrate a deep understanding of your unique needs and a commitment to delivering personalized service.

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4. Explore Direct Indexing Mutual Funds or ETFs

While direct indexing is typically associated with owning individual securities, some asset managers have begun offering mutual funds or ETFs that employ direct indexing strategies ¹³.

These vehicles can provide exposure to direct indexing benefits, such as enhanced tax efficiency and customization, within a more familiar and accessible structure. For example, Parametric Portfolio Associates offers a range of direct indexing mutual funds that focus on specific asset classes or investment strategies^12.

Investing in a direct indexing mutual fund or ETF can be a good option for those who want to access the benefits of direct indexing without the higher minimum investment requirements often associated with SMAs or custom portfolios.

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5. Collaborate with Your Financial Advisor to Develop a Customized Strategy

Ultimately, the key to successfully investing in direct indexing lies in working closely with your financial advisor to develop a customized strategy that aligns with your unique goals, risk tolerance, and tax situation.

Your advisor can help you navigate the various direct indexing options available, from working with a specialized wealth management firm to utilizing technology-enabled platforms or investing in direct indexing mutual funds ^{10 11.}

Together, you can identify the most appropriate approach for your portfolio, taking into account factors such as your investment objectives, time horizon, and liquidity needs. Your advisor can also help you integrate direct indexing into your overall financial plan, ensuring that it complements your other investments and strategies.

The Bottom Line

Direct indexing offers high net worth individuals and families a powerful tool for enhancing the customization and tax efficiency of their portfolios. By working with a knowledgeable financial advisor and exploring the various investment options available, you can harness the potential of direct indexing to help achieve your long-term financial goals.

Whether you choose to partner with a specialized wealth management firm, utilize a technology-enabled platform, invest in a separately managed account, or explore direct indexing mutual funds, the key is to develop a personalized strategy that aligns with your unique needs and objectives.

As the investment landscape continues to evolve, direct indexing is poised to play an increasingly important role in the portfolios of high net worth investors. By staying informed and working closely with your trusted advisors, you can position yourself to capitalize on the benefits of this innovative approach.

References:

[10] https://www.parametricportfolio.com/blog/how-can-advisors-use-direct-indexing-to-deepen-client-relationships

[11] https://orion.com/wealth-management/blog/direct-indexing-example

[12] https://www.parametricportfolio.com/blog/direct-indexing

[13] https://russellinvestments.com/us/blog/direct-indexing-decoded

[14] https://orion.com/wealth-management/blog/direct-indexing-technology

[15] https://www.morganstanley.com/articles/what-is-direct-indexing-benefits

[16] https://www.thinkadvisor.com/2024/02/06/bond-ladders-gain-traction-in-direct-indexing/

[17] https://www.pershing.com/us/en/newsroom/press-release/bny-mellon-launches-direct-indexing-solution-for-financial-advisors.html

Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation.  Information was obtained from sources believed to be reliable but was not verified for accuracy.  It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.  

Savvy Wealth Inc. is a technology company.  Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”.  All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth.  The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.