How Advisors Use Direct Indexing to Attract, Retain Clients

Thanks to the evolution of the internet and social media, today’s retail investors have access to an increasing amount of investment analytics, news, and research. Many of those resources are free. Registered investment advisors are encountering an increasingly sophisticated group of clients and prospective clients.

One way advisors can meet the demands of today’s more knowledgeable clients is with direct indexing. They can access related offerings through one of the most trusted names in the asset management industry. Vanguard, one of the largest issuers of exchange traded funds and index funds, offers Vanguard Personalized Indexing.

Fortunately for advisors, explaining the concept of a direct or personalized index to clients isn’t difficult. Put simply, a direct indexing strategy consists of owning equities in a separately managed account. That account is designed to deliver performance that is closely tied to that of a well-known stock index.

For example, an advisor offering direct indexing services can offer a client a separately managed account consisting of Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), and other mega-cap tech stocks to closely track the performance of the Nasdaq-100 or S&P 500 Growth indexes.

As Vanguard noted, it’s not necessary for that account to hold all of the index’s components to approximate its performance.

Advisors Embracing Direct Indexing

More asset allocators and advisors are warming to the idea of direct indexing. In a recent interview with Vanguard, David Murdock, managing partner at Bordeaux Wealth Advisors, highlighted the advantages of personalized indexing in terms of reshaping client conversations.

“Because what you can talk about here are the benefits to investing. You get to talk about tax savings, you get to talk about ways you can customize a portfolio, you get to talk about the things that they care about, which is what they keep at the end of the day. So, it brings in this qualitative discussion that we really like,” he told Vanguard.

Murdock’s point about tax savings is highly relevant. Direct indexing is a pivotal tool in helping advisors deliver tax efficiencies to affluent clients.

“Using the most advanced tax-loss harvesting technology, we can help you save time and capture potentially up to 1%-2% or more annually in after-tax alpha for your high-net-worth clients,” added Vanguard.

One or two percent in one year might not sound like much. Over time, however, that can result in clients keeping larger sums of capital for themselves.

For more news, information, and analysis, visit the Direct Indexing Channel.