(Adhesion) These days, it’s almost impossible to read through an industry publication without being inundated by advertisements for direct index products and strategies. But all the attention makes sense—in a financial landscape where investors continue to demand more customization and lower costs, the ability to deliver a direct index strategy may create a multitude of benefits for end clients. They include:
- potentially reduced costs
- individual tax lot ownership
- increased tax efficiencies
In some cases, platforms can even offer direct indexes with some degree of personalization, so the investments reflect the unique needs and lifestyle demands of the investor. In those cases, the benefits also include:</p
- screening for personal preferences
- greater portfolio customization
I had a conversation recently with an asset manager that got me to thinking: In a way, our professional world exists because an end investor decided to work with an independent financial advisor. And behind the thinly veiled curtain of the advisor/client relationship, we continually try to evolve with products like ETFs and direct indexing in attempts to stay relevant—and profitable—in this world. In the process, hopefully, we can ward off the threat of mega-firms pushing the industry towards direct-to-consumer.
Advisors help their clients invest following their personal values by way of a low-cost, tax-efficient solution. Don’t go halfway or fall short of the true potential of direct indexing. Implementing an index strategy inside an SMA or as a standalone advisor model – while allocating the client with other managers in different accounts is just that - selling the strategy’s true potential short. Adhesion has expanded its direct index solution with the recent launch of Personal Indexes. With Personal Indexes, our intent was to solve the shortcomings of single-account Direct Indexes without sacrificing the personalization demanded by investors.
Getting the Most Out of Your Direct Index Strategy
But back to my conversation with the asset manager…She was telling me about how much the active tax loss harvesting kicked in last year given the ample opportunity we witnessed with severe market fluctuations.
“Many of our clients are using us as a core and hire other managers around our strategy,” she said.
I asked, “How many of your advisor’s clients complained about wash sales?”
“Our methodology helps prevent wash sales in their accounts,” she said.
“But what about across the other managed accounts?” I asked.
“Well, we can’t see them, so they’re not in consideration…”
This conversation crystallized my opinion that deploying this strategy in an SMA under performs for both the advisor and client by not realizing the full potential of personalized indexing. At Adhesion, we think an index strategy should be delivered in a single multi-manager account via a Unified Managed Account (UMA) framework and implemented through an overlay manager to help realize the full benefits.
If a client has a pool of money allocated over various managers in separate accounts, one hand won’t know what the other hand is doing because they can’t see over the “walls” that those account numbers create. Manager A, who is doing a lot of active harvesting, can’t see what Manager B has just bought or sold. This frequently results in disallowed losses due to wash sales, and actually ends up penalizing the investor. The full impact of the disallowed losses will not be understood until either presented by the custodian at year-end, or when your client is working with their tax preparation firm – who for many advisors is an also important ally in their business development network.
