Direct Indexing Seeks to Level Playing Field for Investors

Once available to only the mega-wealthy, custom portfolios reach less affluent investors.

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Reviewed by: Michelle Lodge
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Edited by: Michelle Lodge

If you’re among the so-called mass affluent, your portfolio may be looking a bit more like that of high net worth individuals and the ultra high net worth ones in a way you hadn’t imagined—thanks to personalized or direct indexing. 

“Historically, only ultra high net worth individuals had access to customized portfolios,” said Nilesh Vaidya, global industry head of retail banking and wealth management at consultancy Capgemini.  “Today we are seeing a level playing field with even mass affluent investors now having access to the same tools.” 

Mass affluent individuals have $100,000 to $1 million in liquid financial assets, plus an annual household income of more than $75,000, whereas those classified as high net worth people hold between $1 million and $30 million. Those considered ultra high net worth hold more than $30 million in assets.  

Personalized, or direct, indexing gives investors more control over where they put their money. The term refers to buying most, if not all, of the individual stocks that make up an index based on tax goals.

Investments are further customized by adding to or subtracting from or reevaluating stocks, and by aiming for securities of companies that are value-driven, which is especially important to millennial investors.  

According to Capgemini’s recent “Wealth Management: Top Trends 2023” report, “recent tech advancements make customizable indices available to a broader customer base.” Tax efficiency, diversification, personalization and values-based investing are the main draws, it said. 

At BlackDiamond Wealth in New York City, advisors have been offering the increasingly popular personalized indexing to their clients since 2018, Chief Investment Officer Ken Nuttall told etf.com.  

“We have two main use cases: clients who have an old portfolio of appreciated assets but want to migrate to another strategy of tax efficiently, or [those who] work at a bank and don’t want any more bank exposure in their portfolio,” he said. “These portfolios allow us to build a more custom portfolio for clients that can be pretty tax efficient.” 

The sky’s the limit for direct investing among investors, according to Capgemini, which predicts that more wealth management firms will extend it to their clients this year, while the technology continues to advance, and large asset management companies ramp up their offerings through acquisitions and partnerships. 

 

Follow Michelle Lodge on Twitter @lodgemich  

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.