Page 14 - Investment Advisor September 2021

INDUSTRY INSIGHTS

By Tim Welsh

How Direct Indexing Can Save the

Investment Management Industry

There is new hope for active managers who have been losing

market share to the passive side of the business.

ost of the recent develop-
ments in the investment
M management space have
been pretty terrible for asset manag-
ers and advisors focused on providing
investment services.
Fees are going to zero, low-cost digi-
tal competitors are gaining popularity,
operating expenses are being questioned
from investors and regulators alike, and
growing behemoths such as Vanguard
and BlackRock are vacuuming up almost
all of the asset flows, leaving the rest of
the industry in disarray.
At the same time, the value proposi-
tion for financial advisors is rapidly shift-
ing from providing investment services
to becoming more planning-centric, fur-
ther pushing asset management to the
back seat in their service offerings.
In addition, the majority of invest- hope: direct indexing. Although this mandates — which in and of themselves
ment managers don’t beat their bench- interesting approach to personalizing are revolutionizing investor demands.
marks. As a result, the indexers are portfolios has been around for some Previously, SMAs and wrap-like
winning — so much so that in the $11.6 time, it has typically been limited to accounts have been the solution for advi-
trillion equity fund market, active large portfolios due to the time and cost sors working with their high-net-worth
management is continuing its losing involved. But with dramatic innovations clients to accomplish these objectives.
streak to passive investing, according in trading and rebalancing technology But those SMA programs have tradi-
to Bloomberg. Currently, passive com- and fractional share availability, com- tionally had high costs and complexity
mands a 54% market share, having taken bined with no more trading costs in the that prevented advisors from using them
the lead over active in 2018, with no form of commissions, direct indexing with all of their clients.
signs of giving it back anytime soon. has become affordable and applicable to The good news for the industry is that
Many in the industry argue that these portfolios of all sizes. new trading and rebalancing technology
secular trends are the final steps in the Direct indexing enables firms to cus- makes it possible to replicate the SMA
complete commoditization of investing tomize portfolios by holding the under- process to create model portfolios or
and that asset managers and advisors lying securities to mimic a separate manage to an index by holding the indi-
should heed the words of the Borg from account structure to track an index. Or vidual securities and fractional shares
“Star Trek”: “Resistance is futile.” it will adhere to a model portfolio to themselves that make up the index or
accommodate constraints and opportu- model portfolio. This replaces having to
NEW HOPE nities in that portfolio, such as tax-loss use less precise and more costly meth-
Amid these dark days in investment harvesting, concentrated positions, and ods, such as investing in a mutual fund Adobe Stock
management, however, there is new environmental, social and governance or ETF.

12 INVESTMENT ADVISOR SEPTEMBER 2021 | ThinkAdvisor.com