How Direct Indexing Benefits High Net Worth Individuals

Описание: On this episode of A Wiser Retirement™ Podcast, we talk about what direct indexing is, the pros and cons, and how it benefits high-net-worth individuals with Casey Smith and Andrew Pratt, CFA. Listen to this episode to see if Direct Indexing is the right strategy for you!

What is direct indexing?

Direct indexing is an investment strategy that uses technology software to systematically optimize, or rebalance the portfolio, a legacy account to a target benchmark’s risk exposure overtime. Strategies range from broad U.S. market cap and style exposures, to even broad international equity indices

3 Primary Benefits of Direct Indexing

1. Tax Efficiency- Maximize tax loss harvesting efficiency. Losses can be used elsewhere. Realized loss capture leads to after-tax outperformance vs index.

2. Reduce Concentrated Stock Risk- You can reduce it for accounts that transfer in large basis legacy stocks. Recycled TLH proceeds can be recycled and used to help to reduce tracking error which leads to increased diversification.

3. It's Customizable- This is only recommended in certain situations, but you can exclude individual stocks or industries as long as the account stay’s within the strategy’s permitted tracking error.

3 Direct Indexing Shortcomings

1. Higher Costs- Providers charge an asset management fee which typically ranges from 0.2% - 1.0%.

2. Higher Investment Minimums- Most Direct Indexing providers’ minimum investment amount is $250,000. Larger capital outlay vs traditional investing.

3. Investment Implementation Time Lag- It takes more time to onboard, open a SMA account, implement, etc. vs traditional investing (ETFs).

Who should be utilizing this strategy?

Direct indexing is an investment strategy best suited for a specific group of investors who can truly benefit from its unique advantages. High net worth individuals, particularly those with investable assets greater than $750,000, stand to gain significantly from direct indexing due to the personalized investment approach and potential for enhanced after-tax returns. This strategy is also highly advantageous for taxable investors who are looking to leverage core benefits such as tax-loss harvesting and the ability to tailor the portfolio to personal values or investment preferences. Additionally, direct indexing is a fitting choice for someone who is comfortable with holding a separately managed account (SMA). An SMA provides the investor with direct ownership of the individual securities in their portfolio, as opposed to owning shares of a mutual fund or ETF, allowing for a greater level of customization and tax management. Therefore, individuals fitting these descriptions are the ideal candidates for utilizing direct indexing to optimize their investment outcomes.

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Timestamps:
00:00 Intro
04:42 Direct Indexing and Tax Loss Harvesting
17:10 Direct Indexing for High Net Worth

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