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In recent years, there has been a growing demand for values-based investing among clients. Investors are increasingly looking to align their portfolios with their personal values, whether it's environmental sustainability, social justice, or faith-based considerations. However, meeting this demand with traditional strategies can be challenging. Enter direct indexing – a revolutionary approach to values-based investing that allows advisors to personalize portfolios to precisely match each client's unique values and preferences.
Direct indexing involves owning individual securities instead of mutual funds or ETFs, enabling advisors to customize portfolios in ways that were previously impossible. This level of customization not only deepens client relationships but also opens up new opportunities for advisors to differentiate their services in a crowded market.
In this post, we'll explore the world of direct indexing and how advisors can leverage this game-changing strategy to capitalize on the growing demand for personalized, values-based investing. We'll cover the key benefits, the role of AI in thand some advantages over traditional values-based investing. Plus, we'll introduce you to VADIS, a powerful solution that streamlines the direct indexing process and makes it accessible for advisors of all sizes.
What is Direct Indexing?
Direct indexing is an investment strategy that involves owning individual securities in a separately managed account (SMA) to track an index, rather than investing in a mutual fund or ETF that tracks the same index. This approach allows for greater customization and flexibility compared to traditional index investing.
The key benefits of direct indexing for advisors and clients include:
1. Customization: Tailor portfolios to each client's specific values, preferences, and tax situations, deepening client relationships and increasing satisfaction.
2. Tax Optimization: Take advantage of tax-loss harvesting opportunities at the individual stock level, potentially enhancing after-tax returns. According to a study by Chaudhuri et al. (2020), tax alpha is estimated at 1.08%.
3. Transparency: Provide clients with full visibility into the holdings of their portfolios, which is particularly important for values-based investing.
The growth of direct indexing has been remarkable, with assets in direct indexing strategies growing from $100 billion in 2015 to $462 billion in 2021. This growth is projected to continue, with assets expected to triple to $1,470 billion by 2027, driven by increasing investor interest in personalization, tax efficiency, and values-based investing.
Moving Beyond ESG: The Advantages of Values-Aligned Direct Indexing
Traditional ESG investing often relies on standardized frameworks and ratings that may not fully capture the nuances of individual investors' beliefs and priorities. As a result, there is growing pushback against one-size-fits-all ESG investing approaches. Investors increasingly seek personalized solutions that align with their specific values and beliefs, and as the slides mention, "personalization is growing" with a shift towards "depth over breadth."
Values-aligned direct indexing allows advisors to create truly personalized portfolios that precisely match each client's unique set of values by selectively including or excluding companies based on a wide range of criteria, such as environmental factors, social issues, governance practices, and faith-based considerations.
By demonstrating a thorough understanding of each client's values and reflecting those values in their portfolios, advisors can differentiate their practices, foster long-term client loyalty, and engage clients in substantive conversations about the real-world impact of their investments.
Streamlining the Direct Indexing Process with VADIS
VADIS (Values Aligned Direct Indexing Solution) is a comprehensive platform built in collaboration with First Affirmative Financial Network that streamlines the entire direct indexing process, from client onboarding to portfolio construction and ongoing management. VADIS delivers portfolios with low account minimums ($25,000), competitive fees (36 BPS), and minimal tracking error (< 2.25%).
Key features of VADIS include:
1. Customizable client questionnaires to capture each client's unique values, preferences, and investment goals.
2. Automated portfolio construction that generates personalized portfolios aligned with specified values while seeking to track a selected benchmark index (ACWI + AGG).
3. Seamless integration with popular advisor technology platforms like Orion for easy incorporation into existing workflows.
4. Comprehensive reporting on performance and impact to demonstrate the value provided through values-aligned investing.
By leveraging VADIS, advisors can efficiently scale their direct indexing offerings, provide a differentiated, high-touch experience to clients of all sizes, and benefit from annual rebalancing and tax-loss harvesting for better after-tax returns.
Leveraging AI to Enhance Direct Indexing Workflows
Artificial intelligence (AI) is revolutionizing various aspects of an advisor's practice, from content creation and client support to document extraction and portfolio analysis. AI-powered tools like YourStake's Advisor Core use advanced machine learning algorithms to analyze vast amounts of data on companies' ESG practices, saving advisors countless hours of manual research and analysis.
In the context of direct indexing, AI can streamline the process by quickly identifying companies that align with each client's specific values, optimizing portfolios for both values alignment and financial performance, and generating detailed impact reports.
Marketing and Content Creation: AI-powered tools can assist advisors in creating great first-draft emails, blog posts, website content, and even newsletters. This not only saves time but also ensures that the content is tailored to the specific needs and interests of your client base and can even be made to mimic your own voice.
Client Support: AI can help advisors provide better client support through automatic alerts, client segmentation, and customer support chatbots. These tools can quickly address common client queries, freeing up advisors' time to focus on more complex issues. Additionally, these tools can be on 24/7 to help support clients anytime they need assistance and alert you to anything missed.
Notes and CRM Advisors can use AI to generate meeting transcripts, summaries, and evaluations, as well as automatically convert meeting notes into CRM fields. This streamlines the note-taking process and ensures that important information is captured and organized efficiently allowing you to focus on your prospect or client.
Document Extraction and Presentation AI can read and format information from PDFs, providing instant personalized analysis and presentations. This is particularly useful for tax planning and proposal generation, where advisors need to quickly extract relevant data from multiple sources.
Analysis Assistant: AI can help advisors understand market commentary and derive portfolio insights, enabling them to make more informed decisions and provide better advice to their clients.
The Advisor Core + VADIS Advantage
By combining the power of Advisor Core and VADIS, advisors can streamline their workflows and provide unparalleled value to their clients. Advisor Core enables advisors to reduce the time spent on portfolio analysis and proposal generation from weeks to minutes, while VADIS allows advisors to optimize and customize tax-efficient, values-aligned portfolios for clients of all sizes.
Together, these tools significantly speed up the process of converting prospects into clients while delivering a highly personalized, values-based investing experience.
Watch & Learn: Webinar Replay
Conclusion
The rise of direct indexing presents a tremendous opportunity for advisors to capitalize on the growing demand for personalized, values-based investing. By embracing the power of direct indexing and leveraging advanced technologies like VADIS and Advisor Core, advisors can create truly customized portfolios, foster deeper client relationships, differentiate their practices, and streamline their workflows.
As the demand for values-based investing continues to grow, advisors who adopt direct indexing will be well-positioned to succeed in this evolving landscape.
If you're ready to unlock the potential of personalized, values-based investing for your clients and your practice, we invite you to explore VADIS and experience the power of direct indexing firsthand. Schedule a demo today.
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