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Executive Summary
What if every client could have a portfolio as unique as they are? Portfolio customization, tax efficiency, and values alignment shouldn't be limited to your largest accounts. The Values Aligned Direct Index Solution (VADIS) brings these capabilities to all your clients, combining sophisticated direct indexing with values-based investing at a fraction of traditional minimums.
For Your Practice: VADIS enables you to differentiate your practice with sophisticated direct indexing starting at just $25,000, a fraction of traditional minimums. The platform combines tax-efficient portfolio management, values-based investing, and active ownership – all while maintaining competitive fees of 36 basis points and offers over 150 metrics to customize portfolios for any client’s values.
For Your Clients: Beyond traditional thematic mutual funds and ETFs, VADIS offers true portfolio personalization, tax optimization, and measurable impact through shareholder advocacy. Clients see their values reflected in their portfolios while maintaining professional investment management and benchmark-aware performance.
Bottom Line: VADIS helps you deepen client relationships, attract next-generation assets, and scale your practice efficiently – all while delivering the personalized experience today's investors demand while not expanding your operational workload to offer this solution.
Understanding Direct Indexing: The Foundation
Direct indexing has emerged as a sophisticated approach to portfolio management, allowing investors to own individual stocks rather than mutual funds or ETFs to replicate index performance.
In fact a recent LSAG study highlighted that Direct Indexing is on a steep growth trajectory. In 2024, roughly 21% of financial advisors utilize direct indexing, and nearly half plan to adopt it in the next five years.
But what makes this approach particularly powerful? Unlike traditional investment vehicles, direct indexing enables precise control over portfolio composition, tax management, and values alignment.
The key advantages include:
- Tax-loss harvesting opportunities at the individual security level
- Customization capabilities to match client preferences and constraints
- Improved after-tax returns through strategic tax management
- Continuous portfolio optimization and rebalancing
However, VADIS takes these benefits further by incorporating a crucial element that resonates deeply with mindful investors: values alignment.
A Brief Overview of Values-Based Investing: The Core Approach
Values-based investing represents a transformative approach to portfolio management that puts investors' personal beliefs and principles at the forefront of investment decisions. According to recent studies by Morgan Stanley and Charles Schwab, 85% of investors express interest in sustainable investing, with this number rising to 95% among millennials.
Unlike traditional investment strategies that focus solely on financial metrics, or standardized and inflexible ESG scoring systems that take a top-down approach, values-based investing enables investors to maintain direct control over their holdings while aligning their portfolios with their unique values and priorities.
The approach is remarkably flexible, accommodating a wide spectrum of values and beliefs - from environmental concerns and social justice to religious principles and singular issues like animal testing, weapons manufacturing, or healthcare access. Through sophisticated and precise screening tools and active ownership, investors can not only avoid companies that conflict with their principles but also actively support businesses that align with their values. As investors' understanding and priorities evolve over time, their portfolios can adapt accordingly, ensuring continued alignment with their core beliefs. This investment approach has gained significant momentum as investors increasingly seek to create a positive impact with their investment dollars around what they care about while pursuing competitive financial returns.
If you’re looking to learn more about focusing on Values-Based Investing for your practice, we built this resource to help educate Advisors about the specific benefits of offering this to your clients. Learn more here.
The VADIS Difference
VADIS isn't just another direct indexing solution – it's a comprehensive platform developed in collaboration with First Affirmative Financial Network that disrupts how advisors can approach values-based investing.
What sets this Direct Indexing Solution apart?
- Lower Minimums: Starting at $25,000 through Apex Clearing ($250,000 for Schwab), making sophisticated direct indexing accessible to more clients without sacrificing customization
- Competitive Pricing: Management fees from 0.36%, compared to industry standards of 0.50% or higher
- Extensive Customization: Access to over 150 metrics across 5 key issue areas for precise values alignment and client flexibility
- Active Ownership: Comprehensive proxy voting and shareholder advocacy program that amplifies client values
Real-World Implementation: From Practice to Portfolio - One Advisor's Perspective
In the recent webinar "Values to Value-Add," Ken Silva-Ballard, CSRIC and IAR with First Affirmative shared insights from his experience as a values-based investment advisor. Having transitioned from a career as a professional chef to the investment world over a decade ago, Ken brings a unique perspective on building deep client relationships through values-aligned portfolios.
"The most amount of money that a client will impact the world with is highly likely to be in their investable assets in the markets," Ken explains. Through his practice, he has demonstrated how values-based investing enables meaningful conversations that go beyond traditional performance metrics.
The Filmmaker's Portfolio
One of VADIS's strengths is its ability to handle complex client requirements while maintaining portfolio integrity. Ken shares a revealing case study: "I had a filmmaker client who, through his documentary work, had developed very specific exclusions. These exclusions actually made up a significant portion of the mega-cap sector, which could have dramatically affected portfolio performance. Working with First Affirmative's team, we were able to fine-tune the optimization process to accommodate these exclusions while still maintaining a portfolio aligned with his financial goals."
The Evolution of Client Values
Ken emphasizes how values-based investing enables deeper client engagement over time: "If you have a really trusting relationship with your client, there's a level of honesty there that's untouched. We're dealing with all the money they have, so incorporating their values provides an extra level of security." He illustrated this through the example of clients who initially invested heavily in electric vehicles for environmental impact, but later wanted to refine their approach after learning more about battery mineral sourcing and mining impacts. VADIS's flexible platform allowed their portfolios to adapt while maintaining alignment with their core environmental values.
Managing Multi-Account Households
Another common scenario involves optimizing across multiple account types. For example, one implementation involved:
- A Roth IRA positioned for aggressive growth
- A taxable account requiring careful tax management
- Household-level asset location optimization
- Values alignment across all accounts
Technical Deep Dive: Portfolio Construction
Understanding Tracking Error
Tracking error is a critical metric in VADIS portfolio construction. As Teresa Gusman explains: "The optimizer is designed to minimize tracking error relative to the benchmark. As values metrics are added or subtracted, and companies are added to or removed from the client-specific investment universe, the outcome can look significantly different."Key aspects include:
- Starting universe of over 3,000 companies
- Optimization to approximately 230 holdings
- Balance between values alignment and benchmark tracking
- Continuous monitoring and rebalancing as needed
The Metric Meter System
The metric meter serves as an early warning system for portfolio construction:
- Green: Optimal diversification potential
- Yellow: Some constraints on diversification
- Red: Significant portfolio constraints requiring client discussion
When the metric meter shows red, First Affirmative requires an additional client acknowledgment document, ensuring full transparency about potential performance implications.
Portfolio Optimization Process
The optimization process involves multiple layers:
- Initial screening based on selected values
- Optimization for tracking error minimization
- Tax consideration overlay
- Regular rebalancing and ongoing optimization
Mastering Client Conversations: A Deeper Dive into Values-Based Investing Discussions
The Initial Values Discussion
The key to successful VADIS implementation lies in how you introduce and discuss values-based investing. Here's a proven framework based on real advisor experiences:
Stage 1: Opening the Conversation
Start broad and let the client guide the depth of the discussion. Ken Silva-Ballard highlighted this approach:
"In our initial consultation, we get to know the client a little better, then set up a dedicated meeting to go through the values picker together. This is where we really discover their experience, and it sparks many different conversations."
Stage 2: Values Discovery Process
The values discovery meeting typically follows this structure:
- Introduction to Values Screening
- Present the baseline screens and persona's
- Explain how these reflect decades of experience in values-based investing
- Allow clients to select what resonates with them
- Deepening the Conversation As clients review different metrics, they often share personal stories and experiences. Common themes include:
- Environmental concerns based on personal observations
- Workplace experiences that inform social views
- Family values and legacy considerations
- Managing Complexity When clients want to select numerous screens, Ken recommends: "Start with the VADIS screens as a baseline. Over the years, you'll get to know your client more and more. They're not going to come into the gate that hot... The VADIS screens are comprehensive and cohesive."
Values-Based Dialogue Examples
Scenario 1: The Overwhelmed Client
Client: "There are so many options. Should I select everything that matters to me?"
Advisor Response: "Let's start with what matters most to you right now. We can always adjust as we go, and remember, we have other tools like proxy voting and shareholder engagement to influence companies we own."
Scenario 2: The Performance-Focused Client
Client: "I care about these issues, but I'm worried about returns."
Advisor Response: "Let me show you how our optimization process works to maintain market exposure while respecting your values. We can also look at reports showing how your portfolio tracks against traditional benchmarks."
Scenario 3: The Evolution Over Time
"If you have a really trusting relationship with your client," Ken notes, "there's a level of honesty there that's untouched. We're dealing with all the money they have, so incorporating their values provides an extra level of security. I've seen people's perspectives completely flip, and we're able to accommodate that with VADIS."
Best Practices for Ongoing Engagement
- Regular Values Check-Ins
- Annual review of values preferences
- Discussion of any life changes that might affect values priorities
- Review of impact reports and advocacy efforts
- Educational Updates
- Share success stories from shareholder advocacy
- Provide updates on new screening capabilities
- Discuss emerging values-based investing trends
- Impact Reporting Conversations
- Use metaphor reports to make impact tangible
- Review proxy voting decisions and their outcomes
- Discuss shareholder engagement activities
Remember, as Ken emphasizes, "Everyone's different, and oftentimes this particular beta screen set will really allow you to get to know your client much better. It's much better to read the book than just look at it on the shelf."
Available Resources
- Guide to Client Conversations about VADIS (Download)
- An Introduction to Values-Based Investing (Article)
- Discover the VADIS Direct Indexing Platform (Website)
To learn more about implementing VADIS in your practice, schedule a demo for a detailed demonstration and discussion of how this solution can benefit your clients and practice.
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