Last fall, our research revealed that 53% of those wealth management firms not currently offering direct indexing were interested in offering it as a service. Given the benefits such as tax optimization, personalization and ESG investing, it’s easy to understand the interest. So how do firms move from “interested” to “offering” direct indexing?
The answer might be easier than you expect. Here are four key decisions points for firms to make in order to add direct indexing as an investment strategy in your firm.
Constructing the Platform
There are two options here: build it in-house or partner with a vendor. The biggest advantage of building a proprietary direct indexing platform is the ability to monetize the product. However, it requires a significant investment and demands technical expertise to build with efficiency, scalability, and user experience in mind. On the other hand, partnering with a vendor gives firms access to direct indexing with less initial expense.
Selecting a Vendor
Typically, larger firms have the capability of building a product in-house (though many still choose vendor solutions), while smaller firms below $50 billion outsource. Therefore; if you fall into this category, as most of the firms considering offering direct indexing do, you’ll need to explore the various capabilities of direct indexing providers to understand what they offer and how it matches your target client and firm’s needs.
There are many providers and more entering the mix regularly, so there’s a lot to comb through and consider. When meeting with vendors, think about which capabilities—proposal generation and account onboarding, benchmark depth, personalization, UI/UX, and reporting—are most important to your firm. Think about who and what will fit best with your tech stack and firm operating structure to narrow your choices. Look towards satisfying the goals of your clients with these direct indexing products. For example, if personalization is very important to your clients, you’ll need to choose a provider with extensive capabilities in that area.
Reporting is also extremely important. Your clients want to be assured that the story of the direct indexing portfolio aligns with the story of their lives. They want to know that the value they receive in the portfolio is aligning with their goals and values. When reviewing the various vendors, take careful consideration on how the vendor reporting can seamlessly align with the advisor and client experience to ensure the story is connecting the dots with the outcomes of the portfolio.
Educating and Training Advisors
Many firms in our research (40% of those not offering direct indexing) cited lack of familiarity with the strategy as a reason for not offering it. Work with your direct indexing partner to leverage the training tools they have already created to train your advisors and firm as a whole. This will include how to use the platform, the onboarding processes and how to get accounts flowing to the vendor and how it all fits within your current workflows.
Working into Client Portfolios
Direct indexing is a part of an overall investment strategy rather than a standalone product to sell. And while it offers the benefits of tax optimization, personalization and more, it’s also not the right tool for every client. Wealth management firms should engage their financial planners and/or advisors in the exercise of connecting direct indexing to portfolio construction and make recommendations for which clients would benefit.
Launching Direct Indexing
The direct indexing strategy has seen steady and significant growth over the past five years because of its benefits to clients. If it makes sense for your firm, don’t let a perceived lack of resources hold your back from offering it. It is a relatively easy due diligence process to select a partner that is right for your clients and firm. We encourage you to take the steps forward to find the right partner as it has many benefits for your clients.
Want to know more about launching your direct indexing, purchase our full report or get in touch for implementation support.