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Kitces: Schwab ‘Declaring War on Funds’ With Direct Indexing Platform

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What You Need to Know

  • A few advisors knocked direct indexing, in response to a tweet form Michael Kitces on the subject, saying it's, among other things, too complex.
  • Ferri Investment Solutions CEO Rick Ferri said more complexity is only job security for advisors like him.
  • But direct indexing doesn't need to be complex or expensive, advisor Tariq Dennison says.

Several advisors debated the pros and cons of direct indexing on Thursday and Friday after Michael Kitces, head of planning strategy at Buckingham Wealth Partners and co-founder of XY Planning Network, tweeted that Charles Schwab’s plan to launch a direct indexing platform in early 2022 means Schwab is “declaring war on funds.”

Kitces cited a comment Charles Schwab CEO Walt Bettinger made at the Schwab Impact conference on Tuesday: “The idea that I’m going to take my money and simply turn it over to some fund or an ETF and just trust that that manager or maybe trust that that index is going to invest the way I want” is no longer realistic.

Kitces included a link to a ThinkAdvisor report that quoted Bettinger.

In response to Kitces, Scott Salaske, an advisor and CEO of RIA Firstmetric, tweeted: “‘Personalized [Direct] Indexing’ is code for plain old active management stock picking to justify adviser job security and high fees. Don’t let the word ‘indexing’ confuse anyone. It’s not index investing. You don’t need 100’s or even 1000’s of individual stocks.”

Jumping into the debate with advisors was Eric Balchunas, Bloomberg Intelligence senior ETF analyst, who tweeted he agreed with Salaske, adding that direct indexing would probably find a “small niche … relative to the hype. I’ve never been wrong betting against things trying to dislodge a 3bp total market index fund of ETF.”

However, Rick Ferri, an advisor and CEO of Ferri Investment Solutions, pointed out that the complexity of direct indexing would only be a positive for his business, tweeting: “Complexity is job security.”

Agreeing with Ferri on the complexity of direct indexing, Balchunas tweeted: “I’m surprised this isn’t more obvious. It’s more complex and expensive. Might be worth to some but my money is on simple and cheap every time.”

But Tariq Dennison, an advisor and wealth manager at GFM Asset Management, pointed out: “DI need not be complex or expensive. My money would be on who ever figures out how to make DI simple and cheap, just as Spotify and YouTube figured out how to replace the previously ‘simple and cheap’ compact disc.”

Dennison added: “For comparison, an S&P 500 or total market index fund may be very cheap, but certainly not simple — even most pro advisors I speak to don’t seem to know most of what’s in them. I expect a ‘natural foods’ movement in investing to replace some ETF big macs w/ DI home cooking.”

But Meg Bartelt, an advisor and president of Flow Financial Planning, questioned just how useful direct index really is, tweeting: “I think it’s well accepted that the more you ‘touch’ your investments, the worse they do (on average). I therefore wonder at the indirect behavioral impact of direct investing.”

She added: “…If you have, say, 3 funds (better yet, target date or balanced fund), you barely have to ever look at/touch your portfolio to keep it on track. But if you have 100s of stocks, will that require frequent ‘touches’ and the behavioral risk therein?”