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Practice Management > Building Your Business > Young Professionals

The Fast-Growing Investing Strategy That’s Attracting Younger Clients

By Germán Soto Sanchez

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What You Need to Know

  • Technology has made it easier than ever for firms to offer direct indexing to build and grow portfolios.
  • The strategy aligns perfectly with millennials' desire for tailored investments and smart tax management.
  • Expected annual growth rates surpass those of traditional investment products.

The transformation of direct indexing is taking center stage in wealth management. This 30-year-old passive investment strategy, once reserved for the ultra-wealthy, is now poised for wider adoption with millennial investors leading demand.

Why now? Technology has made it easier than ever for firms to offer direct indexing. The portfolio construction and optimization technology needed to power direct indexing at scale has become more accessible, changing the dynamics of traditional passive investing.

Why millennials? They’re interested in the tax strategies that direct indexing provides, as well as the customizability that ETFs and funds don’t offer.

Direct indexing aligns perfectly with their desire for tailored investments, ESG considerations and smart tax management, making it a vital tool for building stronger connections with this demographic and delivering exceptional investment results.

Next-Gen Indexing

Technology advancements and changing investor preferences have powered direct indexing’s ascension. Millennials in particular appreciate the ability to build portfolios that reflect their values and preferences while gaining tax advantages that traditional investment options like mutual funds or ETFs often lack.

There are several benefits to direct indexing: portfolio customization, lower fees and tax loss harvesting. Traditional exchange-traded funds don’t provide these benefits to the same extent — if at all.

Additionally, advisors can readily apply ESG criteria to an index, adapt portfolios according to their millennial clients’ risk tolerance, and make precise adjustments to sector exposures, ensuring diversified and highly personalized investment strategies. Or, even simpler, they can replicate an index and modify their clients’ holdings in real time.

Taking Advantage of This Trend

By embracing direct indexing, advisors not only are responding to increased demand but also are positioning themselves as leaders in offering innovative and personalized solutions to millennials.

This transformative approach to investing is notably aligned with the fintech landscape, where online brokerages are taking the lead in making direct indexing more accessible for investors with varied net worth.

At the same time, large wealth management firms are incorporating direct indexing capabilities into their in-house offerings, providing their advisors with a strategic advantage in serving millennial clients. These developments have been facilitated by significant investments in technology firms, allowing for the scalable implementation of direct indexing strategies.

Broader accessibility makes it easier to reach millennial investors. They seek investment portfolios that can be finely tuned to their unique preferences, often with a strong focus on environmental, social and governance considerations.

The rising prominence of socially conscious investing dovetails perfectly with direct indexing’s capabilities, empowering investors to craft portfolios that resonate with their values and ethical principles.

To cater to the preferences of younger investors, Dimensional Fund Advisors and Fidelity, among others, have recently lowered their minimum investment thresholds for separately managed accounts, enhancing direct indexing’s accessibility. We should expect to see other brokerages and robo-advisors doing the same as the cost of implementation goes down.

A Millennial Moment

The future of direct indexing appears promising, with expected annual growth rates surpassing those of traditional investment products. By embracing direct indexing, financial advisors can effectively address the demands of millennials, differentiating their offerings in a highly competitive landscape.

Direct indexing is more than just a passive investment strategy; it’s a potent tool for advisors looking to engage with the next generation of investors. It aligns perfectly with the preferences of millennials, accommodates their ESG investment interests, and delivers the customization and tax optimization opportunities that were traditionally reserved for high-net-worth individuals.

By adopting this innovative strategy, advisors can solidify their positions as industry leaders, connecting effectively with dynamic, and tech-savvy, millennials.

Germán Soto Sanchez is head of corporate strategy at Broadridge, focusing on partnerships and other growth-related activities to drive the development, evolution and communication of the firm’s vision and strategic plan. Earlier, he was president and a board member for Cloud9 Technologies and also worked for JPMorgan Chase & Co., AIC Private Equity and McKinsey & Co.

(Credit: Adobe Stock)

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