Advisory clients increasingly expect customization of their portfolios, but many advisors are failing to adopt new customization techniques such as direct indexing, according to Allspring executives.
Despite some advisors’ reluctance, direct indexing is quickly gaining ground as an investment technique, the compan said The strategy involves buying the individual stocks that make up an index, in the same weights as the index, as opposed to buying the index as a whole.
Only 24% of advisors are using direct indexing and even fewer are recommending direct indexing solutions for their clients, according to Katie D’Angelo, managing director and head of global relationship management at Allspring Global Investments, an asset management firm with $540 billion in AUM and more than 400 financial professionals headquartered in Charlotte, N. C., which was previously the asset management unit of Wells Fargo.
Less than 15% of financial advisors are familiar with the practice of using managed fixed income and equity accounts today, according to Cerulli Associates. As awareness grows and usage broadens, Cerulli Associates expects assets in these categories to balloon from an estimated $260 billion at the end of 2022 to $825 billion by 2026.
“Half of asset managers plan to introduce customized solutions, with half indicating they want to increase their ability to offer personalized investment solutions,” Cerulli said in The Cerulli Edge: U.S. Managed Account Edition. “Many firms have launched or are in the process of launching separate accounts.”
D’Angelo and Manju Boraiah, senior portfolio manager and head of systematic edge fixed income and custom separately managed accounts for Allspring, recently conducted a webinar on direct indexing and separately managed accounts.
While many advisors are hesitant to adopt direct indexing so far, 71% of clients expect customization and 76% say they get frustrated if their advisors do not provide customization, D’Angelo said. The statistics were part of a McKinsey & Company report, “Next in Personalization 2021.”
“Companies that grow faster derive 40% more of their revenue from personalization than their slower-growing counterparts,” McKinsey said in the report.
The ability to personalize portfolios is a primary reason that prospective clients select a particular advisor, Boraiah said during the webinar.
“Separately managed accounts have experienced a meteoric ascent, but the future is even more promising thanks to a broader push for investment personalization and customizable solutions,” Allspring said.
According to an Allspring survey of 87 financial professionals, 63% of whom were RIAs, nearly half of the RIAs said they will be using more separately managed accounts and direct indexing by this time next year. That was two times more RIAs then said they plan to increase other types of investments, such as ETFs or private equity.
One of the draws for direct indexing and separately managed accounts for investors is the ability to reduce taxes by using losses to offset gains. “With separately managed accounts the advisor can create a unique product for the client,” Boraiah said.
Direct indexing also can be used to transition clients, who have too much concentration in a few investments, to a more diversified portfolio, he added.
“This can be particularly important for corporate executives who have too much invested in corporate stock,” D’Angelo added.
Allspring has created Remi, “The SMArt Choice,” to customize accounts, the two executives said. Remi was designed to enable advisors to offer personalized investment strategies for an individual client’s preferences to help advisors create unique accounts for each of an advisor’s clients, Allspring said.