As of this morning, the clients of Charles Schwab & Co.’s roughly 15,000 registered investment advisors have access to a higher level of portfolio management through the firm’s direct-indexing product, Schwab Personalized Indexing (SPI), the company has announced.
Direct indexing allows an investor to track an index, but because the underlying securities are held directly the investor can also customize their holdings. For example, they can exclude a company if they already have a large exposure to that company through employment or if their values and the company's are misaligned. They can also get very granular with tax-loss harvesting through direct indexing.
The enhancements to SPI—which can be accessed through a new digital interface—were designed to increase a client’s customization options and to streamline an RIA’s workflow, whether these advisors are on-boarding a new client or managing an existing portfolio, said Divya Krishnan, director, Schwab product management.
“These are the ways we’re continuing to make it easier for RIAs to enroll clients into direct indexing and to customize their portfolios in the specific ways their clients want,” she said.
The framework for SPI, which previously offered direct indexing but still relied on monthly statements, was released more than a year ago in April 2022. Investment in the technology has been a continuous, ongoing commitment, something Walter Bettinger, Schwab’s CEO, said at Impact 2022 last November in Denver.
“I can assure you that some of the digital investments that we’re making are measured in hundreds of millions of dollars,” he said. “When some of those come to fruition over the coming months ... we’re going to disrupt [the] industry, and it’s going to help you serve more clients.”
The desire to deliver more personalization for clients with different asset levels was there, he said, but working out how to offer that service at the low cost Schwab is known for was the sticky part.
The cost question has been answered, Krishnan said, as the fee for SPI starts at 25 basis points and tiers down to 15 basis points. The account minimum is $100,000, since it would be hard to harvest taxes losses and cover the costs at account minimums lower than that, she said.
Clients will now be able to exclude not just individual stocks from their portfolios, but also entire industries or even sub-industries. And predictive tracking capabilities mean an advisor can see how a portfolio will perform next to its reference index and what the benefit of tax losses would be to a client’s overall tax bill before they start excluding names.
In addition, new digital enrollment capabilities will mean a streamlined workflow for RIAs, with fewer errors and faster processing when they on-board clients in SPI accounts through Schwab’s managed account software platforms.
As of today, RIAs will also have access to a digital dashboard that displays each SPI account, including total realized gains and losses stemming from the tax-loss harvesting algorithm Schwab has developed, updated daily.
“At any given time, they’re able to log in and view those details,” Krishnan said.
Clients can choose from four major indexes—Schwab 1000 Equity for large-cap exposure, the S&P SmallCap 600, the MSCI KLD 400 Social Index for ESG exposure and the MSCI EAFE Index for international names.
“With these four particular areas, it really was where the demand was from our clients. We looked to see where our RIAs were using our indexing to manage their clients’ needs [and] these were really the four major investing exposures.”