How Direct Indexing Helps Clients Deal With Market Volatility and Taxes

Direct indexing is a popular investment strategy that seems new but has actually been around for decades. Why is he growing so fast now?

Look no further than the general trend of personalization and new technologies that make the process easier. For clients opting for direct indexing, “Each investor is going to want their own [particular] customization. Having this agency is really powerful,” Monali Vora, partner at Goldman Sachs Asset Management and its head of custom stocks and direct indexing, said in an interview with ThinkAdvisor.

Over the next five years, direct indexing will grow at a faster rate than ETFs, mutual funds and segregated accounts, according to forecasts from Cerulli Associates — and Vora enthusiastically agrees. The custom strategy allows investors to buy individual stocks in weightings comparable to those that make up a chosen index.

“The outcome is aligned with the investor’s goals and values,” says Vora, who describes her focus as “the intersection of quantitative finance and technology.” Direct indexing can be tailored to specific objectives, such as tax advantage, diversification and investor values, such as betting on an ESG strategy.

Vora develops strategies and portfolios for individual client goals. In the interview, she discusses how financial advisors can effectively suggest direct indexing to clients.

Goldman offers a range of such strategies, including custom transitioning assets from a brokerage account or active manager, a move that offers tax advantages. Additionally, advisors can offer direct indexing using GSAM’s proprietary software — accessible online — to present clients with a variety of investment opportunities.

Vora, who won a 2021 LUMINAIRES ThinkAdvisor Award for Executive Leadership, leads a team of 15 people. The certified financial analyst joined Goldman Sachs in 2000, directly after earning a bachelor’s degree in mathematics from the University of Waterloo in Ontario, Canada.

She has worked in Goldman’s quantitative investment strategies business since day one – a perfect fit. “I was a quant in high school. I was in a quantum program in college,” says the daughter of a computer programmer who was previously a math teacher.

ThinkAdvisor recently interviewed Vora, who was speaking from Goldman Sachs headquarters in Battery Park City, New York. She points out that technology enables “every part of our lives [to be] personalized to an individual’s preferences – and investing is no different.

Here are the highlights of our interview:

THINKADVISOR: What is the purpose of direct indexing?

MONALI VORA: Giving investors market exposure by investing directly in individual stocks so that we can create personalized baskets and portfolios.

What’s the right way for advisors to introduce the idea of ​​direct indexing to clients?

[They could tell them]“It’s a great investment opportunity for you to get exposure to the market and you can control your capital gains and losses.

“You can personalize around your values ​​and align your values ​​with the portfolio.

“You can determine what your income levels are.”

How else can direct indexing benefit an investor?

When a client says, “I liked some brokerage assets. Nobody really manages them. Can you help me think about how to diversify them? »

Why is personalization a trend in the asset management industry?

Every part of our life is organized and personalized according to individual preferences: how we order food, buy in the retail market [and so on].

We now have access to technology that enables such personalization, and investing is no different.

We are able to provide our investors with ways to fit their individual goals and values.

Is the direct indexing strategy heating up?

[At Goldman] we grew up [this business] a few in the last five years [having made it available since 1999]. We are now at $130 billion in assets spread across 25,000 different accounts [nationwide]. Last year alone, we opened 7,000 accounts.

Additionally, there has been a lot of M&A activity in the indexing industry. In the past 14 months, there have been 10 potential deals in the space.

View of people [customization] like a [business for which] technology will become more and more accessible.

How fast is space expected to grow over the next five years?

Ceruli [Associates] predicts that the direct indexing industry will grow at a faster rate than ETFs, mutual funds and segregated accounts.

This is also my expectation. This will be a big growth area over the next five years due to technology and the need and demand for customization in every part of our lives and the benefits to the individual investor.

What is the main benefit of direct indexing for customers?

The advantage that accrues to each investor is determined by how we construct the strategies for them.

Because we buy the individual stocks directly to deliver a market return, we can customize many different elements – around tax goals, align values, provide more income, manage various levels of risk.

Can direct indexing counter market volatility?

One of the ways we can take advantage of equity volatility is to reap losses. For investors who want this ability, in times of high volatility, we will sell shares at a loss and buy replacement shares.

What is the other advantage of direct indexing?

Many of our clients are transitioning from brokerage or active manager portfolios. They want to diversify with a basket of stocks, but they want to think about the tax consequences.

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