How Direct Indexing Helps Clients Cope With Market Volatility, Taxes
Direct indexing is a hot investment strategy that seems new but has actually been around for decades. Why is it growing so quickly now?
Look no further than the broad trend of customization and new technology that makes the process easier. For clients who opt for direct indexing, “Every investor is going to want their own [particular] customization. To have that agency is really powerful,” says Monali Vora, a partner of Goldman Sachs Asset Management and its head of custom equity and direct indexing, in an interview with ThinkAdvisor.
Over the next five years, direct indexing will grow at a faster rate than ETFs, mutual funds and separate accounts, Cerulli Associates forecasts — and Vora enthusiastically concurs. The customized strategy lets investors buy individual equities in weights comparable to those that make up a chosen index.
“The outcome is aligned with the investor’s goals and values,” explains Vora, who describes her focus as “the intersection of quant finance and technology.” Direct indexing can be tailored to specific goals, such as tax advantage, diversification, and investor values such as betting on an ESG strategy.
Vora builds strategies and portfolios for clients’ individual objectives. In the interview, she discusses how financial advisors can effectively suggest direct indexing to clients.
Goldman has a range of such strategies, including custom transition of assets from a brokerage account or active manager, a move that affords tax advantages. In addition, 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 ThinkAdvisor 2021 LUMINARIES award for executive leadership, heads a team of 15. The certified financial analyst joined Goldman Sachs in 2000, directly after graduating from the University of Waterloo In Ontario, Canada, with a bachelor’s degree in mathematics.
She has worked in Goldman’s quantitative investment strategies business from day one — a perfect fit. “I was a quant in high school. I was in a quant program in college,” says the daughter of a computer programmer who was formerly a math professor.
ThinkAdvisor recently interviewed Vora, who was speaking from Goldman Sachs’s downtown Battery Park City headquarters in New York. She points out that technology allows “every part of our lives [to be] customized to an individual’s preference — and investing is no different.”
Here are highlights of our interview:
THINKADVISOR: What’s the aim of direct indexing?
MONALI VORA: Giving investors exposure to the market by directly investing in individual stocks so that we can create custom baskets and custom portfolios.
What’s a good way for advisors to present the idea of direct indexing to clients?
[They could tell them], “It’s a great investment opportunity for you to get market exposure, and you can have control for your capital gains and losses.
“You can customize 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 have appreciated assets in brokerage. No one is really managing them. Can you help me think about how to diversify them?”
Why is customization a trend in the asset management industry?
Every part of our lives is being curated and customized to an individual’s preferences: how we order food, shop in the retail market [and so on].
We have access now to technology that allows for such customization, and investing is no different.
We’re able to offer our investors ways of customizing around their individual goals and values.
Is the strategy of direct indexing heating up?
[At Goldman] we’ve been growing [this business] quite a bit over the last five years [having made it available since 1999]. We’re now at $130 billion in assets across 25,000 different accounts [nationwide]. Last year alone, we opened 7,000 accounts.
Also, there’s been a lot of M&A activity in the indexing business. Over the last 14 months, there have been 10 potential transactions in the space.
People view [customization] as a [business for which] technology is going to become more and more accessible.
How fast is the space expected to grow over the next five years?
Cerulli [Associates] projects that the direct indexing industry will grow at a faster rate than ETFs, mutual funds and separate accounts.
That’s my expectation too. This will be a big growth area in the next five years because of technology and the need and demand for customization in every part of our lives and the benefits to the individual investor.
What is direct indexing’s biggest benefit to clients?
The benefit that accrues to each investor is determined by how we construct the strategies for them.
Because we’re buying the individual stocks directly to deliver a market return, we can customize so many different elements — around tax goals, aligning values, providing more income, managing various risk levels.
Can direct indexing counter market volatility?
One way we’re able to take advantage of equity volatility is by harvesting losses. For investors who want this capability, in periods of higher volatility we’ll sell stocks at a loss and buy replacement stocks.
What’s another plus to direct indexing?
A lot of our clients transition portfolios from brokerage or active managers. They want to diversify with a basket of stocks, but they want to be thoughtful about the tax consequences.
