Michael Laughlin, CFA, FRM, Head of the Portfolio Specialist Team at Morningstar Wealth, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss direct indexing.
Direct indexing, mutual funds, and ETFs are product structures, not asset classes. Clients feel a tangible value with direct indexing, where they own individual stocks in an index. Investors and advisors spend lots of time thinking about expense ratios, which might average 0.5%. In comparison, tax drag averaging 2% seems to get less attention. Taxes are a huge source of drag on portfolios in non-qualified accounts and alpha can be created by reducing tax drag. In direct indexing, clients own individual stocks in an index which allows for tax loss harvesting. Direct index portfolios can also be personalized based on a client’s values or other portfolio holdings.
Morningstar Wealth accepts direct indexing clients with a minimum investment of just $75,000. Using Morningstar indices eliminates the need to pay index licensing fees to external providers.
Many client conversations with advisors now revolve around short-term cash investments. While a 5% yield on short-term Treasuries may seem attractive, clients need to realize that, after taxes and inflation, their real return might be near zero.
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