What is a Direct Index?
A Direct Index is a collection of individual securities designed to replicate the performance of an index. The index selected for replication is often a broad market index such as the S&P 500 or Russell 3000, but any index can be used. Advisers choose Direct Index investing because of the myriad of client solutions enabled by customizing the underlying holdings.
Enhanced Tax Efficiency
Because the Direct Index contains the individual holdings of an index portfolio, Direct Index investments are immune from the phantom taxable gain distributions of mutual funds and ETFs. In addition, the large number individual holdings provide more opportunities to harvest tax losses from the portfolio to offset taxable gains. As an overlay manager, Simplicity Solutions is responsible for trading and rebalancing all the positions in a unified managed account, including the Direct Index’s underlying positions. This unique perspective enables Simplicity Solutions to increase investors’ after-tax returns through continuous tax lot monitoring and trading. The higher the marginal tax bracket of the investor, the greater the tax benefits of these strategies.
Clients holding concentrated stock positions are always needing ways to improve the diversification of their portfolios. Advisors can customize Direct Index accounts on a client-by-client basis to restrict additional purchases of securities that would further concentrate the client’s holdings – either by restricting individual security purchases or by restricting purchases of entire industries. The resulting portfolio is a custom solution for the client designed to improve their diversification.
Talking with your clients about their core values and aligning their investments with those values is impactful. ESG/SRI screening is growing in popularity year-by-year, and it is another area available for Direct Index customization. Unlike ESG/SRI-oriented mutual funds, ETFs and SMAs, this is not a “one size fits all” solution. Your client can dictate which issues are important to them, and we can build a portfolio tailored to their preferences. Enroll the client’s account in Simplicity Solutions’s SRI/ESG screening services, and we’ll take care of removing any positions in the Direct Index that violate the client’s mandates.
Investment advisory and sub advisory services offered through Simplicity Solutions, LLC, a SEC Registered Investment Adviser. Simplicity Solutions is wholly owned by Simplicity Financial Marketing Holdings, Inc. and an affiliate of Simplicity Wealth, LLC, a SEC Registered Investment Adviser. Please review the ADV 2A for complete details. *TD Ameritrade, Inc. is one of the firms that we use to custody our client assets. TD Ameritrade, Simplicity Solutions, and the other entities named are separate and unaffiliated firms, and are not responsible for each other’s services or policies. TD Ameritrade does not endorse or recommend any advisor and the use of the TD Ameritrade logo does not represent the endorsement or recommendation of any advisor. Brokerage services provided by TD Ameritrade Institutional, Division of TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Used with permission. *Salesforce, Salesforce.com and others are all trademarks of Salesforce.com and are used here with permission. Morningstar® Managed PortfoliosSM are model portfolios offered to Simplicity Solutions, LLC by Morningstar Investment Services LLC, a registered investment adviser and subsidiary of Morningstar Investment Management LLC. Morningstar Managed Portfolios are intended for citizens or legal residents of the United States or its territories and can only be offered by a registered investment adviser or investment adviser representative. Simplicity Solutions has full discretion to invest client accounts in accordance with a Morningstar Managed Portfolio model or to deviate from the model. In no way should the use of a Morningstar Managed Portfolio by a Simplicity Solutions client be viewed as advice or establishing any kind of advisory relationship with Morningstar Investment Services, who is not acting in the capacity of advisor to individual investors. Morningstar Investment Services is not affiliated with Simplicity Solutions, LLC. Morningstar Investment Services does not guarantee that the objectives of a portfolio will be achieved or that negative returns can or will be avoided in any of its model portfolios.
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