The power of personalised investing
Josh Persky, Founder & CEO of Briefcase
Many of you reading this will be intimately familiar with the laborious & difficult nature of portfolio construction. Defining a suitable investment universe, collating a cogent & robust investment process, sourcing & cleansing data, implementation, corporate actions, monitoring & rebalancing are just a few of the tasks required to manage investors money.
A privilege, yes, but one that requires an enormous investment of time, dedication, money & great dose of humility.
Our world has evolved from “one size fits most” - vividly recalling a time where there were only five television stations, to a world where our daily interactions with products & services have migrated to “one size fits one”– think Netflix, Amazon & Disney Plus to name but a few.
Thinking about how different our lives are now, compared to a time when watching “Hey Hey it’s Saturday” on TV, one had to be in front of the cathode ray tube television at 930pm sharp on Saturday night, commercials and all. It almost feels a little absurd. Netflix today has close to 37,000 hours of content to be watched whenever one’s heart desires.
The same logic can be applied to investment management. The first mutual fund celebrates it’s 100th birthday next year, and the first Exchange Traded Fund launched in 1990. Much of the world from a technological stand point has moved on, and yet these structures remain the most prevalent vehicles by which advisors implement client portfolios.
What about the client experience?
Having had the opportunity to meet & get to know many financial advisers, both locally & abroad, I was privileged to witness first-hand the enormous amount of time, energy & effort they all took to get to know their clients. Cash flow needs, risk propensity, investment preferences, liquidity constraints, investment time horizons, values, ESG, ethics, estate planning – the list goes on & on. Despite all this, the investment portfolios that an adviser had to offer their clients often felt generic, off the shelf & impersonal.
I’ve had countless financial advisers share with me that the commoditisation of investment management (think model portfolios & ETFs) has made it exceedingly difficult for them to fulfill their promise to their clients – “understand me & offer me a solution that addresses my needs”.
Enter Direct Indexing
Direct Indexing in its simplest form is a modern & alternate approach to index investing.
Instead of choosing a pooled vehicle (ETF or mutual fund), an investor buys a representative sample or sub-set of stocks, with the goal being to replicate the performance of a chosen index (e.g., S&P/ASX200). Whilst ETFs can be a central component to a modern portfolio, it’s at the periphery where the true innovation lies.
Who would want a Direct Index portfolio?
A direct indexing approach, as opposed to using an ETF or mutual fund vehicle, can deliver multiple benefits to both an adviser & their client alike.
Customisation to align with client’s desires. By its very definition, comingled fund structures like an ETF or mutual fund cannot be customised. They are a package deal. Direct indexing allows for customisation based on investors inputs such as values-based investing or individual preferences, whilst still providing an index return.
Client experience. Most mutual funds & ETFs can’t solve many of the issues that high-net worth & wholesale investors face today. These may include:
Diversifying concentrated stock positions. More than ever, executives & long-term employees are being compensated in company equity, be that stock options or restricted stock units. These investors & their advisors are looking at ways in which to diversify their portfolio. Often, these positions will have a low-cost basis, making them hard to get out of without incurring a substantial, taxable gain. Over time, these exposures represent concentrated holdings based on the size of the overall portfolio. Direct Indexing can provide options to diversify the portfolio.
Unique & specific investment constraints. Many investors have specific investment restrictions that prevent them from holding certain securities. These can be religious foundations & charities whose investment policy statements prevent them from holding certain assets (adult entertainment, contraception, alcohol) as well as investment bankers & legal practitioners involved in mergers & acquisitions deals where they are restricted from trading or holding certain positions.
Tax considerations. Traditional unit trust structures (ETFs & Managed Funds) provide their underlying investors with no control over capital gains from one year to the next. Direct index investors hold individual stocks, not units in a fund. This potentially allows for greater flexibility in managing capital gains.
Professionally managed, personalised portfolios for every client. Highly customised direct indexing strategies offered by Briefcase enable operational precision that off the shelf model portfolios simply cannot. Every client portfolio is unique, different & custom built.
Why have I never heard about this before?
Historically, Direct Indexing has been available only to large, institutional investors. There are many reasons behind why Direct Indexing was once reserved only for the few – prohibitive brokerage costs, time to construct a direct index portfolio & the ongoing monitoring & compliance burden made it inaccessible to the masses. Advancements in portfolio management technology, coupled with the lowering of brokerage fees have made this investing approach far more accessible.
The real power of Briefcase draws from the ability to bring together advancements in technology & state of the art portfolio construction optimisation techniques. What was once costly, laborious & inaccessible is now readily available for the modern Australian financial adviser.
These capabilities, combined with a unique & highly compelling client experience, really brings wealth management into the 21st century.
Like to learn more? Visit www.briefcase.au or email enquiries@briefcase.au for further information.
Briefcase Pty Ltd (AFSL Number 546257) does not warrant the accuracy, completeness, or correctness of any information herein.