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Diving Deep into Direct Indexing and Separately Managed Accounts

Julie Willoughby and Syl Flood interview Kaitlin Hendrix and Shawn Jaberzadeh about the growing popularity of direct indexing and separately managed accounts. Kaitlin is a senior researcher and a vice president of Dimensional Fund Advisors. Shawn is also a vice president of Dimensional Fund Advisors.

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In This Episode, You’ll Hear...

0:43 – Why are Direct Indexing Solutions Trending?

Over time, the movement toward personalization has shifted from commingled vehicles into the separate account space. With direct indexing, investors directly own the securities and their own individual custodian account, and managers trade and manage investments on their behalf. Through that setup, investors can personalize around sustainability or ESG goals, or around customized tax management.

Since the end investor owns the individual securities in separately managed accounts, they can also recognize losses and offset gains within that account more broadly.

3:52 – Direct Indexing and ESG

When it comes to conversations about values, advisors can feel hesitant to bring up environmental, social, or governance (ESG) factors because these conversations can be loaded. However, many have found that they don’t have to agree with their clients’ values in order to understand their preferences and present an appropriate set of options and trade-offs. Ultimately, when the client feels heard and tailored to, that leads to a closer relationship with the financial professional.

6:10 – What Kind of Support Are Advisors Looking For?

According to Shawn, advisors need to determine whether they want their clients in the back seat, the passenger seat, or the driver’s seat. As advisors consider if separately managed accounts would be better for their clients than mutual funds or ETFs, this perspective will help them communicate with their clients and set expectations appropriately. Transparency about the trade-offs of separately managed accounts is also essential.

8:43 – Direct Indexing Tools for Advisors

At Dimensional, strategies can include thousands of holdings. To help advisors tailor these holdings for their clients, Dimensional designed a user-friendly digital interface that gives advisors the option to customize around environmental, social, governance, and country-level sector factors. Advisors can dive deeper into specific topics within each category. Dimensional’s analytical screen also shows advisors the impact of the modifications to the portfolio.

11:04 – How Are Advisors Using Dimensional?

Over 90% of accounts at Dimensional use active tax management in some flavor. Outside of tax management, about half of their accounts apply some other level of personalization, such as ESG.

In response to their clients’ request for more personalization, Dimensional is also aiming to pair a direct security strategy with the ETFs that they offer. They believe that separately managed accounts are an “and proposition” that pairs well with mutual funds and ETFs. According to Shawn, operational hurdles are the biggest barrier for advisors interested in separate accounts, so Dimensional’s solutions have been met with excitement.

16:01 – The Importance of Feedback

Dimensional values feedback from the financial professionals that they work with. This has led to expanding from investment management to providing communication support, education, and benchmarking programs for advisors. The feedback loop helps them to identify any mismatches between what they view as areas of value and what their clients view as valuable.

While some of insights that they’ve gleaned aren’t necessarily “groundbreaking,” having hard data often helps drive advisors to action.

20:49 – The SEC Rule and Exchange-Traded Funds

In response to the SEC Rule that came out in 2019, Dimensional introduced ETF versions of their strategies. Their perspective is that advisors are looking for many different types of deployment vehicles, whether it’s mutual funds, ETFs, or separately managed accounts.

As the SEC Rule levels the playing field for ETFs, Dimensional can offer its value proposition for those who feel like the ETF is the right vehicle choice for their clients.

25:05 – For Advisors, Consistency Is King

According to Shawn, training and development is a common pain point for the RIAs they work with, from smaller RIAs to mega-RIAs and everyone in between. Especially as firms are stitched together, acquisitive firms need national consistency but local deployment.

To support their clients, Dimensional is building out more conferences, workshops, and resources. This includes an effective communication framework so that every advisor in an RIA can articulate the firm’s value proposition and their personal story for why they're in the business.

26:54 – What's Next for Dimensional?

Kaitlin shared that on the research side, Dimensional is focused on bringing more solutions to advisors in a way that makes sense for their clients, in a systematic and cost-effective way. According to Shawn, Dimensional wants to pair the best investment solutions with the best client support, helping advisors offer consistent quality and scale personalization so they can better serve investors.

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