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Comparing Direct Index Providers Thumbnail

Comparing Direct Index Providers

I do Direct Indexing for my select physician clients. This is key for high income earners who are saving into taxable accounts and/or those who have sold their practices and are trying to figure out the right thing to do with the proceeds from the sale. Since there are many different Direct Index providers out there I wanted to do a quick compare/contrast on a few of them. This will not be as involved as the old compare/contrast assignments from grade school. Or maybe those were just my teachers😉 Oh, the basis here will be for a physician earning roughly $400k annually and has $1,000,000 in a taxable account. 

My Direct Indexing at Forward Thinking Wealth Management:

  • I work with an outside Direct Indexing expert to assist in running my portfolios. They have over 20 years of experience.
  • For a $1 million portfolio the cost is 0.3%. $3,000 a year.
  • Focus here is on Tax Savings and Management. We like to call it Tax Alpha. And it includes lots more than just Tax Loss Harvesting.
  • Tax Alpha in 2024 saved clients on average 360 basis points. Better known as 3.6%.
  • Again, for a $1 million portfolio this would have been Tax Alpha of $36,000 last year. I think that is a good return on investment.
  • In addition to the focus on taxes, I have the ability to focus on themes with these Direct Indexing models, such as following Sharia Law or maybe focusing on ESG companies.
  • My portfolios that represent the S&P500 do NOT hold all 500 companies. Instead, it holds roughly 150 stocks. This is key as it provides more flexibility when it comes to tax management. Hence the large Tax Alpha last year.
  • Additionally, there are numerous factors that go into my Tax Alpha, not just selling a position when it is down. Other factors include individual tax lot analysis, wider rebalancing ranges, Gain-Loss offset and more.  
  • Finally, I have the ability to build a Direct Indexing portfolio around a concentrated position you may already own, like a bunch of Apple stock. This means not having to sell all of your Apple stock first, which is a tax savings move itself. 

Wealthfront:

  • Cost is 9bps (9 basis points).
  • For a $1 million portfolio this is $900 a year.
  • For that $1 million portfolio Wealthfront will try to hold all 500 stocks in the S&P500.
  • It looks like their S&P500 Direct has been around since last year, although they have been doing Direct Indexing for just over a decade.
  • There is the ability to exclude stocks.
  • Based on the documents I am reading, it seems their Direct Index models focus solely on Tax Loss Harvesting. Additional factors I include that add up to my Tax Alpha are not readily apparent.
  • Additionally, I do not see if they have additional investment themes, like ESG.
  • Finally, it is hard to determine from their website, but I am assuming they do the Tax Loss Harvesting automatically. I can’t imagine clients have to do this themselves, but I would verify with Wealthfront.

 Vanguard:

  • Well, the Vanguard website is about as clear as mud. So, I will do my best to compare here.
  • The cost is not shown. I talked with a Vanguard rep a few years ago about their Direct Indexing and they said it was about 20bps ($2,000 on a $1 million account). I have a feeling it has come down.
  • They also mentioned it was new to Vanguard as they bought out an outside Direct Indexing provider and wrapped their offering into Vanguard. This is not unusual in my world. However, I do not know how long the outside provider has been doing Direct Indexing.
  • Looks like they have investment themes as well as the ability to include concentrated positions.
  • I cannot determine how many positions they hold for example in a S&P500 Direct Index model. It could be 100 or it could be all 500.
  • Like Wealthfront, the focus seems to be solely on tax-loss harvesting.
  • I am not sure if Vanguard allows individual (retail) clients to use their Direct Indexing directly. Their website makes me think you have to use it through a financial advisor. 

Final Thoughts:

  • Direct Indexing, done right, is a powerful tool for investors.
  • However, there are pros and cons that must be considered.
  • Some firms are more limited in their Direct Indexing model. These are typically the ones with a lower cost/entry point. You kind of get what you pay for😊
  • Direct Indexing has been around for years and has become more popular the last few years as technology has improved to the point the barrier to entry (how much money you had) has dropped.
  • Again, more providers are jumping into the Direct Indexing space (I know one who has an incredibly low entry point and their S&P500 Direct Index portfolio holds all 500 stocks, which is crazy in my mind).
  • Be sure to think through whether Direct Indexing is right for you as opposed to following a hot trend.
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