Last year, I wrote about it direct indexing, a lesser-known investment approach that has begun to overtake ETFs and mutual funds in investor adoption. One of the hallmarks of this approach, which traditional ETF or mutual fund structures do not offer, is customization.
Our current financial environment is rich recession fears and inflation worries Today’s investors, at all levels of experience, are looking for investment strategies that not only combat market volatility, but also address their personal and financial values. Consumers are looking for customization in most aspects of their lives. A McKinsey Study 2021 (opens in a new tab) found that consumers not only want personalization, but demand it more than ever, especially after COVID-19 and the increase in digital behaviors beyond 2020.
Advisors expect more Clients who want customization in Portfolios
Registered investment advisors (RIAs) recognize that investment customization is only becoming more important. More than half of the RIAs surveyed in Schwab 2022 Independent Advisor Outlook Study (opens in a new tab) anticipate clients to expect more customization of investment portfolios, a trend that will be driven by Millennial investors.
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Access to a more personalized portfolio has historically been designed for ultra high-net-worth investors (opens in a new tab), due to the high account minimums required and the archaic technology. Today’s digital advancements in financial services have brought these types of offerings to investors across the wealth spectrum, allowing them to align their cards with their values and financial goals.
Personalization can mean many things – building a portfolio around existing investments, following a particular investment philosophy or aligning investments with your values.
Environmental, social and governance (ESG) investments. methods in particular have made headlines in recent years, often getting a bad rap, as many companies have been accused of cheating on their ESG achievements. According to a report from the US SIF Foundation (opens in a new tab), investors held $17.1 trillion in assets selected according to ESG principles in 2020, up from $12 trillion just two years earlier. ESG standards are intended to help investors screen potential investments through a socially conscious lens.
Similarly, issue-based investing puts a finer point on the concept of ESG investing, allowing investors to overweight companies that align with specific issues and remove those that don’t. no. In the process, the investor has more control over their holdings and can customize their portfolio to match their specific views. Issue-based investing is usually enabled with a direct index or thematic ETFs.
More customization options are available
Thematic investments in general have seen increased adoption, particularly in exchange traded funds (ETFs). Along with greater adoption, there has been a significant increase in available options. Today, an investor can find work options such as sector and industry funds or more esoteric choices, such as funds focused on K-Pop (opens in a new tab) (Korean pop music) or companies that appeal to Gen Z.
Although not without risks, personalizing the investment can also lead to better results. One of the biggest drags on investor returns is poor investment behavior – things like selling as a reaction after the market has already fallen or waiting to invest money. The drag on returns from poor investment behavior and other factors can be 1.7% or more (opens in a new tab). A purpose-built portfolio that reflects an investor’s situation and views can help them maintain their investment strategy when the markets get rocky.
All this is to say that with the customization options now available to investors, no matter their financial limit, why not make your investments work for you and your personal situation? Talk to a financial advisor about some ways to tweak your financial plan in a way that is aligned with your values and goals.