Last year, I wrote about direct indexing, a lesser-known investment method that is beginning to overtake ETFs and mutual funds in investor adoption. One of the hallmarks of this approach, which traditional ETFs or mutual fund structures do not offer, is personalization.
Our current financial situation is filled with economic fears and inflation concerns. Today’s investors, of all experience levels, are looking for investment strategies that not only counter the volatility of the markets, but also respond to their personal and financial values. Consumers are looking for personalization in most aspects of their lives. A 2021 McKinsey study (Opens in a new tab) It is known that consumers not only want personalization, but they demand it more than ever, especially after COVID-19 and the surge of digital behavior beyond 2020.
Advisors Expect More Clients to Want to Personalize Portfolios
Registered investment advisors (RIAs) recognize that investment personalization is becoming increasingly important. More than half of RIAs surveyed in Schwab’s 2022 Independent Advisor Outlook study (Opens in a new tab) expects clients to expect more personalization of investment portfolios, a trend driven by Millennial investors.
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Access to a more personalized portfolio historically taught to ultra high-net-worth investors (Opens in a new tab), due to high minimum account requirements and outdated technology. Today’s digital advances in financial services bring these types of offerings to investors across the wealth spectrum, allowing them to tailor their portfolios to their values and financial goals.
Personalization can mean many things – building a portfolio around existing investments, following a particular investment philosophy or tailoring investments to a person’s values.
Environmental, social and governance (ESG) investment practices have especially made headlines in recent years, often getting a bad rap as many companies are accused of misrepresenting their performance in ESG. According to a report from the US SIF Foundation (Opens in a new tab), investors will hold $17.1 trillion in assets selected according to ESG principles by 2020, up from $12 trillion just two years ago. ESG standards are intended to help investors screen potential investments through a socially informed 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 stay away from those that don’t. . In the process, the investor has more control over their assets and can personalize their portfolio to suit their specific views. Issues-based investing is typically driven by a direct index or thematic ETFs.
There are More Personalization Options
Thematic investments in general are seeing increased adoption, especially exchange-traded funds (ETFs). With greater adoption, there is a significant increase in the options available. Today, an investor can find day-to-day 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 risk-free, personalizing one’s 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. Dragging returns from bad investment behavior and other factors can be 1.7% or more (Opens in a new tab). A custom-built portfolio that reflects an investor’s situation and views can help one stick to their investment strategy when the markets get rocky.
All this is to say that with the personalization options now available to investors regardless of their financial threshold, why not make your investments for you and your personal situation? Talk to a financial advisor about some ways to change your financial plan in a way that aligns with your values and goals.
This article was written and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can check the SEC advisor’s records (Opens in a new tab) or with FINRA (Opens in a new tab).
