6 Steps to Tax-Efficient Onboarding of Clients With Direct Indexing
- Financial advisors often face the challenge of transitioning a new client into their practice in a tax-efficient way
- Direct indexing offers the ability to transfer existing stocks into a new portfolio without creating an immediate taxable event
- A six-step process can help advisors leverage a direct indexing strategy while onboarding clients
A challenge many financial advisors face is transitioning a new client into their practice in a tax-efficient way. Most new clients own individual securities, ETFs and mutual funds that may require adjusting or liquidating in order to create a new portfolio. Many times, the investor is reaching out for help because they want the guidance of a financial professional and their current investment portfolio may reflect a lack of industry knowledge. They may be overweight in a particular stock or industry, or they may have investments that simply underperformed their expectations. Financial advisors often grapple with the tax challenge that repositioning some of the assets into a new solution presents. That is where a direct indexing portfolio may be beneficial.
Direct indexing is a strategy that allows investors to own individual stocks in an account that closely replicates the performance of a specific index, such as the S&P 500, rather than investing in a traditional mutual fund or exchange-traded fund (ETF). This approach offers several benefits, including the ability to transfer the existing stocks into the portfolio without creating an immediate taxable event