Staying Ahead of the Game With Direct Indexing in Financial Advisory

Hockey superstar Wayne Gretzky once said his secret to success was that he skates 'to where the puck is going to be, not where it has been.' This adage works not only for sports but for running an investment practice as well.

One of the advantages of being in the financial services industry for almost 30 years is that I have witnessed a lot of innovation. When I entered the business in the early 1990s, financial advisors were mostly building their own portfolios by picking individual stocks and bonds and charging a large commission (by today's standards). Mutual funds were mostly sold as "A" shares with an upfront charge as high as 5.75%. The 1990s introduced the concept of fee-based portfolios and separately managed accounts to the mass affluent. This period also saw the launch of Exchange Traded Funds (ETFs) and index funds, spurring the popularity of passive investing among individual investors.

Looking back, I believe the financial advisors who were most willing to adapt to changing times were generally more able to set themselves apart from the crowd and experienced a higher rate of success. I can think of numerous examples over the years. The bear markets of 2000-2003 and 2008 were a very difficult time for commission-based advisors as clients were hesitant to act in the volatile markets. Over the last decade, financial advisors who neglected to add low-cost passive investments to a portion of their client's portfolios may have had to respond to concerns about cost and performance.

If you want to emulate the Great One (Gretzky's nickname) you need to think about where the puck is heading next and how you can make sure you are prepared.

A trend to keep your eye on is the emergence of direct indexing.