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Orion Brings Low-Cost Direct Indexing to Advisors

The new tool will allow advisors to build customized SMA portfolios for their clients, and will charge a mere $50 annual fee per account.

Orion Advisor Services has officially released details on its latest project, a direct indexing investment platform for advisors dubbed “Project ASTRO” for Advisor Strategy and Tax Return Optimization, which is slated to go live on March 1.

Project ASTRO lets advisors put client money directly into indexes and investment models in customizable portfolios, bypassing the traditional asset management firms. Orion CEO Eric Clarke has called it “the most exciting thing we are working on.”

“I feel like this is the next evolution in product manufacturing or customization that’s available to advisors and clients to utilize as investment tools,” he said recently in an interview with Wealthmanagement.com.

The tool brings the benefits of separately managed accounts—for years the favored tool of advisors to wealthy clients—to the masses. (Read more about direct indexing here.)

Using direct indexing, advisors can build cheap, customizable portfolios for clients based on indexes or model portfolios, using fractional shares of stocks, automatically rebalanced, with lower transaction costs.

“This gives them the capability to do things that previously they would’ve had to outsource to a large asset management firm,” said Clarke. “Now they’ve got that capability right at their fingertips.”

And while advisors are able to outsource similar services for between 30 to 35 basis points, Project ASTRO brings the tool to advisors for an annual $50 fee per account.

“They can still mark it up, if you will, and have a nice margin on that when they’re running these portfolios for their clients, but yet still be well underneath the cost of what they traditionally pay a provider to do this for them, like a Parametric.”

What’s the benefit of direct indexing for advisors? They bring the ability to engage in tax-loss harvesting to indexed portfolios and can provide clients with cheap rules-based models that can be tweaked to accommodate a client’s legacy investments or individual mandates, while still adhering to a targeted risk profile.  

“We see demand coming from advisors that have high-dollar, non-qualified accounts that want to tax loss harvest their way through a portfolio, instead of just buying an ETF,” Clarke said.  

Orion has integrated the optimizer into its trading platform. An advisor inputs the constraints against a model portfolio or an index, and the optimizer rebuilds the portfolio against those constraints, hewing close to the original risk profile. At the end, it shows the advisor how their model compares with the proposed portfolio from a risk and diversification perspective.

Advisors can also use the tool to build stock portfolios with customized tilts. A client may want, say, the diversification of the S&P 500, but without the companies in that index that are either held in legacy assets or engaged in certain business practices. Yes, there are environmental, social and governance mutual funds and ETFs, but in that case an advisor is buying a particular manager’s  ESG filters, not the client’s, and the risk characteristics of that fund might stray from an underlying core S&P 500 index. 

Some automated investment service firms—Wealthfront being the first—already offer direct indexing to clients for tax-loss harvesting, while other wealthtech firms have similar tools for financial advisors

The benefits of direct indexing extend to the index providers at the expense of asset management firms that put those indexes into wrappers. Many see direct indexing as the next revolution in investment management, after ETFs. 

“I think that by an advisor offering this to a prospect, there’s going to be a higher degree of perceived value that the advisor’s bringing to the table,” he said. Investing into an automatically allocated basket of funds via the robos is becoming routine for even do-it-yourself investors. “But for an individual investor to do direct indexing on their own would be very difficult.”

TAGS: ETFs
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