Since their early days as robo advisory custody solutions, fractional shares have democratized investing, proving to be a game-changer for the industry by allowing more investors to gain access to the stock market. Fractional shares offer an affordable way for more people to invest and diversify their portfolio.
This low-cost, direct investment in stocks has also enabled the ability to easily customize portfolios based on their values to a wider range of investors. Ease of portfolio customization is important for advisors. In 2022, Schwab’s Advisor Services Independent Advisor Outlook Study found that more than half (52%) of RIAs believe personalization of portfolios will continue to increase in importance, driven by the next generation of investors who want to see their values reflected in their investments.
Democratization, coupled with the trend toward portfolio personalization, poses a massive and underrealized opportunity. Together, they can enable investors to further connect with the brands and companies they love, while creating a value exchange between companies and consumers in ways our industry has never seen before. As more investors seek personalized investment options and firms look to deepen their relationships with their customers, fractional shares could become a significant driver of growth and innovation in the investment landscape. They can also provide greater clarity into what investors own, along with an opportunity to lower taxes.
Personalized Investments and Brand Loyalty
Values-based investing has increased in popularity among those who want to feel a greater personal connection to the companies in their portfolios—with fractional shares helping to facilitate a new level of engagement between investors and brands.
For businesses, fractional shares provide a unique avenue to connect with their consumers (or a brand’s fans) to create a value exchange that goes beyond traditional marketing strategies. This approach to investing enables businesses to tap into a new source of capital while creating stronger relationships with their customers. Companies can build loyalty, encourage long-term engagement and even turn their customers into advocates for their brand.
We already see this in the form of retailers’ loyalty and rewards. What if companies offered fractional shares for purchases? This could be an opportunity for companies to access new capital, potentially leading to more innovation and growth.
Customized Portfolios and Lower Taxes
Another way fractional shares can offer personalization is by providing advisors and their clients with greater transparency into what they own. This clarity can help them make more informed investment decisions to manage their portfolios more effectively based on their goals. One strategy that has grown in popularity as personalization has taken root in the industry is direct indexing, which enables investors to avoid the commoditized and opaque “soup can” products that are often wholesaled into wirehouse platforms. For example, an investor who is concerned about the environmental impact of fossil fuels can exclude oil and gas companies from their portfolio, creating a more sustainable investment portfolio. This path to diversification can potentially reduce risk and increase the potential for returns.
There are also the tax advantages to consider when owning fractional shares. These include tax-loss harvesting, which can help investors above an income threshold offset capital gains or income in taxable accounts. In addition, direct indexing and owning fractional shares offer other tax advantages, including capital gains management and greater control over dividend reinvestment. These controls can help investors to manage their tax liability to potentially increase their overall returns.
It's Personal
The next generation of investors thinks about investing differently from their parents and grandparents. Fractional shares make it easier for them to align their investment portfolios with their personal beliefs, gain transparency around their investments and generate tax alpha. This personal experience with investing will bring about an explosion in brand loyalty and new brand-consumer connections we haven’t seen before. Whether it’s a bank offering fractional shares for purchases at select merchants or a company like Home Depot seeking to deepen relationships with existing customers by tying purchases to company ownership, the new investment marketplace is only just beginning to take shape.
Doug Fritz, is co-founder and CEO at F2 Strategy