Direct Indexing

There is a new change coming in the area of investing called Direct Indexing. What is Direct Indexing? This is where you invest in a pool of stocks that follows a particular index such as the S&P 500® or the Dow Jones Industrial Average for example. Right now, financial advisors use ETF's that invest in a multitude of different indexes. Generally, most index fund charge fees for managing the funds. Recent competitive pressures have forced a lot of these management fees to come down significantly. These management fees can range from 0.50% down to as low as 0.03%. There are some funds with management fees higher than 0.50%, but for the most part, most of the well known fund sponsors with index funds charge less than 0.50%. If you are investing in one of these ETF's, then this is the fee that you pay the fund sponsor to manage the pool of money.

Direct Indexing is going to change the investing world significantly.  Suppose your financial advisor has you invested in a portfolio of ETF's. The total management fee is based on your financial advisor's fund selections. Let's assume that your total management fee is 0.50% per year. With Direct Indexing and free trading commissions your financial advisor will be able eliminate this 0.50% fee altogether. Now, this is not something that is going to happen immediately, but it will happen. The key to this is two fold. One is zero trading costs and the other big one is the ability to buy fractional shares.

You long had the ability to buy Mutual Funds in fractional shares, but you could not buy fractional shares of ETF's. ETF's trade like a stock. You cannot buy 0.3478 shares of a stock...unless you have a brokerage firm that has the software capability to allow it. The major players like Schwab, Fidelity, TD Ameritrade, E*TRADE and others will soon be allowing you to buy fractional shares in your account, if they are not already. This fractional share issue is the key to Direct Indexing. You may have seen an ad on television for Schwab Stock Slices. This is a form of Direct Indexing, but not the full freedom that financial advisors like me prefer. We want complete freedom to choose as many stocks as we want in each client account. This is when Direct Indexing will really take off.

For taxable accounts, Individual, Joint or Trust accounts, there is a tax advantage utilizing Direct Indexing. Stocks by themselves are tax deferred. After you buy a stock and hold it, you only pay taxes if you sell it. Of course, the amount of taxes that you pay depends on the time period that you held the stock (i.e., short-term capital gain or long-term capital gain) and whether you have a profit or a loss. You can still do Direct Indexing in your IRA and Roth type accounts. There just will not be any tax advantage in doing it. However, you will save in management fees from a formerly all ETF portfolio.

In the very near future, probably in 2021, your financial advisor may come to you to discuss Direct Indexing with you. Direct Indexing will allow you to hold a portfolio of, for example, 500 stocks in fractional shares in your Individual account without having to pay an ETF management fee. This will save you somewhere between 0.03% and 0.50% or higher in fees each and every year. Your financial advisor will be fairly compensated by their normal assets-under-management fee or annual flat fee that they charge. The reason this is true is because, they have to research the 500 fractional share stocks to put into your account! This takes a lot of time and their time is valuable.

I am working on a new relationship with a firm that will be able to offer this sometime late this year or perhaps early next year. It is something that I am personally really excited about. More to come.

Let me know you I can help you today. Visit https://www.marianfs.com give me a call and/or request a Zoom Meeting via email.

New Tag LIne for Our Firm's Logo

We have updated our firm's logo with a new tag line.

The Right Answer. The Right Financial Adviser.™

We are working on a new Brochure too. I have to get my picture made first, though. :)

We hope you like our modified logo.



KYATMA Explained

KYATMA is the initials to the title of my book, Keep Your Assets Take My Advice, It is Easier to Climb Out of a Shallow Hole.

I read a lot. These are some of the things that I read weekly or monthly as they are published.

Inside Information
Investment News Magazine
Investment Advisor Magazine
Financial Advisor Magazine
Financial Planning Magazine
Futures Magazine
Registered Representative Magazine
The Wall Street Journal
Senior Market Advisor
Benefits Selling Advisor
Life Insurance Selling
The Register

My wife tells me that I am all business, but I find time to read the Bible. The Bible is God's word and the works of Jesus Christ. We all need to read it more, myself included. I also read non-business books like The Noticer by Andy Andrews. Andy has a good blog. He is an inspirational writer that can make you focus on what is most important in life. http://www.andyandrews.com/blog/

What is my point? When I walk into a room full of my professional peers, I can easily see by their questions and responses that I am far ahead of them in wisdom. In these trade magazines that I read, they are becoming more like psychology magazines than they are financial magazines.

It appears that most financial advisors have failed miserably in their duties to their clients in protecting their investment portfolios. A ton of the stories that I read now are how to keep clients after you have done a lousy job for them. Other stories talk about how to deal with the stress of losing a large chunk of revenue as a result of your bad advice. Still others discuss ways to lay people off from work, again as a result of your bad advice.

What kills me is that this is all really simple when it comes down to it. If you are a client or a financial advisor, then listen up. There are two inevitable truths when it comes to the stock market.

1. The stock market goes up.
2. The stock market goes down.

You have to invest based on both of these two facts. It is really that simple.

Most every investment mistake can be traced to either an investor or a financial advisor believing only in number one above and completely ignoring number two.

In my book, I talk about how if you put more than 20% in any one asset class, then you are putting your entire investment portfolio at risk. In addition, I discuss how if you put more than 65% in the stock market, then you are also putting your entire investment portfolio at risk. When you combine the two, like for example, holding 50% in one stock (think Bank of America or GE) and the other 50% in four of five blue chip stocks, then you are doomed to failure. This portfolio will lose money at the first sign of a recession or bear market.

You have to invest based on the known fact that the stock market will go up and also go down. In my book, I have a plan and a process that you can follow that will help you manage money. Or, you can be one of the many fools who believe that they will make a killing by picking individual stocks.

Let me show you the fallacy of picking individual stocks. Pick a stock. Any stock. Let us choose one that is selling for $30 a share right now. You buy 1000 shares of it to start. Now, when do you sell? Do you sell when it is $35? Or, $40? If $40 is better, then why not $45? If $45 is better, than why not $50 or even $60? Whatever number on the upside we choose, once it hits our target price, then are we really going to sell it at that exact moment? Do we put in a limit order? Or, do we re-evaluate? Do we become a little greedier and raise our target and let winners run? Or, do we get out while the getting is good? These are only the questions related to when the stock goes up.

Now, let us consider the downside. When do we sell on the downside? Do we sell at $25 or $26? Or, do we sell at $27, $28 or even $29 a share? When it does hit our sell target, then what? Do we immediately buy another stock? Or, do we wait until we do some research? How long do we take to do our research? A day? A week? Two weeks? A month? Where do we park the money in the meantime? What if we are suddenly in a recession? What if we are in a bull market?

These are just some of the decisions that you have to make to invest in one stock. Now, imagine that you have to make 30 or 40 independent decisions just like these on your entire portfolio. Another point that I make in my book is if I pick 30 or 40 stocks, then I have effectively made my own personal index fund. The performance of my personal index fund is going to match the performance of the stock market. You cannot pick 30 or 40 stocks and they all be winners of 50% performance of higher. Some will win. Some will lose and the end result is that you will have built your own personal index fund, like I said. More than likely, you will have done a bad job at it, too.

If you follow the principles in my book and become a KYATMA follower, then you will have a plan and process that will give you more of an opportunity for success. There is one catch, however. You have to read my book.

Thanks.

Schwab Offers No Commission Trades for RIA Clients

Schwab recently announced that for new clients of registered investment advisers (RIA's) who open an account between July 1, 2009 and December 31, 2009, they will receive commission free trades through June 30, 2010. In addition, they will reimburse any fees to transfer your account from another firm.

See this article for full details:

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090628/REG/306289971/1009/TOC&ht=

There is no disputing that Schwab is the number one custodian for registered investment advisers. They are also the leader and with this move, they are leading by example.

Of course, I have a soft spot in my heart for Schwab since I am an ex-Schwabbie. Currently, because we custody our client's accounts with Schwab Institutional, any new clients that come to our registered investment advisory firm, Marian Financial Services, Inc. can take advantage of this no commission offer.

Sweeeeeet!!