Last year, I wrote about direct indexing, a lesser-known investment approach that has begun to overtake both ETFs and mutual funds in investor adoption. One feature of this approach that traditional ETF or mutual fund structures do not offer is personalization.
Our current financial environment is full of fear of recession and inflation. Today’s investors of all experience levels are looking for investment strategies that not only combat market volatility, but also address their personal and financial values. Consumers are looking for personalization in most aspects of their lives. 2021 McKinsey study (opens in a new tab) found that consumers not only want personalization, but are demanding it more than ever, especially in the wake of Covid-19 and the rise of digital behavior beyond 2020.
Advisors expect more clients to want to personalize portfolios
Registered Investment Advisors (RIAs) recognize that personalizing investments is becoming increasingly important. More than half of RIAs surveyed in the Schwab 2022 Independent Advisor Outlook study (opens in a new tab) predicts that clients expect greater personalization of their investment portfolios, a trend that will be led by millennial investors.
Access to a more personalized portfolio has historically been reserved for ultra-high net worth investors (opens in a new tab), due to high account minimums and archaic technology. Today’s digital advances in financial services have made these types of offerings available to investors across the wealth spectrum, allowing them to align their portfolios with their values and financial goals.
Personalization can mean a number of things – building a portfolio around your existing investments, following a specific investment philosophy, or aligning your investments with your values.
Environmental, social and governance (ESG) investment methods in particular have made headlines in recent years, often getting a bad rap as many companies have been accused of misrepresenting their ESG performance. According to a report by the US SIF Foundation (opens in a new tab)In 2020, investors held $17.1 trillion in ESG assets, up from $12 trillion just two years earlier. ESG standards are designed to help investors screen potential investments through a socially conscious lens.
Likewise, emissions-based investing adds a finer point to the concept of ESG investing, allowing investors to maximize companies that fit specific concerns and divest from those that don’t. In this process, the investor has more control over his holdings and can personalize his portfolio to suit his particular beliefs. Issue-based investing is typically enabled through direct index or thematic ETFs.
Other personalization options are available
Thematic investing has generally grown, particularly in exchange-traded funds (ETFs). With wider acceptance, the number of options available has increased significantly. Today, an investor can find everyday options such as industry and sector funds or more esoteric choices such as funds focused on K-Pop (opens in a new tab) (Korean pop music) or companies that like Gen Z.
While not without risk, personalizing your investments can also lead to better results. One of the biggest drags on investor returns is poor investment behavior – things like selling as a reaction after the market has already fallen or waiting to invest money. Bad investment behavior and other factors can result in returns of 1.7% or more (opens in a new tab). A customized portfolio that reflects an investor’s situation and beliefs can help them stick to their investment strategy when the markets get rocky.
All of this means that with the personalization options now available to investors regardless of their financial threshold, why not make your investments work for you and your personal situation? Talk to a financial advisor about some ways to adjust your financial plan to align with your values and goals.
This article was written by our advisor, not Kiplinger’s editors, and contains opinions. You can check advisors’ records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).