How The Use of Fractional Share Technology and Direct Indexing Can Make You An Improved Investment Manager

Over the past several years, investing has become more democratized and accessible to a greater number of wealth builders. Strategies once reserved for high net worth investors—like direct indexing—are now in demand from a greater number of investors. 

In the face of this rising demand, new innovation in direct indexing has actually lowered costs. Fractional share investing is
now more commonplace than it was even two or three years ago. Advisors armed with fractional share capabilities and direct indexing tools are uncovering innovative ways of using these methodologies and serving new client segments.

But not everyone may be aware of the new investing opportunities that await. Here’s a brief review of how advisors are using this new technology, and newly available investing techniques, to provide their clients with top-notch service and support.

Fractional Shares

Fractional shares have become a popular investing method for investors unable, or unwilling, to pay for the entire share of some of the more expensive stocks in the market. It has also unlocked innovative investing techniques. 

In particular, investing using fractional shares makes it simpler for investors to spread their capital across a greater number of securities. It makes diversification easier, according to Terrance Odean, a behavioral economist at the Haas School of Business at the University of California at Berkeley, interviewed by The Washington Post.  “Fractional shares make it easier to be diversified,” he said, “so you probably don’t have a lot to lose on any one company.” The flip side, of course, is that investing a small amount of capital limits the potential upside of a client’s investments, too. 

But by lowering the barrier to investing, fractional shares introduce more investors to the stock market. Younger clients, once priced out of stock ownership because they lacked large amounts of investable assets, are now able to access markets more easily and more responsibly.

Fractional share investing also lowers the barrier to direct indexing.

Direct Indexing

Direct indexing is an investing strategy whereby an investor purchases components of an index, at appropriate weights, presumably allowing the investor’s direct indexing portfolio to reflect the index it is referencing. Some strategies call for owning all of the index’s underlying components. Others pick and choose representative components.

An advisor now has the ability to offer a portfolio with 250-300 positions to their clients through service providers like FusionIQ. Those positions, in some cases enabled by fractional share technology, are managed in a portfolio management tool.

Direct indexing can provide greater autonomy, control, and tax advantages to advisors or self-directed investors, compared to owning a mutual fund or exchange-traded fund (ETF) based on an index. The tax benefits of direct indexing, in particular, have many advisors excited to enter this “unknown territory.”

Direct indexing’s tax efficiencies are derived from the individual securities that make up the strategy. If an individual stock appreciates steeply in value, gains can be offset by tax-loss harvesting other individual securities. The tax management opportunities available to investors utilizing direct indexing are simply unavailable to others owning a fund. 

 While not necessarily dependent on fractional share investing, direct indexing is streamlined by technology. Fractional shares can make direct indexing solutions available to investors at a lower cost, because they don’t need to own an entire share of any individual security. 

FusionIQ’s Revolutionary Digital Wealth Management Experience

FusionIQ provides the tools and strategies that end-clients are demanding. Historically, direct indexing was reserved for high-net worth individuals, because owning 250-300 individual securities was so expensive. Advisory firms can now offer direct indexing through FusionIQ’s fractional share investing technology and model management tools, unlocking greater customization at a lower cost. 

By leveraging algorithmic portfolio construction, advisors using FusionIQ can even incorporate specific investing parameters into their Risk Tolerance Questionnaires, for example. Advisors can include or exclude specific securities based on client preferences or risk tolerances, established through questionnaires or documented conversations with clients. 

FusionIQ’s digital investing platform offers advisory firms multiple technologies to extend to clients. Its unique investment strategies and theme-based portfolios, including ESG offerings, are available directly to advisors to in turn provide to their own end-clients. They can also be offered by firms as a white-labeled product, suitable for self-directed investors. 

For advisors wanting both options, FusionIQ takes its offering a step further. It combines the two via its robust dual journey experience, which unlocks either or both technologies so that firms can service both self-directed investors and those opting for professional financial advice.

Interested in learning more about how our technology can work for you? Contact us for in-depth demos and more information.

John Guthery, CFA <br> Chief Investment Officer
John Guthery, CFA
Chief Investment Officer

John is a highly respected investment executive, bringing more than 27 years of experience to his role as Chief Investment Officer for FusionIQ. As CIO, John focuses on developing advisor platforms and business lines including finTAMP and Digital Model Marketplace. He also contributes to FusionIQ’s thought leadership and market analysis.

John’s extensive financial services background includes leading market research, due diligence and platform enhancements for top-tier wealth managers including LPL Financial, where he spent 19 years running product research, Park Avenue Securities, Voya Financial and WP Carey where he helped to design and manage public and private real estate funds and public BDCs. | Connect on LinkedIn

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