Fidelity Brings DIY Direct Indexing to Traditional Investors with $4.99 Platform

Ordinary investors can soon create their own versions of the S&P 500 Index, and for the price of a large Starbucks latte.

Loyalty investments said On Tuesday, it would allow Main Street investors to create custom indices and pour money into their underlying stocks. With no account minimums and no flat $4.99 monthly fee for the service, the Boston-based mutual fund giant is targeting the portfolios of mass-market investors lured by commission-free, no-minimum trading at investment houses. brokerage such as Charles Schwab, Merrill Edge and Robinhood Markets.

The Fidelity Solo FidFolio platform, which will be rolled out in the coming weeks, aims to capitalize on the rise of personalized investing that reflects an investor’s values ​​and preferences, often according to environmental, social and governance (ESG) criteria. ). It is also a response to the growth of stock exchanges during the pandemic. According to a May 2022 academic, retail investors increased their weekly trading by almost 14% at the onset of the health crisis as COVID surged and hurt the economy. study researchers from Southwestern University of Finance and Economics in China. Investors historically trade more during economic downturns, he said.

Kyle Moynihan, a spokesperson for Fidelity, said comments from investors with Fidelity brokerage accounts on the company’s official Reddit channel “inspired” the new platform. Fidelity launched its subreddit in March 2021 to answer customer questions and gather direct feedback to influence products and services.

“Redditors are ‘the engaged investor’ and are really excited and checking their Fidelity accounts every day,” Moynihan said, adding that “we’re seeing especially among next-gen investors the desire for something customizable that matches their values/interests/etc.” Faithfulness new platformhe said, “would give them more ability to control and manage their investments.”

This, in turn, will create wealth to pass on to the next generation – Fidelity hoping to later earn the lucrative wealth management business from these people and their heirs.

Tushar Kumar, a partner at Twin Peaks Wealth Advisors in San Francisco who oversees financial planning and business development, said while the platform is a way to create a basket of investments “truly unique to an individual,” it can have pitfalls. The first is that “it requires an initial and ongoing effort on the part of the end user to look at what’s there and if they want to continue to keep it.” Another: Individuals tend to have a myopic view of the things that interest them. ”

Index this
Fidelity’s move turns a once obscure and expensive strategy used only by the wealthy into a family investment. Called direct indexing, the strategy involves selecting dozens or more stocks with one or more common themes, then weighting them in an “index” based on their price, market capitalization or other factors. The investor then buys shares for an amount corresponding to their weighting in the index. This direct ownership contrasts with securities traded on an exchange and mutual fundin which the investor holds shares of the fund, not its underlying shares.

Josh Krugman, Fidelity’s product area manager for Solo FidFolios, said the service “is for the most committed investor, the investor who already manages their money on their own.”

Wall Street institutions from Goldman Sachs and Morgan Stanley to UBS and BlackRock have rushed to exploit the direct indexing boom in recent years with a land grab for fintech and traditional players specializing in the technique. Since an investor can also trade their positions, direct indexing creates opportunities for improved tax efficiency that other types of funds lack.

Like a Build-a-Bear workshop, Fidelity will allow investors to design an index from scratch or choose from more than a dozen thematic portfolios, including fintech, clean energy and cybersecurity. What might be called “it’s all up to me” investing requires work and knowledge that not all ordinary investors have. After all, there’s a reason money managers get paid so well.

The fund giant, which also manages company pension plans, was once synonymous with actively managed funds and star stock pickers like Peter Lynch. Now he’s offering Main Street investors a chance to do like him. Last April, the company launched Fidelity Managed FidFolios, a one-of-a-kind personalized indexing service for high net worth customers with separately managed accounts, setting minimums at $5,000 and initial spend at 0.40% – well above those of a low cost exchange. – traded funds.

Before the appearance of this personalized service, most banks and brokerages on Wall Street needed investments minimal $50,000 to $300,000 for separately managed accounts, which are typically sold through financial advisors. Fidelity is asking for $250,000, which includes the cost of a financial advisor.

Both of Fidelity’s direct indexing options use split trading, which is when an investor buys only part of a stock. Krugman said that for customers with a managed account, “the index is managed for you” after it’s created, while for solo accounts, “you manage it yourself.” Still, he said, solo accounts “don’t require you to actively manage and trade on a day-to-day basis.”

Direct indexing through a separately managed account is often profitable thanks to tax-loss harvest Opportunities. It is when an investor sells a stock, fund or other asset that has declined and places the proceeds in another asset. The investor uses the capital loss from the sale to offset taxable gains on other investments. Losses can reduce taxable capital gains and offset up to $3,000 of ordinary income, with any excess amount available to reduce taxes in future years.

Cerulli Associates said last August that direct indexing would grow 12% annually over the next five years, outpacing mutual funds, ETFs and separately managed accounts not using the technique. Last March, the research firm found more than half of high net worth advisors were unaware of direct indexing, with broker-dealers three times more likely to be. Fidelity customers with separately managed accounts have more than $33 billion in direct indexing assets.

Krugman said of the new service, “We think there’s a big chunk of engaged investors and do-it-yourself investors for whom this is appropriate.”