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The future of investing is personal — and it's already here

By Samir Vasavada

What does it say when the world’s second-largest asset manager and pioneer of index funds makes a move into direct-indexing? Is it simply another example of an established company refreshing what it offers customers or does it speak to a larger trend? 

Vanguard’s acquisition of direct-indexing company JustInvest in the Fall of 2021 cannot be viewed in isolation. When taken together with similar moves by other investment giants, it is a deafening statement on the future of investing. In the past year alone, Goldman Sachs, Morgan Stanley, BlackRock and Charles Schwab have all expanded their direct-indexing capabilities. It is clear they are jockeying to position themselves for the next generation of investing.

As the co-founder of a technology company that helps advisors build and manage custom portfolios, I welcome the industry’s growing recognition of what we’ve long believed at Vise. The days of offering investors the same old, one-size-fits-all portfolios are ending. The future of investing is personal. 

Falling costs and better technology have democratized access to hyper-personalized portfolios. Historically, building and managing personalized portfolios of single securities was only available to the select few, such as large institutional investors or high net worth individuals. It was simply too time consuming and too expensive to offer such a high degree of personalization to middle or working class investors with smaller bank balances. But now, advisors can offer hyper-personalized portfolios and sophisticated investment strategies to more investors than ever before. 

Portfolios and personal values

Changing expectations and demographics will further accelerate the shift from commoditized to personalized advice. More investors want their portfolios to align with their values and beliefs. They no longer view their portfolio as being separate to their person. A record $1.7 trillion in assets - roughly the equivalent of New York’s GDP -  are now in funds focused on environmental, social and governance issues. According to Morgan Stanley, 84% of investors want the ability to tailor their investments to their values. And more than three-quarters of investors say they would refuse to compromise on their personal beliefs when investing - even if they could make more money. 

This demand for personalization is especially strong for Millennials and Gen Z like myself. A staggering 95% of Millennials are interested in sustainable investing. One study found that one-third of Millennials often or exclusively use investments that take ESG factors into account. For younger generations, investing in a plain-vanilla mutual fund or cookie-cutter ETF is the equivalent of watching cable TV rather than Netflix. 

What does it mean for advisors?

So, what does this latest round of dealmaking actually mean for financial advisors and investors? 

If it wasn’t clear before last week, it should be clearer today that personalization is the future. 

Advisors will need to embrace new technologies which help them differentiate themselves in the short-term and simply compete in the longer-term. Those that continue to rely solely on mutual funds or ETFs will increasingly struggle against those who can offer tax-smart, value-aligned and hyper-personalized portfolios. 

For investors, there has never been a better time to access and benefit from hyper-personalized portfolios. If they haven’t already, investors should be talking to their financial advisers about whether model portfolios and ETFs remain the best option for them.

They should also be asking whether they could benefit from greater personalization, better technology and better investment strategies.

This piece originally appeared in Investment News.

May 28, 2022