How real people are using personalized indexing

I’m from the East Bay and my primary office is in San Francisco, California, which I do see a few days a week. However, lately I’ve been spending most of my time out on the road with our employees and clients. In fact, I’ve been to over 30 Schwab branches in the last two months.

Today I’m at the Newport Beach branch which I think has to be the nicest Schwab branch in America. They call it the Schwab Mahal—with a Pacific Ocean view and prime location near Fashion Island, you really can’t beat it. But I’m not here to hand out awards for nicest branch (though there’s a clear winner), I’m here to help educate our financial consultants on personalized indexing.

It’s one thing to read about personalized indexing or see a webinar about it, but it’s another thing to bring your clients into a strategy that feels brand new. I say “feels new” because the reality is that this isn’t a new strategy, it’s just a strategy that is new to the masses. For years it was only available to the ultra-high net worth segment of the market, so most of the US population had never heard of it. However, now we're in a position to make it accessible to more people—because that's what Schwab does—we democratize these approaches and offer them to many people.

It can take a little time and education for people to appreciate that this strategy is different than buying an index Exchange Traded Fund (ETF) or mutual fund. To answer to this, my team and I are spending a lot of one-on-one time with financial consultants to get them more knowledgeable and comfortable with this investing approach.

I joined Schwab Asset Management™ in 2016 and was brought on to be an ETF strategist. I had a lot of experience working with index ETFs and investing over my 20-year career, and I had come to the conclusion it was a good investment option for many people. But what motivated me to join Schwab wasn’t that we’re just helping index investors, it’s that we're helping everyone at every level.

I love the fact we represent Main Street, not Wall Street, and we help people like my parents. Seeing my dad open a Schwab account 30 years ago and buying an index ETF which he held for over 20 years, helped shape my personal outlook on investing.

A few years ago, when my kids became teenagers, I wanted to help them get started as investors. I reflected on what I saw in my dad decades ago and the impact it had on me. And what did I do? I taught my kids all about ETFs, helped them get their own accounts opened and invested in ETFs.

Fast-forward to today and my passion that brought me to this Schwab role has now been amplified even more by the development of personalized indexing in the industry and the potential opportunity to further help people. In my experience, the average investor has no idea what personalized or direct indexing is, so being able to help educate people and see it leading to more educated investors has been incredibly fulfilling. And that's really what I love doing.

There are two big benefits of personalized indexing I’d like to highlight. The first is simply that it's personalized, so you can make it your own. When you buy an index ETF, you have no input on what securities are in the fund. With personalized indexing, you select an index and you own shares of individual securities, some of which you can take out if they don't align with your values or investing preferences. For example, if your daughter lost a grandparent to a tobacco related illness and she doesn't want her investment money going to tobacco companies, she can simply have them excluded (limitations may apply). For people who are really concerned about global warming and don't want their money going to the oil and gas industry, they can make sure to avoid it.

There's also another way to look at personalization. Let’s say you work for a company, and you're compensated in your company stock. There's a chance you may not want to add more of it to your index fund. For example, I’ve seen times when people who work for Fortune 500 companies want to customize their personalized indexing by taking out the employer’s stock because they want to stay diversified and don’t want to get further concentrated in their company’s stock.

The second benefit is that there are some potential tax advantages to personalized indexing. Personalized indexing seeks to minimize tax liabilities in an account and potentially outperform the reference index on an after-tax basis. So, it can potentially enhance your returns. Equipping our financial consultants with the education to explain these complex details to clients has been very beneficial. We also provide a digital dashboard, where you can graphically look at your account with colored sectors instead of 430 individual stocks—which would be overwhelming and impossible. We've done our best to make the experience seem like traditional investing, while giving clients the ability to customize their experience which includes a tax strategy aimed at potentially lowering tax obligations.

Learn more about the pros and cons of personalized indexing.

Every investor has different goals and there will likely be places where you might still use index ETFs or mutual funds versus personalized direct indexing. For example, if an investor’s time horizon is shorter, then ETFs could make sense from a trading in and out of the market standpoint. But if the investor’s intent is to invest in equities, and they plan to be there for 5 to 10 years or more in a taxable account, then personalized indexing could be a potential alternative.

Ultimately, the way we need to look at personalized indexing is that it’s a new thing that advisors and investors should be aware of as a potentially attractive investing choice to consider for their own goals. And so that's our mission right now, to raise awareness for everybody so that they have the choice.