The financial services industry is behind on personalizing separately managed accounts, such as for tax optimization, but fintech solutions may hold the ticket to wider adoption, according to a recent report.
Direct indexing is seen by 67% of asset management firms as the most direct method to manage for tax as well as for environmental, social, and governance factors, research firm Cerulli says.
However, only 53% of managed accounts currently receive tax treatment and just 16% get systematic tax optimization, according to Cerulli’s recent report on managed accounts. In addition, only 24% take advantage of tax location strategies, the company says.
“At a time when overlay management of taxes is readily available, this low proportion represents a failure to realize the long-articulated benefits of managed accounts,” Cerulli director Tom O’Shea says in a statement.
Meanwhile, certain developments in the industry — such as a transition away from brokerage commissions, the increased use of fractional shares and improvements in the ability of algorithms to construct portfolios — mean that financial services firms can offer tax optimization to a wider range of clients, thanks to a lower price point, Cerulli says.
For the industry to be able to do that, asset managers will need to devise a “console” that lets advisors build portfolios with input from their clients and communication with portfolio managers, according to the report.
“To do this, the industry has to move to tech-enabled solutions,” O’Shea says in the statement.
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