Hello and thank you for joining us today for our webinar. You're going to hear from Andy Rosenberger, head of Orion's custom indexing solution and Timothy Welch on current industry trends around direct indexing and then a look into Orion's own solution for custom indexing. For a little bit about our speakers today, Andy, who's head of Orion's. Some indexing solution he overseas the management and monitoring of all investments under the offering and he and his team are focused on delivering tax optimized solutions to help financial advisors build a more customizable client portfolio to fit those individual needs of their investors. Our featured speakers Timothy Wells, he's President, CEO and founder of Nexus Strategy, which is a leading consulting firm within the wealth management industry prior to founding. The strategy, Tim was the director of Business Consulting services for Schwab Advisor Services where he led the development and marketing of practice management resources for independent advisors. Before we begin, I would like to cover just a few housekeeping items with you. Our presentation is being recorded and will be available shortly to you after we conclude. And if at first our slides don't appear to be advancing or you don't see our video feed, please try refreshing your browser and lastly, if you do have. Any questions, please use the Q&A box at the bottom of your screen and we can follow up with you. I would now like to turn it over to Tim to begin our presentation. Tim, thank you so much and it's great to be here. Looking forward to our conversation this afternoon. Why don't we start with that first slide and we'll dig right into it. You can see that we're talking about the ideas of a direct index approach for investing now. Direct indexing has clearly been around for a number of years. And I think what's interesting now is it's so hot today because of a lot of powerful technology advancements, fractional shares, no commissions anymore. All these things we're talking about, they really make it a little bit more of a approach that more and more investors can tap into. So why are we here today? Why are we talking about this? Well, I think you know the invasion of the robo advisors a decade ago, if you can believe that it was a decade ago that really had the industry thinking is. The investment process, you know, worthy of an advisor's value proposition. Clearly, we've held our hats on that all the years before. But now because of automation and cost improvements, you can do a lot of this stuff through the computer. And clearly that puts a challenge for advisors to be able to continue to differentiate their products and services, what they deliver for advisors. And the good news here is that while yes, indeed, absolutely investment is commoditized, the indexers are winning, there is still a tremendous opportunity to use something around. Direct indexing to be able to personalize portfolios and really bring value back to the advisor and how they work with this. And ultimately, we think that this whole idea of, you know, personalization at scale, being able to work one-on-one with clients, build a portfolio that is aligned with their needs, wants, desires and outcomes and it's tailored to what they want to accomplish with their financial resources, you know, really is driving this movement to create more of those personalized and bespoke portfolios. But as we know, that takes time, that's effort. That means more work. Do I really want to do that? And I think the good news here today is that we're going to have some great solutions. I'll be able to answer those questions. Absolutely. Yes, so. The next slide, please. And here's just the numbers. You know we always want to base our conclusions and our our analysis on the facts and clearly there's a ton of money out there, 103 trillion if you can believe that all in in terms of the asset management world. But while that's growing you can see that the revenues are not and that goes back to our premise that cost reductions. Automation are really taking a bite out of basis points everywhere across the value chain for investing and really that's the, the, the challenge for the industry is that yes we're growing which is fantastic, but clearly we're not scaling in terms of revenue opportunities and also profitability. And also again we talked about the robots. Yeah well they never displaced the human advisor of course not you know we're we're we're very sure of that. They still have made a dent into this world and you can see right there are three trillion from nothing a decade ago and that's being you know projected to increase to trillion. So there is something out there that really is challenging. Advisors 12 would rethink maybe re message what they're doing for clients and take it away so much from running the money as to what the value that you're delivering to the end investors. So these are opportunities for advisors to continue to differentiate. We're very bullish on human advisors as the solution for investors, particularly when it comes to money. People are funny about that. They want to talk to a person. So really now how can you differentiate yourself in a sea of sameness? And let's take a look at that on the next slide, if you wouldn't mind. And let's get into it. So direct indexing and you know Andy's expert on this and we'll ask you a few questions about the ends and outs of this stuff. But really it's the concept of holding the underlying securities instead of in a packaged product so that you can be much more efficient around taxes and managing tilts around ESG or other things that you want to do with that. And you can just see here that, you know, even the benefits of direct indexing have been around for a number of years, but only 12% of advisors are using them. So to me, that means opportunity, right? 88% of the industry is not using this tool. So you can differentiate yourself immediately by doing that and there is a lot of flow here. Look $360 billion you know in custom index certainly managed accounts. Again that's projected to grow. Our friends that truly measure this stuff every year and this is one of their hot topic areas and I think you've seen it in the press, it's very much of a hot topic. And why is that? Well really because you can really manage tax alpha, you know again we can't really control the markets. You know we see what happens there but by doing some. Really you know, you know traditional aspects of managing capital gains and exposures and workouts. There is a ton of opportunity for advisors to show tax outflow and being able to really you know bring more back to the the an investor that more than justifies their fees. You know we're talking 123 percent, Vanguard has done studies on this in terms of the value add that advisors are bringing towards this approach. So it's really substantial and also of course SG you know people want to align their values with their investments. They want to make sure that what they're comparing their financial resources. Syncs up with their personal values and the way you can do that is you can actually take a portfolio or an index or anything and take a look and and measure for those type of factors and tilt the portfolio away from things you don't want or towards the things you do like in terms of ESG. So we think there's a lot of buzz around this and that's why we started to talk about it today. So next slide please. And so, you know, along the ways we wrote a white paper and I was a, you know, proud to be part of this research that we did and we studied a number of firms and one that sticks out to me is you know, forming financial. These are some of the smartest gentlemen and women in the industry. They come from legacy institutions. They come together to create their own RA and they are doing a startup and they're focusing solely on this aspect in terms of delivering tax alpha and going to their clients with the message around direct indexing and ESG. So it's a great. Case to look at in terms of an example of firms doing this and and again these are veterans from the financial services industry who come from those legacy platforms who went independent, created their own firm and they could do it you know at the stroke of a pen right there on a custom canvas bringing all the latest and greatest aspects of this industry and this is what they are doing. So I think it's a good leading you know indicator of what the industry is seeing. If you're seeing the pros do this then you know that's got to have some points there so. So maybe I'm gonna, you know, ask any couple questions. My colleague here on the webcast here, you know, so when you think about this direct indexing, custom indexing, you know, in a simple way how do you explain it to the end investor, I mean advisors probably have a lot of questions here, but so from your point of view, how do you kind of talk about that and why this can really be a powerful tool for advisors? Thanks Tim. So it's funny you had mentioned this earlier that what is it, 88% of advisors or 8% of, yeah, 80% of advisors are not using direct indexing and what I tend to find is that. It's not because I don't believe in it or it's not because of a lack of features. It it tends to be because it's difficult to explain. It's a little bit more complicated. And so I think the biggest hurdle to the industry right now in terms of direct indexing is really an educational hurdle. It's getting people comfortable with the technology and understanding it. And so I like to think of this through really two different lenses. I like to think of this through the lens of the advisor. And then I like to think of this as if I were the advisor, how would I explain it to the client? And so if I'm talking to an advisor who doesn't really have a lot of parity with direct indexing, the way that I think about it is it's just the technology. It's just it's it's modern day technology to apply customization to a portfolio. Now typically that can be an index portfolio, hence the term direct indexing. But really that technology can sit on top of anything. And what you often see is that technology is used to create customization on ESGSRI exposures in the portfolio. Where we tend to see it a lot though is tax management. And that's because really every client who has taxable assets needs some sort of customization. Nobody invested in the same portfolio, nobody invested at the same time and nobody has the same long term outcomes. And so tax management is really specific to every client and that's where you tend to see it being used for the tax management part of a clients allocation. Now that's who. The ones of the advisor, when I think about it through the lens of a client, I actually take a take of, you know, further step back and I have a chart up here that I'd like to use and almost presented as a walk through. And so when I explained this, a walkthrough in my mind, it's four steps. The first step is you're picking your exposure. Now, again, I'm going to keep it simple. We're going to assume that we're applying it to a passive index to keep it plain vanilla, let's say the S&P 500. So the first step is you have to know what you want to put it on top of. S&P 500, very generic, tends to be probably the most common exposure that you have within the direct indexing space. Once you pick your exposure, you now unwrap the exposure. So where you might have gone to an ETF or a mutual fund in the past to get that S&P 500 exposure, now what we're saying is you're going to unwrap it and you're going to own the components of that ETF for that index fund. Most people know this is a separate account. Clients often don't know what a separate account is. So basically you're saying you're buying the individual stocks that make up that ETF's. Once you own the stocks that make up that ETF, now the third step is you can customize it. You can do what you need to, to move the levers around to build the portfolio according to what that client and their customization needs are. So it may mean that the client already owns Microsoft, so we need to exclude Microsoft from the portfolio. It may mean the client is bringing over positions in kind and they have a mutual fund or an ETF that has a technology concentration. So we need to lighten up on our technology exposure. It could be that the client has a particular passion or conviction about the climate or some sort of. Faith-based. Issue that that they might want not to own in the portfolio. So we would build around that. So it's really about using those levers that we now have our disposal to customize the portfolio. And then the 4th step in the last step is you have to manage that and whether that's through taxes harvesting that we would do on a daily basis or whether that would be through management corporate actions or whether that would be through the client taking money out of the portfolio, adding new money. There's an ongoing management that has to occur to make sure that you're staying on top of what that customization needs are and how do you continue to represent that underlying index. Exposure. Fantastic. I mean, I think that's the nuances there. So how does technology help? I mean, clearly these tools are very powerful these days. I know runs in a lot of work around this. Do I have to have all these software tools myself or or can I partner with somebody to help me get me started anyway and then maybe I can adopt the platform and go from there. What's your best thoughts for advisors going forward? Yeah, I I've been having this conversation a lot with advisors and and to some extent. The underlying technology that makes up direct indexing is becoming more and more commoditized. And not to get into the weeds too much, but when you think about how direct indexing does what it does. It's using an optimizer. It's using a mathematical algorithm to say, how do I, how do I target that portfolio as closely as I can, given that I might have tax considerations or given that I might have the SG considerations, or given that I might have a country to position and that underlying technology. I don't want to say it's a commodity, but there's a lot of different providers out there who can provide that technology. I I think where. The offering can really separate itself. It's not the underlying optimization software. It's the experience that the advisor goes through to create a portfolio and to provide that to a client. It's the reporting that they're able to use to be able to show the client what is the value add that's delivering. It's the service that's put on top of it to say I I have a team at my disposal to be able to help me run proposals or to be able to help me with taxes harvesting, or to be able to do all the things that tend to actually add up to the value add for the client. So the technology is super important. Through the lens of the experience. The underlying optimization technology is now typically something you can often buy off the shelf, although it can be fairly expensive. And So what you tend to find is that you you have firms like Orion who have built the technology, the interactive technology, on top of the optimization technology. Fantastic. And so you mentioned tax alpha and I think you have a slide there that shows that. Clearly people don't want to pay taxes and that motivates a lot of different, you know, behaviors in terms of investors and what they'll do when we're not to never sell something just because they don't want to do that. But clearly we know that there is an opportunity here. So love to hear your thoughts on that. Yeah. So again, tax management is probably 8085%, maybe even 90% for some firms. Of the flows that you tend to see into custom indexing type of portfolios. Now you do find qualified assets, you do find clients who want to have that EG short of Esri tilt, they want to build some sort of, you know, custom investment portfolio. But again, most of the time you're seeing it focus around tax management. Now when I think about tax management, I think about it through two different angles or two different ends of the spectrum. One part of tax management would be really through maybe more of a prospecting lens. It's you're working with, you're working with a client, maybe they're at a wirehouse or maybe the with another advisor. They've been invested for the past ten 1520 years. They have a lot of embedded capital gains in their portfolio, but they really want to make a change. They want to work with you. They want to bring those out, that's over. But they feel stuck. It's almost like, you know, they're just bound to where they are for the sake of complacency and because they don't want to lose a big tax bill. And so one part of tax management could be the facilitation of bringing those assets over in kind and building a portfolio around what they currently own. Think of it more tax transition, it's going to custom tax transition portfolio. For that quiet, that's a form of tax management and it's a form of tax management where you see a lot of that that value ad being up front. And then there's the other. The other end of the spectrum, the other form of tax management and that's more on the taxes harvesting side. What you tend to find is that if you're bringing over a portfolio in kind, you have a bunch of legacy positions, you have some tax servicing opportunities, but you're working with a portfolio that's really entrenched and has a lot of gains. So where Texas harvesting really becomes beneficial when you're starting with that blank sheet of paper, it's when you're starting from all cash, you can take a lot of losses in portfolio. When you look at a year like this year 2022, very volatile year, obviously a negative year. It's one of the few bright spots I think you can port point to for our client to say here's how we continue to add value. And if we look at the year like this year for a client in a very high tax bracket and a state like California, it's not unheard of to have tax alpha, right, if you think about the value of Texas. Servicing as a percentage of the portfolio in the double digits and now that's that's probably an extreme case given that you're in a very high tax bracket and there's a lot of, a lot of benefit from it. But even clients who are in a more normal bracket, you're still seeing tax alphas in this type of year in the mid single digits. So when you think about that through through the more traditional active management picking stocks or Apple forming the market. That's really difficult to do 5%, three percent, even 1% of the very challenging thing to do over a long time. With tax management it becomes, I don't recall a lot more predictable, but it's a lot more I think reliable to the to how you can add value to a client portfolio. Well, you know, these benefits are very compelling, you know, and we're starting to see a lot of activity in the industry in terms of you know, acquisitions. You know, it seems like all you have to do is put direct and indexing on your website. The next thing you know you're being acquired. Why is that? I mean is it that they're quoting the technology or they're requiring the strategies or what do you think is really driving this and what's the long term impact for the industry? Yeah, good question. I I think I think there's a couple of ways of looking at this. If you're an asset manager right now, I think you're looking at ETF that really taken over the asset management industry over the past 20 years and you're saying how did I miss out on this and you kind of look at the running on the wall of active management, which is a really tough game. You're saying how can I remain competitive in the industry and still add value to clients, but do it in a way where it's a little bit more again reliable or predictable or there's there's more meat to it. So I think from an asset manager perspective, there's this, there's this kind of realization that. If if you want to be around in the next 10 or 20 years, you really need to embrace technology customization and and adding value through just pure stock selection or how the industry has done in the past. So I think that's that's one now that's that's a fairly jaded way of looking at the industry. I do think there are a lot of benefits that that asset managers are looking at for direct indexing but obviously it's also about self survival and this is really kind of the feature of asset management. Again it's taking technology and embracing technology to build customization for clients. If I look at it through the through the eyes of the advisor. I I think if there's a parallel to it, but again it's more how do I continue to the advisor sits down with the client, they build this custom plan. You know, they'll work through all the all the different scenarios and outcomes and how they can retire. And then what they end up doing is often pulling a portfolio off the shelf of American funds or DFA funds or an ETF and saying here's your portfolio. And so you spend all this time doing the work with the plan and then they get an off the shelf offering on the portfolio. So the nice thing I think through the advisor's eyes is you can now have a continuation of the custom plan with the custom portfolio. The two now become married off. And when you're marrying up the portfolio with the plan, not only do you get the clients who who buy into that who now have kind of they understand that they have a portfolio that's both for them but but it's also just a continuation of. Of a better portfolio, it's creating the outcome that's more specific, more targeted for what they're looking to achieve. So that's the advisor. And then from the investors perspective, which is probably the most important, we've talked about some of the tax alpha and customization and other ways of adding value but. We're in a world now where. Consumers are used to customization. And and I'll give you a real quick example that most people familiar with even if you don't own a Tesla, you've probably seen going on Tesla's website and being able to build your own car. You know, you think about where we were 20 years ago, don't go into the dealer and going through the hassle of buying a car. Well, now you can just go online. You can build your own. So that's one example. Another example, which I I like to use. Some people can probably roll their eyes because I've heard this example before, which is. I have a my older son who last year for Christmas wanted his own custom pair of Nike shoes. And I didn't even know this was a thing at the time. But for Christmas he wanted his brother was getting Air Jordan, so he couldn't have Air Jordans. He wanted something else. So he went on the Nike website, was able to build his own custom pair of Nike Air Force One shoes. And it was pretty amazing that he could go through and he could customize the the souls and the tongue and the laces and the tags and all the other things that go on it. And for a 12 year old, 11 year old at the time to be able to go build their own custom pair of shoes, this is what people are expecting now. They're expecting a custom portfolio they're expecting. Technology to really be part of how you're providing investment recommendations. And so it's entering the everyday consumer landscape and it's something that we have to embrace because the standard 6040 portfolio off the shelf isn't going to, isn't going to cut it for most advisors or most clients in the future. Yeah, I love that example there of customization. I I've done the same thing and like you said 510 years ago you wouldn't even occur to you that that would be something that you would want to do or have access to. So you know, I think traditionally, you know, direct indexing has always been sort of at the Super high net worth levels because of the time it takes and how long you have to do this stuff and the people involved out hours and so forth. You know, where do you think the scale is going to be for advisors and how you know what sort of a portfolio is going to bring it down to and you know are there any resources? That you have that can help them in that process. Yeah well, it is coming down and one of the challenges in the past you already rattled off 1 which is cost fortunately cost of potentially gone to zero. And so when you think about the benefits of of custom indexing, it's again you unwrap it, you get to own the components and if you want to own let's call it 200 stocks and make up the S&P, well now you have not one opportunity tax this harvest, you get 200 opportunities the tax loss harvest. But in the past 20 years ago, that's now 200 ticket charges or 200. You would have to pay for it. That's essentially gone away. So through through through that perspective, not nearly an issue as much anymore. I think the one that the industry is still struggling with is fractional shares. And what we find is that our systems, our technology can actually deal with fractional shares, but a lot of the times the custodians can't. So the infrastructure is still catching up with ideally where the where the where the problem is able to be solved here in the future. Now that being said, what we have been able to do through technology to bring the minimums way down our solution is the $100,000 minimum, fairly fairly low, low entry point for most investors. And within that we can build not just equity portfolios but portfolios that are more rounded portfolios that have multiple asset classes. So that would include fixed income exposure in them, so that. The, the, the minimums are definitely coming down and as the as the back end kind of custodial technology catches up to the the direct investment technology, I think you'll probably see those continue to go lower. Speaking to the high net worth client, obviously there's a natural gravitation towards high net worth because of the most impacted by taxes. They're the, they're the type of investor group that would tend to have a lot of embedded capital gains in the portfolio. The type of investors who have some sort of liquidity event in the future or sale of the business. And they need to be mindful of how do I accrue as many losses today in the next few years so that when I sell my business I'll have those losses accrued that I can offset the sales by business, right. So I think there's, there's always going to be this a tilt towards the high net worth. Client, but what I would stress is I don't think just because a client is in a lower bracket doesn't mean that it's not a value add for them as well because all clients care about paying taxes, all clients care about having a portfolio that's right for their financial needs and more and more clients care about what they own in the portfolio. So I do think there's, there's a broader applicability outside of the true high network space, but I think it tends to gravitate especially now a little bit more towards those type of client. Yeah, yeah I mean I think the challenge of being a business owner and the wealth management space and advisor owner operator you know just are almost how do I you know take advantage of these great opportunities that are available to me and kind of position my business. So if you were an advisor starting out, you know how would you set up your shop, how would you message this to them the benefits to and investors and how can you know leverage tech and and platforms to you know really get there? Yeah, yeah, really good question. We've seen, we've seen a couple of firms who've done this in very successfully. You mentioned one earlier form financial. Form financial has built their, they built really their business model around the idea of providing tax efficiency to those type of clients. Their focus is really on the the the medical doctor to profession. Obviously you're catering to people who tend to have higher tax brackets, have more complexity with their, their, their, their household, their finances and so they've been very successful. And and catering to that particular group. What we've also seen as a parallel to that is advisors who have paired up with CPA firms as an example or consulting firms as example also tend to have a lot of success with this approach. Because naturally when you think about the CPA firms, it's a trusted referral for the client. The client is trusting, the CPA knows what they're doing. Obviously they're filing taxes for them, so they want to trust. And when the CPA knows that, they have a solution which maximizes tax efficiency. And is really you know focused on the the life and everyday job of what that what that CP is doing, it becomes a very good hand in hand relationship. So what we also tend to find is that those type of referral sources are good for newer advisor. And then the other thing that I would throw out there and the thing I have up on the screen here is that we do have a lot of tools to help you with having those conversations with the end client. And so when you're sitting there looking at a prospect and. They bring this statement over and it's a Morgan Stanley statement or it's a UBS statement and and you're looking to help, you're looking for help. Turn out to analyze that and think about how could you take those positions, transition them over. Well, we've built a lot of the technology which will help you run that analysis, figure out what sort of track transition is is available and then map out how we can get from where they are today to ultimately where you're trying to get them over a one year period of three-year period of five year period, whatever that would look like. In a way which makes the most amount of sense for the client so you know whether it's the front end reporting or if I bring up another screen here the the back end. And and the ongoing reinforcement of the value add that you're bringing to them, the simplicity of the story, taking something that's relatively complex but making it easy for the client to understand and and and have reported on. I think there's a tremendous way of really changing the narrative here. So it's using the technology to help help facilitate that conversation with that client. So a couple of different ways if I were getting started, how I would think about it. Awesome. That's. I think you're right. The picture tells 1000 words as they say and definitely in this arena when you're trying to communicate some of these complex concepts even to savvy financial folks, it always is helpful to have that illustration, that graphic, that proposal. So well well done there. So if I want to get started, you know, in this whole process, you know what's the my first step. I mean I I got it. I buy in. You convinced me, you know, how do I get started? Yeah, great question. The nice thing about the Orion. Platform, the Orion technology stack is that we've embedded our solution within the Orion technology stack. So setting up a new account for a client, it takes all of 20 seconds, maybe 30 seconds if you want to take your time on it, super easy to be able to put a new client to work. When you think about doing a transition, again, we're we're doing more and more to get those tools in the hands of advisors so that they're not waiting seven days like they might with some of our competitors to get some sort of analysis turned around. Think about cost, very cost competitive when it comes to a lot of the other firms out there. First step would be reach out to your either strategic consultant, your wholesaler, your external, your point of contact at Orion. And we'll start off by having a conversation of what your needs are and walk you through the solution, walk you through everything that we can do for you. We're acting in a sub advisory capacity, so. The next step would be kind of supervise your agreement. They kick off the setup process. Setup process is fairly quick. We get you established, and then once you're established you're good to go. Were $100,000 minimum, very low cost and. You know there's you're only, you're only paying for what you use. There's no setup costs or anything that would be associated with this. So I think in terms of an offering it's it's really using what we've built at Orion to continue to improve that advisor client experience overall. That's fantastic. So, you know, we're coming up to the top of the hour here. So what what's so your recommendations, you know, As for the advisors, you know, thinking about this or there are two dipping in it or, you know, do you think this is the future of investing? I mean, I I think so. I love your analogy. You got personalization, customizing everything. That's where we want to be. So I think that makes a lot of sense. Yeah, I mean, I absolutely do. I think what you're going to see. I think what you're seeing right now is that people are waking up and they're saying, hey, there's something here, it's been around for a while, but now people are actually turning to experiment. That. First up is educating yourself. Second step is really trying to trying it out, getting a sense for it. I know me personally, I really can't understand something, so I so I actually use it and play with it a little bit. So I would say the first step and we can do this even if you're not ready to sign up yet and that's sent us some, send us a case, send us an example. But it's run out of transition for you. We'll show you what it looks like, we'll present you the outcome, we'll help you really understand what, what sort of capabilities we have at our disposal. So I think that's a great next step. What I would also say is that I've talked with enough advisors to know that there's. Jeez, I don't know a dozen different ways you could potentially build a portfolio, right? And so when I think about it through the lens that or through the, the, the seat that I'm sitting in, there's not just one way to use a direct index portfolio. You know, you could use it as a core part of the allocation. You could use it as a transition solution where it goes from a big part of the allocation to a small smaller part of the allocation. You could use it as a satellite position where you're trying to manage around maybe one or two stocks the client may have concentration for. You could use it, use it as a barbell approach. Maybe you have this active strategy that you want to own in the portfolio, but it has a lot of turnover, creates a lot of gains. You need something to offset that so it could be used as the other end of that barbell of the portfolio. There's a lot of different ways you can think about using the portfolio. I've even seen clients use it as the entire. Part of the portfolio which you know when you think about some of the things you can do in terms of the asset allocation strategies, a lot of flexibility out there. So I think that the first step is really to get your arms around it, reach out to us. We can run a proposal for you, we can show you what that would look like and we're happy to walk you through any questions presented in your materials that we would have to help facilitate that. That's fantastic. I really appreciate your insight. I want to thank everyone for joining us today. Again, this is being recorded, so if you want to watch it again or forward it onto a colleague, please do and let us know of any questions and we'll get back to you through the chat. Thanks again for your time. Thanks ever. _1713999641124