Transition Away From Concentrated Stocks with Direct Indexing

Manju Boraiah: Do you or your clients hold a large position in a single stock? Is your portfolio heavily concentrated in just a few companies? If so, it may be time to consider reducing concentration risk. But what's the best way to do this? Many investors are turning to direct indexing. Direct indexing empowers investors to take control of their portfolio holdings, unlock broader diversification, and benefit from robust year-round tax management. Now, let's look at an example. Let's say an investor worked at a company for many years and now holds a significant amount of its stock. While this may seem like a great problem to have, it can introduce serious concentration risk into an overall investment portfolio. This can be solved with direct indexing. A strategic transition plan can allow the investor to gradually liquidate the concentrated stock holding over time, rather than selling the entire position at once. This approach can help mitigate the overall capital gains tax burden while proceeds can then be used to fund the new direct indexing strategy through a separately managed account. Because direct indexing portfolios are customizable, the concentrated stocks can be excluded from the index strategy, enhancing diversification and reducing concentration risk. The bottom line is that the investor has reduced concentration risk, increased diversification, enhanced tax management, and gained more control over portfolio customization. We believe direct indexing isn't just a solution. It's a smart way forward for investors seeking to manage concentrated stock positions and more.