Evolution of customer experience personalisation
Segmentation of customers and tailoring customer engagement based on segment traits has been in practice for quite some time. However, with advances in technology, today it is possible to capture salient features of every interaction with the client, either in person or through automated channels. Predictive AI tools leverage this data to advise the ‘next best action’ and make the engagement with the customer a highly personalised interaction rather than a persona-based interaction. With advanced capabilities of transaction platforms, personalisation of client experience is also moving on to the next level in terms of customising products to suit personal preferences and leveraging technology.

This is becoming a differentiator in the Wealth Management (WM) business too. WM has earlier seen high personalisation for the Ultra High Networth Individuals (UHNI) and High Networth Individuals (HNI) segments, with a high level of Advisor touch. With the increasing focus on the lower end of the retail segment of the WM business and individual touch not being an option because of the numbers involved, wealth managers face the challenge of offering a personalised experience to these customers. On the other hand, studies have indicated a high degree of willingness of wealth management customers to share personal data with their wealth managers – even slightly more than their willingness to share personal information with their physician or a health worker – for a more personalised service or user experience. Significantly, the willingness is high among all age segments, too. This indicates a huge potential for more fruitful customer engagement through deep personalisation.

Personal / direct indexing
Evolution of technology has increased the ability to capture and mine data at the individual level. It has also increased computing power and predictive analytical capabilities to process this data in real-time. Enabled by all this, personalising customer experience in terms of product offerings and servicing for all the WM customer segments is gaining traction. Personalisation of WM products is taking the form of enabling a larger segment of investors to have customised portfolios rather than invest in passive products like ETFs or model portfolios. Access to personalised products such as Single Managed Accounts (SMAs) has typically been restricted to UHNIs and HNIs in the Retail segment and Institutional investors. However, advances in terms of next-generation product platforms have enabled the offering of Direct / Personalised Indexing variations of the SMAs at scale. Unlike traditional SMAs, which offer completely customisable portfolios, Direct / Personal Indexing accounts typically offer limited customisation within an overarching standard model.

The US has been the main adopter of Direct / Personal Indexing as part of portfolio strategy, which has become very popular among affluent clients. Enablement of trading in fractional shares and increased availability of zero fee trading accounts in the US have been key reasons for the increasing popularity of the product among investors.

AUM under Direct / Personal Indexing portfolios is estimated to have grown more than four-fold from about US $ 100 billion in 2015 to about US $ 450 billion as at the end 2022 & is expected to be a key investment option for investors going ahead. The last few years have seen major players in the WM business like Morgan Stanley, Blackrock, J P Morgan Chase, Vanguard, Franklin Templeton, Charles Schwab, Fidelity etc. move into Direct / Personal Indexing space, reflecting the perception on future growth potential of this product.

Why personal / direct indexing?
Benefits of a Personal Indexing portfolio to a customer are in terms of:

1. Tax Loss Harvesting
   The investor is having a profit from other sources or investment with other advisors, and a book loss on one of the stocks in the portfolio. The investor can realise losses on the individual stock, replacing it with a similar stock that does not form part of the index on which the portfolio is modelled. The loss can be offset against profit from other sources, reducing tax liability and improving net gains without a large deviation from the portfolio strategy.

2. Value Based Investing 
   Investment in an alternate stock, similar in profile to the index stock, but preferred for other criteria like higher ESG compliance score, industry/country exposure, etc.

   However, investors opting for Direct / Personal Indexing need to be actively involved in managing their investments, preferably with the help of a professional advisor. The strategy also makes sense only where there are other sources of income, the profits or losses accruing from which can be effectively managed. The WM firms benefit too, in terms of higher fees as compared to managing passive investments and also a stronger customer connect to grow their business.

Approach To enabling personal/direct indexing
A technology-driven product offering of Direct / Personal indexing products requires WM firms to acquire additional capabilities in terms of specialized technology platforms besides trained manpower. This would include automated capabilities for advisory, trading, & portfolio management for this product, integration to client systems through digital channels for understanding client’s financial position & identifying tax loss harvesting opportunities, robo advisors capable of advising on tax loss harvesting opportunities and identifying alternate investments, Robotic Process Automation, etc.

WM firms have the option of building these capabilities in-house or acquiring them inorganically. The last few years have seen multiple M&A deals in the US, with a focus on adding Direct / Personal Indexing product capabilities to their existing portfolio of offerings.

Some examples of acquisition activity with a focus on acquiring Personal / Direct Indexing capabilities are:

An example of in-house capability development for Personal / Direct Indexing has been Fidelity’s Solo FidFolio platform.

Continuing evolution of platforms with more & more computing capabilities and technologies like AI, is likely to see further innovations in product personalisation in the WM business in future.

Co-authored by Eswaran Swaminathan, and Venkatesh Padmanabhachari

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