Advisor Investment Platforms on Cusp of Major Transformation

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives

RIA investment platforms – specifically the vehicles and tools they use to manage client portfolios – are about to undergo the most profound change in a generation. With the race to zero for trading stocks, mutual funds are becoming outdated. Customized portfolios of individual stocks will be the winner.

Three emerging trends will radically transform how RIAs manage client portfolios: the elimination of trading fees; increasing demands for custom portfolios, including custom tax and ESG solutions; and the rise of index-replication technology.

Why own individual securities?

In an ideal world, investors would own a diversified portfolio of individual securities directly and not through an ETF or mutual fund. The advantages to investing in individual securities over a pooled ’40 Act product are many.

A portfolio of individual securities can be customized to reflect individual investors’ unique tastes and preferences. For example, an investor may elect to remove publicly traded gun companies or use a combination of sophisticated ESG screens to develop a highly personalized portfolio. Naturally ETFs and mutual funds don’t provide this type of flexibility.

A portfolio of individual securities allows for more surgical tax management. An investor can’t go inside his or her mutual fund or ETF holdings to harvest capital losses or to carve out capital gains to utilize as part of a gifting strategy.

A portfolio of individual securities allows investors to retain their own cost basis in each security. In contrast, mutual fund investors run the risk of paying taxes on gains earned by other investors since they “inherit” the fund’s cost basis.

Finally, by any measure, a portfolio of individual securities is more transparent than any mutual fund or ETF.