Bespoke Portfolios Promise More Choice

Tax efficiency is the primary goal for many new personalized index offerings, but they come with a lot of caveats.

- KIM CLARK

Take advantage of an investing strategy only institutional or ultra-high-net-worth investors had access to in the past. Increase your investment portfolio’s aftertax return. Build your own index fund to invest in what matters to you.

It’s tempting to dismiss these marketing claims as hyperbole, except they are coming from some of the best-known and most-respected names in the investing world, including Fidelity, Schwab and even Burton Malkiel, author of the investing classic A Random Walk Down Wall Street.

The fanfare is about a controversial trend: A growing number of investment firms now offer Main Street investors a strategy called “personalized” or “direct” indexing that typically requires buying and trading stocks directly, mimicking an index.

Investment firms and advisers have long offered this strategy to the wealthy for an annual management fee that’s often more than 1% of the portfolio’s value. But now, enabled by no-commission trading, smart supercomputer programs and the ability to buy fractions of shares, at least three firms—Fidelity, Schwab and Wealthfront—are repackaging the service for cost- conscious index investors. The new offerings enable you to dabble in personalized indexing with portfolios as small as $1, for fees ranging from $4.99 a month to 0.4% a year (see the table below).