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Schwab Follows Fidelity in Offering Direct Indexing to Investors


Building wealth has grown more accessible than ever thanks to declining trading costs. Many brokerage firms already offer zero-commission online and exchange-traded fund (ETF) trading. Financial giant Charles Schwab just added another weapon to its stockpile, offering one more tool for the masses.

Charles Schwab, which administers $380 billion in assets, recently announced the launch of its first direct-indexing product for retail investors. Called Schwab Personalized Indexing, the company’s newest offering aims to combine technology with commission-free trading to lower the barriers to direct indexing for investors and advisors alike.

Investors often leverage direct indexing to reduce their tax burden or implement a specialized investment strategy, enabling them to save more for retirement and build wealth faster. A qualified financial advisor can help you determine if such strategies are an appropriate option for you.

Schwab Personalized Indexing: Inside the New Product

Charles Schwab already offers several types of separately managed accounts (SMAs), which are accounts managed by professionals to pursue specific investment strategies. The new Schwab Personalized Indexing product is Schwab’s newest addition to its SMAs offerings, employing a proprietary optimization process that includes daily monitoring of client portfolios and tax management.

Direct indexing is not a new strategy. Since you cannot directly buy shares of an index, such as the S&P 500, many investors commonly attempt to replicate an index’s performance by buying mutual funds and ETFs to track it. An alternative to buying managed funds is to invest directly, buying the individual stocks of an index so your investments have similar characteristics.

However, since direct indexing is a traditionally capital-intensive strategy, it was previously limited to ultra-high-net-worth investors. Investors generally build direct-indexed portfolios to maximize after-tax returns or customize for environmental or social causes. With this new launch, Charles Schwab joins other large financial institutions in offering a lower-cost option.

Fidelity recently opened a direct indexing offering, the Fidelity Managed FidFolio, to retail investors, combining direct indexing with fractional share investing. Schwab, on the other hand, is launching its direct indexing option for wealthier investors and advisors–you’ll need $100,000 minimum to open a Schwab Personalized Indexing account versus the FidFolio which only requires $5,000 to open. Both charge 0.40% in management fees.

What Investors Need to Know

SmartAsset: Schwab Follows Fidelity in Offering Direct Indexing to Investors

Charles Schwab follows other major investment firms in offering direct indexing, but the company has chosen to market its new product to investors with more liquid assets than Fidelity’s Managed FidFolio. Schwab Personalized Indexing will launch with an account minimum of $100,000, an account size that Schwab states will still provide the opportunity for meaningful tax benefits while being more accessible to a broader base of clients.

Indeed, one of the key advantages of direct-indexing accounts is the ability to leverage certain tax strategies, such as tax-loss harvesting. If you own shares of a mutual fund or an ETF, you can only buy or sell one at a time. On the other hand, holding hundreds of individual stocks rather than shares of an index-tracking fund allows investors to harvest multiple losses from selling individual positions, thereby balancing those losses against other taxable gains. This can effectively lower a retail investor’s tax bracket if employed properly.

“The launch of Schwab Personalized Indexing marks a milestone in giving investors the power to personalize their investments to fit their unique circumstances and perspectives,” said Omar Aguilar, Chief Executive Officer and Chief Investment Officer at Schwab Asset Management, in a press release. “Each investor is different, and we are now able to…expand access to personalized solutions that will enable them to invest in ways that meet their distinct goals.”

Bottom Line

SmartAsset: Schwab Follows Fidelity in Offering Direct Indexing to Investors

Decreased costs and innovative financial products are opening more wealth-building opportunities to retail investors, and Schwab’s newest product aims to do just that. Although the sheer multitude of available products can prove confusing, the addition of yet another direct indexing option allows more individuals to benefit from investment accounts tailored to their personal financial objectives.

Wealth-Building Tips

  • Not sure what investments and strategies will help you meet your long-term goals? For a solid financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s free investment calculator to get a good estimate of how to grow your money over time.

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