Factor-Based Portfolio Alignment for Direct Indexing
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A significant shift is occurring in the wealth-management industry as clients demand increased personalization of investment solutions and advice. This trend has created a tension between the operational efficiency of an approach driven by model portfolios and the need to satisfy the requirements of individual clients. The MSCI Similarity Score, a metric designed to measure the alignment between the behavior of a client portfolio and its corresponding model portfolio, aims to address this challenge by focusing on portfolio behavior rather than exact holdings. This shift from holdings-based comparisons to behavioral enables firms to balance individual client needs with scalable processes.
We demonstrate the practical applications and effectiveness of the MSCI Similarity Score through several examples based on a hypothetical U.S. wealth-management firm. The examples are designed to illustrate real-life situations in which the wealth manager is monitoring the alignment between the client portfolio with the optimal model portfolio. Additionally, we offer a use case that explains how the score can be applied by CIO teams responsible for overseeing large numbers of advisers and their respective client portfolios.
By adopting this factor-based, behavioral-similarity approach, wealth managers can efficiently assess and manage diverse client portfolios, while maintaining alignment with strategic models. The MSCI Similarity Score empowers firms to deliver tailored investment solutions that address the increasing demand for personalization, while supporting data-driven decision making and operational efficiency.
©2025 With Intelligence. Republished with permission from the Journal of Beta Investment Strategies, from: Dhruv Sharma and Joseph Wickremasinghe. 2025 "Factor-Based Portfolio Alignment for Direct Indexing." Journal of Beta Investment Strategies 16, no. 3 (fall).
The authors thank Raina Oberoi, who was a coauthor of a previous version of this paper.
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