Partnership with Purpose

BRIAN O'MARA: My name is Brian O'Mara. I'm with Natixis Investment Managers. And I'm going to do a quick Natixis overview and cover our relationship with Edward Jones. And then I'm going to turn it over to Pete Klos, who is currently the Senior Vice President and Portfolio Manager for the Natixis Overlay Program. 

And he will cover the UMA and SMA product structure and how they can benefit your clients and your practice. Then we will kick it over to Greg Kanarian, who's the Vice President and our Direct Indexing Strategist, who will cover the direct indexing content and why we believe it's a smarter way to index. 

And then we are very fortunate to once again have Chris Ewens joining us from Edward Jones. Now, Chris is an Investment Advisory Consultant with the Wealth Management Enablement Group, and he will get into some of the specifics of the Edward Jones UMA. So with that, we'll go ahead and jump in. 

So now you may be familiar with Natixis as the overlay manager for your UMA program, but in addition, Natixis is part of a global financial services firm, and our affiliates are some of the most respected active investment managers in the industry, bringing diverse views to a wide range of asset classes and investment styles. 

Now, you may recognize some names, such as AIA, Loomis Sayles, Oakmark, and Vaughan Nelson as some of our managers available across all the various Edward Jones platforms. Now, whether it's mutual funds, ETFs, or SMAs, our expertise covers most major asset classes and investment styles. And in addition to our affiliated investment managers, our solutions group offers portfolio strategies, including direct indexing, which we're going to cover here today, multi-asset portfolios, portfolio analysis and construction, and overlay management. 

And you may have heard that recently, in the last few months, because it's this overlay management, that's the portion of our business that Edward Jones acquired earlier this year. And you'll hear more about that in just a few minutes. So as one of the largest multi-affiliate investment management companies in the world, we have $1.4 trillion assets under management as of year end 2024. 

We've got more than 15 specialized investment managers in the US, Europe, and Asia, and our model allows for, and actually really encourages, independent thinking among our managers. We offer centralized global distribution platform dedicated to Natixis affiliates and act as a single point of access to that affiliate lineup. But more importantly for all of you, we have an experienced and dynamic sales force dedicated to promoting all of our capabilities. And one of those capabilities, at least up until a few months ago, was our overlay management, which will be moving over to Edward Jones later this year. 

And so now I'm going to turn it over to Pete Klos, who currently manages that overlay business for Natixis. And as a result of the acquisition that I just mentioned, he will be moving over at the end of the year and become part of the Edward Jones team. And while we hate to lose Pete, it is a huge addition for your firm, and he's going to be a valuable partner for all of you going forward. 

So with that, I'm going to turn it over to Pete to cover the UMA, the role of the overlay manager, and as well as the SMA product structure. So, Pete, I'll let you take over from here. 

PETER KLOS: Yeah, and definitely excited to be joining Edward Jones. A little bittersweet. I've been with Natixis for 20-plus years, been working on the Jones UMA since we started back in 2011. So it's been a great relationship. And I kind of feel like we've been working for Jones for years already. 

But with that said, I think when it comes to the various different platforms and the various different ways that clients can get advice and clients can get invested and allocated within the Jones system, and you guys probably know this better than we do, but there's a lot of different choices in terms of the different platforms that are available. 

When I'm looking at this grid, select really stands out in a lot of ways as being a little bit more unique and different. So that's your traditional brokerage account, client-driven, commission-based, oftentimes a lot of interaction with the FA and the client to effectively pick mutual funds, ETFs, and individual securities to diversify a portfolio. When you go to the items on the right, you kind of move into that managed account space. But there are some real key differences between the various different options. And I think even within the different containers there's key differences. 

So with guided solutions, the client is really working with that advisor to build out the portfolio, but rather than in select where it's commission-based, you're moving into that fee-based environment where there's guardrails associated with the investment of the account. But I think still a lot of client interaction, kind of client first when it comes to guided solutions, when you move more into FA-managed solutions and advisor solutions, that's where you're really delegating the investment implementation to the home office. So you're in that kind of fee-based world. 

And then within advisor solutions, that's where you have a couple of different paths you can go down. So you can go down the path of mutual fund ETF portfolios. There's a massive number of clients and assets associated with those portfolios. I think for today's conversation, we're definitely going to lean into the UMA platform, which is really the one and only place where you can get separately managed accounts. 

So a huge part of the conversation today is going to be really exploring SMAs generally, and then in particular, direct indexing, which is going to be an option within the UMA platform. So if we go to the next slide. So how does that all work in UMA? And this is where some of this is going to change, I would say, a little bit come January 1st when the deal is expected to close. 

So historically, if you want to have a portfolio with multiple separately managed account strategies, if you rewind 20, 30 years ago, you would have to open up a different account, one for each individual money manager. So if you want four managers, you open up four different accounts. Those accounts are not talking to one another. 

So from a tax perspective, there can be some inefficiency. Logistically, it's painful. The client has to open up four different accounts. If you have to rebalance between sleeves, if you need to process cash flows, all very cumbersome. So this idea of an overlay manager came about really in the early 2000s. 

So rather than open up four different accounts and have four distinctly different relationships with those different managers, you open up one account and those money managers are communicating with the overlay manager. So that overlay manager function has been maintained by Natixis. So we've been the group that's kind of sitting in between the money managers and the underlying portfolio. 

Come next year, all of that implementation is going to be done inside the walls of Edward Jones by Edward Jones overlay portfolio managers, by Edward Jones traders, et cetera. So effectively, the client decides what that allocation should look like based on their risk profile. 

And then based on that allocation, the managers are communicating to the overlay manager. And then we're going into the account doing all of the trading, rebalancing, and tax management. I would say one other thing that's going to be relevant for later on in the program here is most of the managers that are available on the platform are model-based strategies. 

So those managers, they're looking to outperform an index or a particular part of the market. So it's a large cap growth manager. They're selecting a very specific mix of securities. And they're communicating that to Natixis. All clients that are using that strategy are going to own that same mixture of securities. Most of the strategies on the platform are like that. 

However, there's two use cases where I would claim there's value in more customization. One would be muni managers. So for instance, if a client is in a high tax state, like California, if they buy California State bonds, that's going to be additive for that client. So that would be one use case. 

The other use case is direct indexing, where there might be advantages from a tax perspective of owning different stocks, whether it be transitioning in or on an ongoing basis. So all of that is kind of coordinated and orchestrated by the overlay manager. So if we move on to the next slide. 

So in terms of tax management, there's a number of different techniques that we employ with the goal of for every individual client, they're kind of getting their own custom ride. And at the margin, we're really looking for opportunities to pull forward losses and push out gains. 

All these tax management techniques does not mean the client never has to pay taxes. So our goal is to minimize taxes as much as possible. But the reality is, at least especially for the last 10 years or so, markets have tended to move up. Many of the managers are active, but as much as possible, we're trying to find ways to, again, pull forward losses and defer gains as much as possible. 

So a couple of things that we do, number one, is wash sale avoidance. So because we're doing all of this in one account, we're aware of all of the buys and sells that are happening in that client account. Because of that, we're really looking to avoid wash sales as much as possible. 

There will be instances where we intentionally violate wash sales. As an example, if the client needs to pull money, we have to sell positions. But at the margin, if we can avoid wash sales, that's going to help the client, again, pull forward losses, push out gains. 

A couple other examples. We use short-term gain deferral. The example I use here, let's say the client invested in the portfolio 360 days ago and we bought NVIDIA. NVIDIA is up 100% over the last year, but the money manager decides it's time to sell NVIDIA. 

For that specific client, if it's a taxable account, if we wait five days, that short-term gain becomes long term. The tax rate associated with that effectively is 2x. So if we can defer that, in this case, just by a handful of days, again, that tax rate will become much more advantageous for the client. 

Another example would be this optimal tax slot selection. So the reality with a lot of UMA accounts is you might have multiple tax lots of the same security. That could be one money manager that's bought the security at different times. 

It could also be multiple money managers that both like the same security for maybe totally different reasons. Large cap value, large cap growth. They both like Apple. They both like Microsoft. In those scenarios, if one of the managers decides they want to sell the name, we can look across the entire portfolio and pick the best tax lot to sell. 

So in a best case scenario, maybe we even sell the position for a loss and we hold off on selling the tax lot that has a large gain. So again, at the margin looking to avoid gain realization and push that out. By far the biggest value add, though, that we tend to be able to deliver for these portfolios is via tax loss harvesting. 

And there's the tax loss harvesting differs a little bit based on the different managers that are on the platform, based on different investment vehicles. A couple just highlights here. We're doing proactive loss harvesting on any mutual fund on a quarterly basis. We're doing proactive loss harvesting on ETFs on a monthly basis. 

And then for model-based SMAs, we're doing proactive harvesting on a monthly basis. That SMA part tends to be the area where we can really add a lot of value. The reality is, when you're buying into an SMA, you're getting a diversified mix of securities. Those securities can move up or down. 

There tends to be volatility at the market level, but also at the individual security level. So inevitably, as things are moving up and down, we're looking for those opportunities on a monthly basis. We're going in. We're selling positions for a loss. We're purchasing an ETF with the proceeds. And then we're repeating that process on a monthly basis. 

So we're continuously looking for these opportunities to add value from a tax perspective. And historically, that has been an area that, again, we've been able to pull forward losses, push out gains. Later in the show, we'll go much more detailed into the direct indexing strategy, where I think some of the bells and whistles around tax management are even greater than what we can do for model-based strategies. 

So if we go to the next slide. Really quickly here, this is really showing the progress over the years really since we started as overlay manager in terms of the assets within the UMA program. If you extend this line to today, we're approaching $61 billion. So the growth has really taken off over the last couple of years. 

Some of that's market based, but a much bigger component is more and more clients getting comfortable using the UMA, using SMAs. I think what we've also tried to highlight here is the kind of broader Natixis relationship. So Natixis has been working with Jones actually from before we were selected as overlay managers. 

There's a number of mutual funds available within advisory solutions. There's been additions within the bridge builder series of mutual funds. And maybe most relevant for today, back in 2020, AIA was added as an option within the UMA, and AIA is effectively the one and only direct indexing strategy that is available within the Edward Jones UMA. 

We'll get into a lot more detail in the coming slides. Advance to the next one, and maybe just jump one more. So we've already talked a little bit about SMA usage. I think broadly speaking, the reality is, SMAs are the fastest growing part of the managed account universe. 

So SMA assets are expected to close in on $4 trillion in the next year or two. Advisor usage is really dramatically increasing. So more and more advisors are kind of opening up that first SMA account and/or really using it for more and more clients. And there's a couple of key reasons for this. 

I think tax efficiency is really one key reason. Another key reason I would say is just more logistically. So, both with Edward Jones and in other platforms, the minimums have tended to come down a bit. So when we first launched the platform back in 2011, the minimum for the UMA was $500,000. Now it's $300,000. 

I think there's talk of even reducing it further in 2026. So it's becoming more accessible to more clients. But I think the primary driver is really, by using SMAs, especially from a tax perspective, a lot of opportunities open up, and then especially when you're using it within the direct indexing space. So SMAs broadly are growing tremendously. 

But then within that kind of investment vehicle type, direct indexing assets have grown 37% per year over the past three years. We've seen that at Edward Jones, definitely. We've also seen it at other platforms. So it's a very broad-based growth that we're seeing in SMAs and direct indexing in particular. Move to the next slide, please. 

So what are some of these drivers, and why are SMAs a better mousetrap? So I think number one is this idea of personalization. So when you own a mutual fund or an ETF, you buy shares of that fund and effectively you're owning all the underlying stocks or bonds that make up that fund or ETF. There's no ability to customize or personalize. 

Whereas with an SMA you're going to actually physically own the individual securities, those individual stocks in an example of an equity SMA. So if you have a desire to add social category restrictions, individual ticker restrictions, you can do that in an SMA. Whereas in a mutual fund or an ETF you have no ability to customize and personalize. 

To me, maybe even the bigger one is tax efficiency. So with a mutual fund, you're along for the ride, along with all of those other investors that are inside of that mutual fund. With an SMA, by owning all those individual stocks, even in a really strong market, there's inevitably going to be some volatility at the individual stock level. 

And with that volatility is going to open up opportunities for us to loss harvest. Investment expertise, that's just a way of saying rather than just only being able to use mutual fund managers, there's lots of mutual funds available. There's actually a lot of money managers that don't have mutual funds, or maybe for certain strategies, they don't have a mutual fund available. 

So it kind of broadens the suite of managers that you can select from. So just more variety. And then I think also transparency. So, when you select an SMA, rather than a mutual fund where the holdings are masked and dated, with an SMA you really see exactly what you own all the time. So that increased transparency can be nice for some clients. 

Jump to the next slide. And maybe just in the interest of time, let's jump one more. So as far as SMAs, ETFs, and mutual funds, I talked about this a little bit. I think ETFs and mutual funds have a lot in common. They're both commingled vehicles. 

Unless you're actually selling shares of the fund, there's no ability to loss harvest, there's no ability to personalize. There's no ability to negotiate from a fee perspective, there's no ability to transition existing assets into a mutual fund. You have to effectively just buy with cash. So ETFs and mutual funds, a lot in common. 

There are some nuanced differences. I would claim ETFs tend to be a little bit more tax efficient because of their creation redemption process. But there's a lot of commonality there. The one really nice aspect for mutual funds and ETFs is it really opens the door for diversification at low minimums. 

So for certain sized clients, they can really get diversification at low minimums. So mutual funds and ETFs are great from that perspective, but especially as you have clients that start having hundreds of thousands of dollars, or definitely millions of dollars, you can looking at SMAs. And this is where things change a lot. 

So you're going to physically own the underlying securities rather than buying commingled funds. With that individual ownership you can personalize, you can do tax management. The fees become negotiable. So especially relative to traditional mutual funds, SMA fees tend to be lower. And then you can also transition existing holdings into SMAs. 

And this is maybe really where the direct indexing in particular is going to be really interesting in a minute or two here, where based on clients inevitably have owned maybe stocks, especially with stocks at all-time highs, they likely have embedded unrealized gains. If they're going to move those into a mutual fund, that means completely selling them out entirely to buy a mutual fund. Whereas with an SMA, depending on the strategy you're using, oftentimes we can use those individual stocks to build out a portfolio. So definitely a real key difference, especially for transition scenarios. 

And then my last slide is just really quickly what we're doing here is we're showing the average mutual fund distribution for large cap mutual funds in the US on a calendar year basis, going back to the early '90s. And just a couple of things to highlight. You'll see really effectively over the entire time period, that average experience is realizing gains. 

I think everyone here is very knowledgeable and understanding of that experience. You get a cap gain distribution at the end of the year. Especially if it's been a strong market, those distributions can be many percent, and it can be kind a bit of a surprise at the end of the year. 

But what I would like to highlight here is just effectively how that gain realization is out of your control. So for all the benefits of diversification at low minimums, which mutual funds can deliver, if we look at 2000 as an example, if you're that average client moving into the average mutual fund, if you invested at the beginning of the year, by the end of the year, your mutual fund is down 9% over the course of the year. 

Yet you're paying a cap gain distribution of around 8%. So even though your investment fell in value, inside of the mutual fund there was selling going on, whether it was manager directed trading, whether it's cash flows that are hitting all the mutual fund more broadly. So I think it just really highlights that for those benefits of diversification at low minimums, which are significant, from a tax perspective, you're kind of losing control of what's happening inside of the account. 

If you compare that to an SMA, you would have invested at the beginning of 2000. You're establishing own cost basis as of that date, and you're likely going to have real opportunities to harvest losses over the course of 2000. So that tax experience is probably going to be very, very different when you compare an SMA with a mutual fund. So with that, I will turn it over to Greg to go into a deep dive on direct indexing. 

GREG KANARIAN: All right. So what is direct indexing? The way I like to describe direct indexing, it's an equity strategy designed to match the performance of an index on a pre-tax basis, but outperform on an after tax basis. So our industry is typically built with trying to beat an index. We're not trying to do that. We're trying to match the performance of the index. 

By the way, the S&P 500 has been up 25% the last couple of years. So just matching the performance of the index has been great. But we can outperform the index after taxes. So reduce or even eliminate tax drag that comes from dividends or capital gains that you might get if you're invested in an ETF or mutual fund that distributes at the end of the year, like Pete showed us. 

We can outperform an index by taking advantage of a number of these tax management techniques, namely tax loss harvesting, deferring gains from short term to long term, avoiding the wash sale rule, and earning qualified dividends that are treated as long term capital gains taxed at a preferential lower rate. 

So in terms of the direct part of direct indexing, we own individual stocks and our own separately managed account. And the benefit of that is when there is market volatility, we can selectively sell stocks that are down that meet our threshold. So for Natixis, we're looking at short-term losses down around 4% to 5% before we harvest those, and long-term losses down 8% to 10% before we harvest those. 

That's when they become valuable to clients. So that's the direct part of direct indexing. The indexing part is we're trying to match the performance of the index. We've got 500 stocks to choose from, if you select the S&P 500 as the index you want to track. We're not going to own all 500 of them. We need to have spares available on the sidelines, because when we do sell a stock at a loss, we need a replacement available. 

This is a differentiating feature versus an active manager where we would tax loss harvest, and swap into an ETF. We're always going to own individual stocks in our portfolio because we want the volatility of those individual names. So we do it with about 150 stocks. And we're going to track the sector weights. 

And I think we know that the Magnificent Seven, the FAANG names, these have driven a lot of the performance of the index. So you need to own all 500 to have performance that looks like the index. So let's transition and we can talk about how we build our portfolios.. So let's assume the client and the advisor decide they want to track the S&P 500. So we've got 500 stocks in the S&P 500 as our investable universe. Because these are separately managed accounts, the client has some say in what they want the portfolio to look like. 

As opposed to a mutual fund or an ETF, you just select the one that you think best fits for you. In this case, we can customize. So for example, maybe the client wants to build an S&P 500 portfolio, but wants to exclude the stock of the company that they work for. Maybe that's Microsoft. So build me the S&P 500, but exclude Microsoft. 

If I were to buy an index-based mutual fund or an ETF, Microsoft says 7% weight, so I'd automatically get 7%. I already have plenty of Microsoft, so let's exclude that stock. And you guys can exclude up to 10 individual ticker names. But also maybe I don't want to own companies involved in alcohol or tobacco, so I can further narrow the universe. 

So maybe I go from 500 investable stocks down to 400. And then our algorithm will select to make sure we have about 150 names and make sure the sector exposure is in line with the S&P 500 index. And we're going to make sure that the market cap exposure looks a lot like the S&P 500 as well, or as close as we can, because we know those bigger cap names tend to drive a lot of the performance. 

And so our portfolio is now going to be built. And periodically, so for our direct indexing strategies, we are going to tax loss harvest these portfolios on a quarterly basis. So we're going to look for stocks that meet our loss threshold. We're going to sell them. 

We're going to replace them with another stock. We're not going to sit in cash during a wash sale period. We're not going to replace it with an ETF. 

We'll also trim positions that have become overweight relative to the index. And if there's a non-index holding in the portfolio, we will get rid of that as well. Maybe you fund an S&P 500 portfolio with an emerging market stock. Well, that's not going to stay in there. Or maybe a stock has fallen out of the index. 

Maybe it's a stock that went from a mid-cap index to a large cap index. At which point, it will no longer be part of the mid-cap universe. Let's go to the next slide. 

So Pete had talked a little bit about this. We are in the business of deferring gains as long as possible and harvesting losses while they exist in the portfolio. And what I'm showing you here is a graphical representation of tax rates. So we have two different types of tax rates. 

In purple you see what you'd pay for ordinary income. So this is clients' wages. But it also applies to short-term capital gains, so stocks that have been held a year or less, as well as non-qualified dividends, dividends that you receive for a stock that you've held for less than 61 days. 

Those are all taxed at high, ordinary income rates. The blue is what you'd pay for long-term capital gains. So stocks that have been held for a year and a day or longer and sold at a gain, and then qualified dividends. 

So when we are looking at portfolios, we're typically harvesting short-term losses. So if we can harvest a short-term loss, let's say we harvest $1 in losses for a client, and that client has $1 in gains and they are in the top tax bracket at 37%, our dollar of short-term losses will offset that dollar of short-term gains. The client will have 0 capital gain liability. 

And that means we just save them from pulling $0.37 out of their portfolio to pay taxes. Furthermore, this is considered an interest-free loan from the treasury. You don't have to pay taxes today. You defer to paying it in the future. And as the market appreciates or as individual positions appreciate over time, we go from a short-term capital gains in purple to long-term capital gains in blue. So this gain deferral can save clients as much as 20%. 

You can see the spread between these lines at the 35% tax bracket, that overlaps with the 15% tax bracket for a couple hundred thousand dollars of income. So just by waiting a day and being cognizant of when we're recognizing gains if we need to, we're going to save the client as much as 20% in taxes. 

So this is really valuable and shows you how we can take advantage of the tax code. Also notice, again, these are accounts where a client has some say in how it looks. So in some years clients might want to recognize gains in the portfolio. And they might want to recognize gains when they're in the 0% tax bracket. 

So that typically comes after clients have retired. They're not yet taking Social Security. They're not yet taking RMDs. And you can see that long-term capital gain bucket is at 0%. So there's some good tax advantages to having individual stocks in your own portfolio with all different cost bases to take advantage of these tax management techniques. 

So I think you guys know this, but let's just walk through this quick example of what a tax loss harvesting transaction looks like. So we buy Coca-Cola stock, we pay $10,000. Coca-Cola stock declines to $7,000. We have a $3,000 unrealized loss. 

That's going to meet our threshold. It's down 30%. We're going to sell that stock, if that's in our portfolio. 

When we do that we have just booked this valuable tax deduction. It's a tax write-off for our clients. They can use that loss to offset other gains in their portfolio. And that's super beneficial. When you're talking to clients, as soon as you say tax losses, they're going to get confused. They're not going to want to hear any more of what you have to say. 

So talk to them about tax deductions, tax write-offs, tax benefits, tax savings. Those are the types of positive terminology you want to use. Anyway, so, we have this $3,000 tax deduction we just created for our clients. But we have $7,000 in proceeds from Coke stock. So what are we going to do with that? 

We're going to reinvest that. We're going to buy another stock in the same sector. So here the easy example is Pepsi. But it could easily be Altria, Mondelez, something else in consumer staples, right? Now, whether we sold that stock or not, the portfolio is still $3,000 less. We've lost this money in the portfolio, but we've harvested this valuable tax write-off. 

And now Pepsi can do one of two things. It can go up or it can go down. If it goes down, we're going to tax loss, harvest it. We're going to repeat the process. We'll buy something else. If Pepsi stock goes up, we're not going to touch it. We're going to let that winner run. 

And again, a key differentiating feature between our strategy and the active managers, we're using Coke and Pepsi stock as tools to achieve our objective of matching the performance of the index on a pre-tax basis and outperforming on an after tax basis. We don't have an alpha thesis saying, we need to get back into Coke stock after the wash sale period. 

We just don't. We're using stocks within the index, within these sectors, to maintain broad market exposure. By owning 150 stocks, over time, we're going to have performance that looks a lot like the index. You can look at our track record back to 2002. We're within 10 basis points of the index through this process of building portfolios, with a representative set instead of all 500 stocks. Next slide. 

OK, so on the left-hand side of the page, we have an example where $500,000 of capital gains have been realized during the year. Maybe the client sold a business. Maybe they sold a stock. They had a big gain in. Maybe they sold their house and had capital gains in excess of what they could write-off, which is typically half a million dollars that they can shield. 

So they've got $500,000 in capital gains. On the right-hand side of the page, you can see that's in the top tax bracket at 20% for long-term capital gains. Their tax bill is $100,000. So as any good advisor would do, at the end of the year, they're going to look to the portfolio to harvest losses. 

With direct indexing, we're not doing it at the end of the year. We are systematically loss harvesting throughout the year. And so here you could see we have harvested $445,000 of losses. And that's very beneficial because it knocks the capital gain from 500,000 down to 55,000. Taxes on 55,000 are only $11,000, and the client has 89,000 in tax savings. 

So you want to have these losses available to you, especially in years where you have big capital gains. I didn't say this earlier, but capital losses offset capital gains. If you have excess losses, you can write off $3,000 against ordinary income. 

If you have losses in excess of that, they become a capital loss carry-forward that can use in future taxable years. So we'll get into one of the benefits of direct indexing, which is planning for a future capital gain event. If a client is going to sell a business or going to have a big capital gain in the future, these losses that are harvested today are valuable for the future as well. 

So tax loss harvesting opportunities exist in all markets. As we say, we're turning market volatility into tax write-offs, tax deductions. This is a really good example. Again, because clients, when they hear about tax losses, they get worried. Why are we losing money? But a natural result of investing in the stock market is volatility. 

So if you look at 2024 here, this is the S&P 500. You can see it was up 25%. But if you owned all 500 stocks in your portfolio and you sorted them at the end of the year from best performers to worst performers, you'd see that 35% of the names or 175 stocks were down that year. So the ones that performed well overpowered those that underperformed such that the client was 25% more wealthy, but they still had all these losers. 

With direct indexing we're not trying to lose money. We're just looking for these stocks that are down, harvesting those losses systematically throughout the year. So for example, this year, in the first quarter, we harvested about 8% of a new portfolio in losses. The market's up 14% as we speak. 

If we didn't harvest those losses when that volatility existed in March and April, we would have wasted that opportunity. All right, in the interest of time, I'll just explain this slide very quickly. If we're doing our job, the purple and green should be pretty close. We're trying to match the performance of the green, which is the S&P 500 index. 

But that blue, that negative blue in each of these years, that's showing net losses. So the point here is even in a year where the market is up, we can generate net losses for clients, taking advantage of volatility while it exists. Let's go to the next slide. 

So common use cases. Pete hit on this, a separately managed account manages a direct index is going to be more tax efficient than an index fund or ETF because these pass through benefits of losses that are harvested. We can also help transition existing accounts, so you can only fund in an ETF or mutual fund with cash. 

With direct indexing, you can fund with cash. About a third of our accounts are opened cash only, but two thirds are funded with a combination of cash and individual securities. We talked about customizations. We can exclude stocks, sectors. We can add personal values screens. And then we already talked about banking these losses to offset a future capital gain. 

So we've got a couple examples of these use cases. Case study number one, this is a client who starts a direct indexing account at the beginning of 2020. They run into a buzz saw of COVID in March of that year, harvested about $197,000 in losses, close to 19% of their million dollar portfolio. 

If you remember 2020, at the end of the year, the market was up. So they were able to use these valuable tax write-offs to offset other capital gains from selling individual stocks in ETFs, in mutual funds, or distributions that happened that year. 

So the next case study, number two, is planning for a large capital gain event. So this doctor is going to sell her business in five years. She's going to have this big tax bomb because she's built this business from scratch. So let's start harvesting these losses, creating this bank of losses as we can carry them forward. 

And you could use this for sale of a business, for selling a piece of real estate, if you're going to exercise stock options. What we like to say is for every dollar you give us, somewhere between $0.20 and $0.25, we'll be able to harvest in losses over a three to five-year period. 

If you were to look at our track record back to in 2002, by the way, we manage $25 billion in direct indexing assets. We have 35,000 accounts. We've been doing this for a long time, but our track record, we're harvesting somewhere between 5% to 6% a year in losses on average. 

Some years it could be great, like this year. A year like last year, that number's going to be less because the market went straight up. 

And then finally, we talked about transitioning assets so we can take individual stocks in kind. Let's say you are disappointed with your large cap value manager. You fire them. You've got 75 stocks that are now unmanaged. If those large cap value stocks are members of the S&P 500, we will gladly hold them for you. 

Some might be at losses, so we'd harvest those losses immediately. Some might be overweight positions, so we'd want to reduce the weights in those. So through the losses that we're harvesting systematically every quarter in our portfolio, we're able to use those losses to help transition this portfolio to look more like the index. 

And again, this is valuable because it can avoid paying capital gains and defer gains into future years. The next slide shows you the strategies that are available to you on the platform. The most have $150,000 minimums, 15 basis points. The S&P 500 is by far our most popular strategy. 

The S&P 1,500 All Cap, don't overlook that strategy. It says it's All Cap, but it's still very much a large cap focused strategy. It has about 90% in large cap stocks. So the performance looks like a lot like the S&P 500. But it has a little bit more volatility, which allows for more tax loss harvesting opportunity and typically a little bit better after tax performance historically. So that's my favorite strategy out of all of these is a 1,500. 

We talked about customization. So you can see here some business involvement screens. You can narrow the investable universe for controversial businesses, defense and weapons, climate change, international matters. And then you could exclude up to 10 individual stocks for your client. 

And differating features of our strategy. So we've got a long track record. We are aggressive in tax loss harvesting. So some managers would look at a position that's down and just trim it. 

We're going to sell out of that position. Clients are going to get the benefit from the value of that big tax write-off. We can always get back into a stock later if we need to. We run these portfolios with about 30% to 40% of the index names, which tends to be a little bit tidier on 1099s. Some other folks in the space will do it with about 300 to 400 stocks, which some clients, they just can't handle. And then we can accommodate generally lower minimums at 150,000, you saw on your platform, which makes this applicable to a lot more of your clients than if we had higher minimums. 

BRIAN O'MARA: All right, Greg, thank you very much. Appreciate that. Now we are going to transition to Chris Ewens from Edward Jones. And I know there's been a lot of questions put into the chat. And what I would ask is, Pete and Greg, if you want to take a look at those while Chris is going through the slides, we are going to do the Q&A at the end. We've seen some hands go up. We know the questions are there, we do want to address those. 

But like I said, we're lucky to have Chris with us. He's part of the wealth management enablement team at Edward Jones. If any of you have already worked with him, you know he's a wealth of knowledge and he's a great partner. And so with that, I'll turn it over to you, Chris. 

CHRIS EWENS: Well, I certainly appreciate it, Brian. And let's be honest, I mean, with everything that you guys have covered today, Greg knocked it out of the park. Pete, hey, it's Pete. We love Pete. I'm really just here as the eye candy. Let's call it what it is. 

So a lot of this stuff, we've already covered. I'm going to hit some quick points. We're going to breeze through this because I want to make sure we have time for Q&A. We only start with talking making good choices. Guys, a couple of takeaways here on making good choices. 

This needs to be a part of your conversations with your clients, not just your prospects, not just a one-time conversation. When you look across the firm, you'll see that most of our top FAs are having repeated conversations, repeatedly talking about, here are the different ways that I work with my clients. They're bringing UMA up in just about every Making Good Choices conversation, as far as taking the time to explain what it is and how you work with clients under that platform. You'd be surprised, it can be a $200,000 problem that you're talking about, and suddenly the client comes up with more money because we know the minimum on UMA currently is 300,000. 

So have those conversations. It's not about pushing clients into something. It's about making sure they know that we offer these solutions. I talked to an FA that lost an $8 million client to one of our competitors simply because the client didn't know that we had the ability to do this here at jump. So have those conversations. 

Let's skip the next slide, because we already know that UMA, unified managed accounts, that's our combination of active portfolio management, active tax management. Who is our ideal client for this? Obviously, they have to meet the minimum. They're looking for professional management. 

Tax management, that is a big part of UMA. It's not the only part of UMA. If you have clients that need customization, whether it's those social restrictions or restricting up to the 10 individual positions, UMA can be the answer for that. Being able to have individual securities. So let's talk about that for a minute. 

There were multiple questions in the chat. Would I ever use UMA for a qualified account? And the answer is, yes. There are times when it makes sense. 

If you have a client, as was described before, maybe they retired from Walmart. They own a bunch of highly appreciated Walmart stock already. The only business that you have with them is they're going to roll over their 401(k) into an IRA. They probably don't need any more Walmart stock in their IRA. So this could be an opportunity to use UMA. 

If you have somebody that feels very strongly about not investing in alcohol, tobacco, nuclear weapons, what we might consider good time back home, they don't want to invest in those things. So we need to have those restrictions, that could make sense in an IRA. I've had a nonprofit, a church, obviously, they have social category restrictions. That was a $7 million account. 

We had a corporation, $8 million account, there were two specific companies they couldn't invest in. So make sure any one of these things could be your tip off to, should we be talking about UMA? So when we look at UMA, let's go to the next slide, we have our research models. There's a $300,000, a $500,000 and $1 million dollar model. 

Why do we have those different levels? Is it because we're greedy? No, it's not. The SMAs all have individual minimums on them. So a $300,000 research model is going to have less SMAs than $1 million research model. But as we look at these research models, keeping in mind the S&P 500 direct indexing strategy from AIA is a part of some of our research models, we're looking to increase the exposure that we have to these direct indexing strategies because we very much believe in them. 

What if the restrictions that we have, the personalization that we have available in the research models doesn't go far enough? What if a client needs more? Or what if they want to use some of these other direct indexing strategies that are not available in a research model? This is where we use a custom model. 

So the question that I get quite often, what am I giving up if I'm using a custom model? Let's take a look at the next slide. You're still getting the allocation guidance from Edward Jones. You're still getting threshold rebalancing. You're still getting the active tax overlay. All of these things are still part of a custom model. 

What you're not getting is our opportunistic asset allocation. So if you're not aware of what-- or AIA. I'm getting myself thrown off. OAA is our one to three-year view of the market. So that gets reviewed quarterly. 

Sometimes we lean a little bit into US large cap. Maybe we lean away from short-term bonds, whatever that may be. If we change our guidance for OAA, we are not going to go in and make that change in your custom model, because we feel you set that portfolio up that way, you want it to be that way. You will get an alert that the firm has changed guidance on OAA. That allows you to sit down with your client and discuss, is that a change that they want to make in their portfolio? 

So with that, taking a look at the next slide, what is the allocation limits when it comes to custom models? We've made a few changes in the past year. So for SMA specifically, we did remove the 25% maximum allocation that we had. It used to be you couldn't have more than 25% of the portfolio allocated to any one SMA. So we've removed that for SMAs. 

Then if we take a look at the next slide, we can see that the guardrails for the allocation, these are going to look familiar to you guys, because this looks exactly like the guardrails for GS Flex. But specifically, let's look at all equity or let's look at the income focus. You can see, we drew the little red boxes around it. 

If you have a client that is an all equity focus, how much US large cap can they have? They can have all the way up to 100%. If they are income focused, how much can we allocate to income? All the way up to 100%. 

So what is that doing? That's opening the door that if you have a custom UMA portfolio that is all equity focused, we can go all the way up to 100% US large cap, we can do it in one single SMA. So let's use the S&P 500 direct indexing as an example. If you had a client that needed an account only covering US large cap stock, you could use that one single SMA to build the entire account. 

Now you want to make sure that overall they have the right diversification of different places. The other thing to keep in mind, as was discussed earlier, that S&P 500 direct indexing SMA has a minimum investment of $150,000. If you are using it as a single SMA UMA, we still have to hit the $300,000 minimum. So be aware of that. 

All right. What is all of this stuff cost? Well, next slide, you're going to see. It cost the same as the rest of our platform. So when we talk about the investment advisory platform, last year, we did levelized fees. It's the 1.35 plus the 0.05. Don't get confused here. 

I literally just had this question when I was presenting in Chicago yesterday. Chris, doesn't UMA still cost more because of the SMA manager fees? No. The answer is no. 

Why does it seem like that? Why do people ask that question? Because SMAs are all about transparency. You see every position you own, you also see the individual SMA manager fees right there on the statement. What do you not see? The underlying expenses for mutual funds. 

So because we show the SMA manager fees, don't let that confuse you. SMA manager fees are typically half to less than half of what a like-minded mutual fund would be, it's just we show it to you. So all right, moving right along. 

This next slide, if you want to take a picture of it, I always tell people, my group, we get paid by the web ID. So click early, click often. We love web IDs, but there's a whole bunch of different resources here that each piece can help you on your UMA journey. Obviously, our team is available as well for one-on-one coaching, all of that fun stuff. 

Next slide is going to be the final resources page. If you have operational questions, how do I actually build the proposal, how do I pull money out of it, what buttons do I click, that's Advisory Service at #39, specifically option 5, option 1. If you need training and coaching, reach out to my team. Go to WEB5080834. 

And if you need help with a transition analysis, our portfolio consultation group is available. You can see their web ID, 588297. Also, as a side note, if you are planning on using the direct indexing SMAs and you need help with transitions there, please reach out. You also have your regional Natixis wholesalers. 

They are great, they have the team available, and they have the tool available that they can help with some of that transition analysis on what specifically would be built in that direct index strategy. So, all right, I think we made it as quickly as possible, Brian. I'm going to take a step back. Where do we go from here? 

BRIAN O'MARA: That was perfect, Chris. Thank you. Way to bring it home. And I know we're at an hour, but Pete and Greg, I know you've been answering some of the questions in the chat. I'll ask if there's anything else you wanted to address. Any other questions you wanted to address specifically? 

PETER KLOS: Maybe just one or two, because I think we've got them in other questions. I think one key question we hear a lot is, can you use the UMA for nontaxable accounts? The answer is yes. I think a misconception is that we're doing tax management for non-taxable accounts. We are not doing that. So you get kind of a more pure implementation. 

Why would you use the UMA and SMAs broadly for a non-taxable account/ A couple of reasons, could be fees. SMA fees tend to be lower than mutual fund fees. So fees can be a real one. Customization, so social category restrictions, individual ticker restrictions, that can be a nice use case. 

Some clients just like the transparency of what they own. So there's a variety of different reasons why you'd use the UMA generally, or AIA specifically for non-taxable accounts. I guess I saw another question comparing and contrasting direct indexing and model-based strategies, like, why would you use AIA? One of the questions was almost like, is it less tax efficient than model-based strategies? 

The answer to that, in short, is no. AIA tends to be the most tax efficient thing that's available on the platform. And so why is that? So with model-based strategies, those managers are looking to beat an index. They are actively making changes to their portfolio. And the overlay manager is in turn executing on that. 

So some of the managers are higher turnover. Some of them are lower turnover. Some of them are in between. But the reality is those money managers are tending to realize gains through their ongoing management. With AIA, it's looking to track an index. 

So oftentimes, there's very limited reasons for them to realize gains. And instead, the strategy itself is really trying to take advantage of losses. So if there is more turnover in an AIA strategy, it tends to be, because there's loss harvesting available, and it's very aggressively going after those opportunities. So that's maybe a couple items that were top of mind. I don't know, Greg, if you had one or two others that you noticed that might be useful to touch. 

GREG KANARIAN: Yeah, Pete, do you want to just touch on, can we use direct indexing to reduce a concentrated position? So we've got a large embedded gain. And the answer is yes, but it's not as clean as maybe the advisor would like. 

PETER KLOS: Yes. So I guess I would say, so again, comparing and contrasting model-based strategies with AIA, and then the flexibility in both. So let's say you've got a model-based strategy. It has a very specific model with very specific tickers and weights for us to track. So let's say in that model, they want a 4% target to Microsoft. 

If the client is funding with Microsoft, we are going to look to hit that 4% exactly, with very little flexibility. And then let's just say also that client is funding with Apple as well. If that manager doesn't want to own Apple, we're going to sell it completely during the transition. So especially for clients with big embedded unrealized gains, I completely recommend, no matter which managers you're looking to use, get a transition analysis run to understand what would be kept and what would be sold. 

So model-based strategies, it's fairly simple. If the manager likes the name, we're going to hold the name at that weight. With AIA, it is customized for every individual client. So if that name is in the index that you're looking to track, using my example, let's say the S&P 500, Microsoft and Apple are names that are in the S&P 500 at significant weights. The algorithm is going to want to hold on to them, especially if they have large gains. 

So when clients are transitioning in, again, in my stylized example, it's going to want to hold on to portions of Microsoft and Apple. But I think the key element is there are risk controls around what AIA is going to want to hold. It's going to want to match off against the sector weights. It's going to want to protect against being over concentrated in any individual position. 

So if you were funding with 100% Microsoft, we're going to trim it down dramatically. Or I say, AIA is going to trim it down dramatically, but it is going to want to hold on to it, but at a much more reasonable weight. I think the best case scenarios for these transitions that we've seen into AIA our clients with a reasonably diversified portfolio already. There's going to be a lot of names for AIA to choose from. 

And it's going to fill in the gaps around what the client already owns. It's going to look for a loss harvesting opportunities, if there's names at a loss. So AIA tends to be the best kind of catcher's mitt for transitioning existing embedded unrealized gains. But it's going to vary based on what the client owns currently. 

CHRIS EWENS: So let's say that a different way, Pete, because you make it sound so pretty, and so nice, and so flowery. I'm going to be more straight to the point. Don't call me if you have a $500,000 portfolio and $450,000 of it is Tesla. Let's just be honest, we got to be reasonable in these situations. 

But the idea there, is if a normal research model that doesn't have the over allocation to the direct index SMA, might take on 1% to 2% of any one individual stock, if we're increasing the amount of exposure that we have to the AIA direct indexing strategies, we can bring that number up. It might go from 1% to 5% or 8%. We can't build a portfolio that's going to be 95% Tesla and work through it over time. 

Just to be clear. And I point that out because I get that question all the time. Another thing that I'll also point out, and this is what makes UMA at Jones different from a lot of different firms that have UMA platforms is when we look at the tax loss harvesting that Greg explained to us that happens inside of the direct index SMA, and then we think of the overall tax overlay that we have across the entire UMA account, most firms are not able to combine those two strategies together. If they have the direct index, it's sitting in a separate account, it doesn't flow well with the overall active tax overlay. 

Jones is one of the few firms that is able to blend those two together, not have them work against each other, and everything works seamlessly, just like our relationship with Natixis always has. So stand firm on the fact that at Jones, we do have really top-of-the-line UMA portfolios, tools. There's nobody out there that's doing better than we can. We can hold our head high on that. So all right, I'll get off my soapbox now. 

BRIAN O'MARA: It's a great point and a great way to wrap up. Greg, Pete, Chris, any last parting comments? Any other questions you might want to address? I know we've gone over an hour now. 

Look, Chris said it, you've got the Natixis wholesaling team at your disposal. You've got the IA Wholesaling team at Edward Jones at your disposal. You've got a lot of tools to help you as you continue to explore to use these tools and expand their use in your practice. 

But with that, I think we'll end here. We really appreciate everybody's time today. I appreciate all the speakers' time. And if you have any questions at all, like I said, you can reach out to IA Wholesaling, your Natixis wholesaler, we'll be happy to help you out. Thank you everyone.