Better than an ETF

With an index ETF, you own a piece of the ETF fund. Meaning, you don’t own the stocks that are part of the index. However, with direct indexing, you own the underlying stock. You might be wondering: why go through all this trouble? The answer is tax savings. In an index ETF, the underlying stocks cannot be traded by you. But with direct indexing, you unlock the ability to sell stocks that are down to claim a loss, temporarily buy a different one while still tracking the index, and buy back the stocks you sold later.

It’s kind of like earning points with your favorite airline, but instead of points, you earn “losses” that can be used as deductions against your tax bill. Plus, our software handles all of the individual stock trading for you without any work on your part, all while generating net new tax savings that you wouldn’t have gotten by just investing in the index. Keep in mind that you should consult your legal, tax, or financial advisor before making any financial decisions.

Frec’s brokerage firm, Frec Securities LLC, is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org.

Frec is not FDIC insured because we’re not a bank. FDIC insurance is only available for money held at FDIC-insured banks and protects deposit products like checkings and savings accounts.

Your funds are held in your name at clearing house Apex Clearing, which works with other prominent financial technology companies .This means that you can easily access your funds and even create an account with Apex to monitor your assets outside of Frec.

Our Registered Investment Adviser, Frec Advisers, is a fiduciary, meaning we are legally obligated to prioritize your interests over our own. Frec Advisers provides advisory services for our direct index strategies and Treasury services.

You can easily transfer stocks from your other brokerage to Frec without selling them during the process (with the exception of fractional shares). Meaning, you if you own 10.5 shares of AAPL, you can only transfer 10 of the 10.5 shares. The 0.5 shares can remain at the other brokerage firm or will be liquidated if you initiate a full transfer.

Note that there are two types of transfers: full transfers and partial transfers. With a full transfer, you are moving your entire portfolio to Frec (including ETFs, stocks, and other securities). With a partial one, you select which assets to transfer.

Remember, once your stocks arrive into your self-directed account on Frec, make sure to choose your direct index and select “stocks” to fund your portfolio. This is when our algorithm starts diversifying your holdings into direct indexing.

There are limitations on the type of securities that can be transferred into Frec. Learn more here.

You can withdraw from your direct indexing portfolio at any time. We will deplete the cash balance in your direct index portfolio first, then attempt to sell out of your portfolio in a tax efficient manner that avoids wash sales and sells out of lots with a loss. However, depending on the size of your portfolio and the amount you want to withdraw, you could incur capital tax gains.

You can also direct the dividends earned on stock within your direct index into cash or Treasury. You would then be able to withdraw from those accounts at any time without withdrawing from your direct indexing portfolio.

Alternatively, Frec offers a portfolio line of credit which allows you to borrow up to 70% of your portfolio value (See rates). Through Frec’s portfolio line of credit, you can get cash in your bank account as soon as the same day. Borrowing against a portfolio line of credit adds to your risks. Read more about those risks in Frec’s Margin Disclosure.

You can also transfer your portfolio out of Frec by initiating an ACAT transfer at another brokerage firm (ACAT fees will apply). We will then transfer your stocks in-kind to that firm. Note that fractional shares cannot be transferred and will be sold and transferred as cash.

Tax loss harvesting solutions offered by robo-advisors typically do ETF level tax loss harvesting, meaning the software will sell an ETF and purchase a similar but not “substantially identical” ETF to harvest losses instead of tax loss harvesting at the individual stock level. The downsides to this approach are there are less opportunities to tax loss harvest with ETFs, and the ETFs that are being sold and purchased may be very different from one another. With Frec Direct Indexing, we check for daily tax loss harvesting opportunities at the individual stock level and track a single index very closely.

Plus, common robo-advisors^* charge a 0.25% advisory fee and you have to pay ETF expense ratios on top of that (for example, the ETF SPY which tracks the S&P 500 has an expense ratio of 0.09%). At Frec, you can direct index for as little as an annual 0.10% advisory fee with no additional ETF expense ratio fees.

^* Wealthfront and Betterment are considered robo-advisors and both charge a 0.25% advisory fee as of September 21, 2023. Pricing based on terms & conditions may vary.

No, direct indexing has been around for decades and was primarily used by high net worth clients with financial advisors investing large sums of money. However, fractional and commission-free trading and modern software have made the strategy more accessible to more people. At Frec, our fees are as little as 0.10% for indices like the S&P 500 (compare this to SPY’s expense ratio of 0.09%) so that this strategy can be accessible for those who already adopt a passive investing strategy but want the benefit of tax loss harvesting. Note that direct indexing fees are AUM (assets under management) fees while ETF fees are fund fees expressed as an expense ratio.

Direct indexing is ideal for individuals who are anticipating any type of capital gain in the future like selling stock or a house for profit. The same is true if you want to customize an index by removing or adding stocks / sectors. Direct indexing is less ideal for individuals who may not pay taxes or have capital gains now or in the future they will need to offset. It’s also not ideal for certain indices that have a high turnover of stocks, or an equal market-cap weighted index, or an actively managed ETF. The tax benefits of direct indexing are not relevant for non-taxable accounts.

No. Even though Frec makes hundreds of trades on your behalf to save you on taxes, the filing process is as simple as entering a number. At the mid or end of February every year, you’ll receive a 1099 consolidated tax form from Frec. There is a tax summary on page 2 of the form that shows your total net short-term and long-term gains or losses. You enter these consolidated numbers on your tax return. That's it.

Yes, we permit those who currently work for or are affiliated with Broker Dealers or Registered Investment Advisers to open accounts at Frec. You should check with your employer about any potential trading restrictions you may be required to follow prior to opening an account with us. You will also be required to disclose your employer to us. If your employer only permits you to open managed accounts, we can restrict trading on your account for you and provide your compliance department with written documentation stating such.