In this post:

  • The Perils of Today’s Portfolio Personalization with Yesterday’s Client Diagnostics
  • Analogy: What Diagnostics Would be Needed to Get the Most Out of Personalized Shoes?
  • ESG Personalization with Next Gen Client Diagnostics

In my last post, I argued the personalization “upside” of direct indexing would be limited because of shortcomings in conventional client diagnostics (i.e., client dialogue and questionnaires).

It begs the question: What kind of diagnostics would be needed to support the full personalization promise of Direct Indexing?

I’ll argue here that the industry needs to look to the frontier of revealed preferences methods – which bring together standard economics, behavioral economics, gamification and human-centered design – to find the diagnostics that are up to the personalization task.

The Perils of Today’s Portfolio Personalization with Yesterday’s Client Diagnostics

What do these new diagnostics look like? What must they do? How should they work?

To illustrate, let’s go back to the personalized shoe example from my prior blog post. These days, you can customize your athletic shoes in minute detail.*

  • Model – e.g., is it a Kyrie 7 or Air Force 1 (these are types of Nike basketball shoes)
  • Size/shape/fit—e.g., not just a size 12, but how it molds to the unique contours of your foot and ankle
  • Innards—e.g., what kind of sole shock absorbers or instep cushioning
  • Color cosmetics—e.g., the color of the lace rings, the swoosh, embroidery, etc.
  • Pattern cosmetics—imagine anything from stock patterns to custom artwork

Imagine you were considering personalized shoes. With this many customization options, what would you build for yourself? How would you be confident it’s the option that suits you best, and gets the most value for your money?

Go try it yourself online. You’ll see how it’s easy to become overwhelmed with choices. The classic diagnostic “tool” for footwear—that foot measurement device with the slider that tells you your shoe size—would be of ZERO help to you.

Surely, this is a challenge of imagination in getting to what the wearer’s needs and preferences are. One that requires a structured approach and a set of modern diagnostic tools that go far beyond the classic foot measurement device.

Analogy: What Diagnostics Would be Needed to Get the Most Out of Personalized Shoes?

What might this look like? Let’s say Nike had in-store shoe Sherpas, equipped with the latest diagnostic tools, who could guide you to your best personalized shoe.

Here’s how the flow might go:

  1. Understand use case and outcomes.
    What are you using the shoe for? Your shoe Sherpa might just ask you this strait up. She’s trying to understand in what context you’ll wear the shoe, and what a good outcome will look like.

    • Pick-up basketball with the boys. So you need performance on the court, but the looks matter, too. Gotta keep up your social cred.

  2. Customize the shoe’s technical “performance”.
    This is hard for you to communicate to your Sherpa with enough precision. And, you may not even know what’s possible (how schooled are you in the 12 varieties of in-sole cushioning available?)

    • Your Sherpa runs a foot scan for both of your feet, to get a computerized measurement of all your foot and ankle contours.
    • Your Sherpa asks for video of you playing basketball, so she can see how you run, cut and jump.
    • She might run some live simulations to gauge how your feet and legs tend to move during common basketball motions.With the latest 3D scanning, video capture and motion tracking tech, your Sherpa can get you an ideal fit that maximizes your on-court performance (at least, as much as shoes could contribute to that…extra 3-point practice at the gym is on you).

  3. Nail the “look”.
    With the guts of the shoe all set, your Sherpa needs to help you get the look that knocks your socks off. This is literally a blank slate—it could involve any look, even including custom artwork. Some customers will just want a solid color, others will want their cousin’s boyfriend’s Hipster artwork.

    • Lots of ways your Sherpa might try to get at this, from asking you about colors and patterns you like to showing you an idea board of examples to see which look you gravitate to before getting to specifics.

Note what’s going on here. You’ve got a Sherpa who knows the shoe personalization options. And, that Sherpa has a structured approach with new-in-kind diagnostics to guide you to your uniquely personalized, dream shoes. Having come through this process, you’ll feel MUCH more confident that you’ve landed your feet in the best personalized shoes for you.

The Sherpa could not have done this with good old Q&A and the foot measurement device of yore. It took diagnostics that use the latest 3D scanning, motion capture and tracking tech to get there.

ESG Personalization with Next Generation Client Diagnostics

Now, let’s go back to ESG personalization in a direct indexing context. What might the analogous guided personalization experience look like, from an advisor’s (Sherpa’s) point of view?

  1. Understand use case and outcomes.
    What is the investor looking to accomplish with ESG investing? Is it all about investing her values? Is it reducing ESG-related risk to achieve better long-term risk-adjusted returns with retirement in mind? is it supporting innovation in solving specific ESG problems?

    • In the shoe analogy, this is equivalent to understanding how the customer will use the shoe and what a good outcome looks like

  2. Understand ESG theme preferences and conviction.
    Whether you offer personalized ESG investment by United Nations Sustainable Development Goal (SDG) or by some custom ESG taxonomy, you’d want to understand which SDGs or themes the client favors.

    As important, you’d need to know how much more they prefer one theme vs another. The only way to get this level of precision on conviction is to have the client show you through decisions they would make with their money.

    You can’t just ask the client and get an accurate, precise answer.• In the shoe analogy, this is the foot scan and live simulations of you playing basketball. It SHOWS what your needs (and preferences) are in ways that you could not possibly communicate with words alone.For most clients who are new to ESG, understanding this level of preferences will do the trick for getting the upside out of the personalization that direct indexing affords. But for some, a deeper preference dive is needed.

  3. Dive deeper (if warranted) to understand nature of desired ESG impact.
    For the more avid ESG investor, you’ll need a way to surface the areas where that investor wants to go deeper to express preferences for a more targeted ESG impact.

    • For example, the advisor might learn from step 2 that a client has a passion for climate change and nutrition themes. A good preference experience will discover that this investor would like to invest not just in companies with good ESG records in these areas, but in companies actively working to develop plant-based protein substitutes. It requires a blend of education and detection—educating the client that this kind of targeted investment is even possible, and the ability to detect the client’s conviction to do so (even in the face of a tradeoff in diversification or greater tracking error).

Happily, advancements in decision science, gamification and human centered design have given us the next generation of diagnostic tools that can do exactly this. These diagnostics are digital, quick (completed in minutes), highly engaging, and mobile-friendly.

Moreover, they dramatically reduce the need for the advisor to be the ESG expert who has to navigate the ESG conversation “minefield”. Many advisors we talk to dread these client conversations, where you can easily and unwittingly step on a value “mine” that offends the client.

If you’re looking to capture the upside of direct indexing’s personalization, we’d love to take you inside the next generation of diagnostics we’ve developed to do just that.

Be in touch at, or request a demo.