Overview
In the past five years, direct indexing has emerged as a useful tool for advisors to personalise client portfolios in a way that addresses unique tax needs as well as asset allocation needs.
Between April 1 and May 1, 2024, FTSE Russell patterned with RIA Channel to conduct a ‘direct indexing’ survey with over 600 advisors from independent registered investment advisors, broker dealers, hybrids and asset managers, among other firm types (see the *footnote on this page for more information). We’ve collated the key findings and highlighted the opportunities for platform providers in this new report.
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The beginning of a new growth period?
Direct indexing appears poised for a new wave of growth. Almost half of survey respondents are not using it but plan to start using it in the next five years, indicating a period of strong growth ahead. The biggest increase is among advisors with up to $200 million in assets under management (AUM), although advisors from across the spectrum indicate that they increasingly expect to use direct indexing.
Expectations of accelerating growth give platform providers a window of opportunity to differentiate themselves through education, technology and strong product ranges.
How are advisors adding value with direct indexing?
Those advisors deploying direct indexing have a keen appreciation of its benefits around tax efficiencies and customisation, according to the survey. When asked what value they see it adding for clients, they give the following top four responses:
o Tax-loss harvesting: 64%
o Tax-efficient transactions: 56%
o Reducing concentration risk: 39%
o Investing in line with clients’ values, e.g., sustainability: 38%
What do advisors want from platform providers?
- As they prepare to make greater use of direct indexing, advisors are seeking platform providers with competitive costs, as well as a strong track record and a range of investment options.
- Approaching two thirds of advisors stated that if they were to offer direct indexing to their clients, cost would be a criterion for selecting a partner. That suggests advisors will be cost-sensitive if there is a new wave of growth.
- However, advisors also want partners with a strong product offering. More than half of advisors said they would look for experience / track record and investment options. Over 40% also alluded to brand and reputation.
Where are the opportunities in direct indexing?
- Providers have an opportunity to educate advisors in terms they are familiar with — in particular, they can present it within the context of separately managed accounts, one of the main wrappers that providers use to deliver direct indexing portfolios.
- Direct indexing is part of a new era of personalisation made possible by advances in platform technology, sitting alongside other innovations like fractional share trading, low trading fees and portfolio management technology.
- Returning to our ETF analogy, it took years of consistently educating the market for ETFs to become as widely adopted as they are today. While adoption from the mass market segments may result in modest AUM growth at the outset, direct indexing can offer immediate personalisation, allowing for the deployment of more sophisticated solutions as the clients’ wealth accumulates in the future. Direct indexing platforms that can lay a groundwork of education today may see the benefits in the coming years.
What should I look for in a direct indexing strategy?
- A successful direct index strategy can help to achieve a client's goal while also deepening the advisor client relationship. The index you use matters, and we are here to provide time-tested solutions that advisors and their clients can trust.
- FTSE Russell works across the market with direct indexing platforms and wealth managers, delivering innovative index solutions spanning asset classes that are increasingly in demand from direct indexing users. Our consultative approach fosters partnerships where we provide our learnings and market intelligence gained from supporting a host of direct indexing clients and constructing our transparent and well-established global indices.
- We offer recognised index solutions and market intelligence to direct indexing platforms and wealth managers. We would welcome the opportunity to discuss our findings in more detail.
*About our research
Between April 1 and May 1, 2024, FTSE Russell patterned with RIA Channel to conduct this survey, which collected the views of 631 advisors. The advisors came from independent registered investment advisors, broker dealers, hybrids and asset managers, among other firm types. Over half of respondents’ firms had an AUM of over $1 billion (51%) and most served clients with assets of over $250,000 (83%).
