Direct indexing: Poised for a fresh wave of growth

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.

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.

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%

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.

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.

In the past five years,direct indexing has skyrocketed froma curiosity to a key growth driverin the financial industry,especially for wealth firms.Direct indexing offers several advantagesover traditional investment vehicles.At the top of investors minds isa need for portfolio customization.With firms citing a need for tax loss harvesting,ESG screens overlays and more.A successful direct index strategy achievesa client's goal while alsodeepening the advisor client relationship.The key to success is determined bythe strength of the underlying index and how well itrepresents your chosen asset class And strategy advisorsshould seek an index with rules based,transparent and easy tounderstand construction methodology allowing fora reliable and consistent representation ofan asset class FTSE Russell indices are constructed,maintained, and operated to the highest standards.We employ a robust governance framework to approvenew indexes and changes to existing index methodology.Index providers can collaborate withadvisors and wealth managers to createa comprehensive universe of securities that canform the basis for a direct indexing solution.While many index providers offera starting universe for a direct indexing strategy,the most prominent ones go above and beyond.This emphasizes the importanceof evaluating an index providerholistically and assessing available resourcesand support beyond the index.Choosing FTSE Russell's indices to fuelyour investment solution will give youthe confidence to best advise your clients.Don't miss out on the unique benefitsDirect indexing can offer.To learn more about FTSERussell's direct indexing solutions.Visit direct indexing solutions, LSEG.

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%).