Ryan Sullivan
- Advisor Adoption: While only 21% of advisors currently use direct indexing, 48% plan to adopt it within 1-5 years, indicating future growth.
- Customisation & Efficiency: Direct indexing allows advisors to create highly tailored, low-cost portfolios for clients, addressing tax efficiency and specific needs.
- Diversification: Advisors use direct indexing to reduce concentration risk, especially with large-cap equities that dominate indexes.
A wave of opportunity
Exhibit 1. Cumulative expected use of direct indexing from respondents with some awareness of it
As investors needs become more complex, and technology and brokerage capabilities expand, advisors are looking for new and innovative ways to solve client challenges.
Tax efficiency, fractional ownership and customisation
Direct indexing combines technological innovations and competitive market dynamics to enable advisors to build customized, low cost, and efficient portfolios for their clients. In some cases these portfolios closely track major indexes, in other cases they reflect a customized version, tailored to the client need.
Fractional share ownership, a relatively recent offering by some US stock brokerages, allows investors to hold only portions of shares (rather than whole units of them). This has significantly reduced the minimum viable size of an index portfolio.
With this customization and direct ownership (through products such as separate accounts), advisors are also able to generate tax alpha for clients through tax lot harvesting and deliberate holding periods.
Direct Indexing – A key too for addressing concentration risk
Advisors who are using direct indexing with clients, are leveraging the tools listed above to create unique client solutions. When asked to identify the value add for clients, advisors answered as follows. See the chart to the left.
The recent growth in large cap equities has been driven by a specific group of companies. At times referred to as the Magnificent Seven, or the fantastic Four. These stocks have accounted for a larger and larger share of equity indexes, and therefore investor portfolios.
Advisors have been looking for an efficient way to address this recent concentration risk. It shouldn’t be a surprise that 39% of advisors currently using direct indexing with clients, are using it as a solution to increase diversification and reduce concentration risk.
As more and more advisors become familiar with direct index, and learn about the solutions it provides client, we can only expect it to grow in popularity and usage.
Your index matters—and how we deliver it
FTSE Russell works across the market with direct indexing platforms and wealth managers, delivering innovative index solutions across asset classes.
We take a consultative approach, aiming to share our experience and the market intelligence gained from supporting a host of direct indexing clients.
Underlying our offering are FTSE Russell’s transparent and well-recognized global indexes.
The index you use matters, and we are here to provide time-tested solutions that advisors and their clients can trust.
If direct indexing is part of the next stage in the evolution of the index business—and it looks like it will—we’ll be there to support the trend.
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