Susan Quintin
As recently as five years ago, hardly anyone in the financial services industry—outside of a small group of specialized, mostly tax-focused firms—had heard of direct indexing (DI). Fast forward to 2022, and DI has risen to prominence in the index investing conversation, with its surging popularity fueling significant asset growth.
From March to June 2022, Aite-Novarica Group conducted an online DI survey, and its 21 respondents spanned the wealth industry—including wealth management firms, asset management firms, investment platform providers, and digital/robo advice providers. Three clear themes emerged from the data, which given the survey sample size is a directional representation of wealth industry DI sentiment.
#1: The wealth industry hears opportunity knocking
DI is expected to be a key growth driver in the industry, especially for wealth firms. Survey results indicated that 81% of firms have a high interest in offering DI solutions to advisors—and 76% ranked DI as a top priority over the next 12-24 months. When it comes to what wealth firms view as the best opportunities for DI adoption and distribution, 90% of survey respondents named registered investment advisors (RIAs) as the top target market.
| Ranking the Direct Indexing Opportunity | ||
|---|---|---|
| 81% of firms have a high interest in offering DI solutions to advisors |
76% of firms ranked DI as a top priority over the next 12-24 months |
90% of firms ranked RIAs as the top opportunity for DI adoption/distribution |
#2 Customization is king
DI seeks to replicate the performance of an index through purchasing the underlying shares, allowing for bespoke index solutions. This feature is of growing importance to investors, as more are prioritizing objectives such as tax efficiency and ESG considerations. For investors concerned about tax bills eroding their portfolios returns, holding individual securities directly facilitates tax loss harvesting on an index constituent level. And the rise of ESG has more investors valuing the ability to customize index allocations to meet their individual ESG requirements.
Survey findings support the growing investor demand for customization. As shown, the majority of firms surveyed cited both tax loss harvesting and ESG screens/overlays as important capabilities for managing and delivering DI solutions.
How important is it to have the following capabilities for managing and delivering direct indexing solutions? (n=21)
Source: Aite-Novarica Group - June 2022
#3: Direct indexing growth is on the brink of a surge
With rising investor demand for customization, it’s no surprise that the industry is in broad agreement that DI is undergoing significant growth—and that this growth is expected to accelerate over the next three to five years. Survey responses were consistent with this outlook, with 76% of firms reporting a high likelihood for adding DI solutions for US equity large-/mid-cap within the next five years. The survey also revealed that wealth firms are starting to look beyond large US equities for their DI offerings, targeting smaller cap equities, non-US equities, and fixed income.
To read the full report, visit FTSE Russell Research page.
What is the outlook for adding direct indexing solutions for the following asset classes/investment vehicles in he next five years? (n=21)
Source: Aite-Novarica Group - June 2022
A rosy outlook for direct indexing
If wealth industry sentiment is any indication, direct indexing has claimed an enduring place alongside ETFs and mutual funds in the index investing conversation. By one estimate, global DI assets are projected to more than quadruple over the next five years[1] —supporting survey respondents’ view that the direct indexing opportunity could be a key growth driver for the industry over the next several years.
For more details on our direct indexing survey, read the full paper Survey Report: The Direct Indexing Opportunity 2022.
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