- 79% of advisors* are not using direct indexing, but 48% plan to start in the next 1-5 years
- Educational gaps remain as less than half of respondents identified the potential client benefits of direct indexing
- Barriers to entry proved to be operational as well as educational
FTSE Russell, the global index provider, announced today the results from a recent survey of independent RIAs, hybrid advisors, broker dealers, registered reps and other financial advisors on their knowledge, views and use of direct indexing.
Advisors across most AUM segments indicated strong interest in using direct indexing in the future, but most (79%) are not current users*. Just 34% of advisors describe themselves as “very familiar” or extremely familiar” with direct indexing, and many advisors lack a clear understanding of the benefits of direct indexing. Yet, 48% plan to start using direct indexing in the next 1-5 years*, and future growth may come from smaller account sizes. More than half (59%) of firms with $50-200 million AUM plan to use direct indexing in the next 1-5 years.
Ryan Sullivan, head of buy side, Americas at FTSE Russell, said: “Direct Indexing has been touted as a sea change in the industry, but it’s important to understand we’re still very early in its wider adoption. While larger advisors with access to tax optimization tools can articulate the benefits of direct indexing, many non-users are unsure how to communicate the value proposition to clients. Direct indexing providers should look at these advisor segments as an opportunity and align their strategy with a focus on reducing operational friction and enhancing their educational support. Firms that can effectively engage with these advisors will be well positioned to ride the next wave of growth for direct indexing.”
Advisors’ familiarity with direct indexing
Advisors’ perceptions of direct indexing and its benefits underscore the need for education. While current direct indexing users identified “tax loss harvesting” (64%), “tax efficient transitions” (56%) and “reducing concentration risk” (40%) as the top benefits for directing indexing, those not using direct indexing* were significantly less likely to identify these potential values.
In addition, 28% of total advisors* agreed with the statement, “I don’t understand the benefits over other investment options,” 27% indicated “it’s easier to achieve the same goals with an ETF portfolio,” and 20% felt “it’s ultimately the same offering as Separately Managed Accounts.” Among advisors who are currently using direct indexing, only 66% agreed with the statement, “I feel confident talking to my clients about it.”
Barriers to entry
Advisors noted several barriers reflecting a combination of educational and operational challenges. When asked about barriers to using with a client, “lack of client demand” was the top response (34%), followed by the advisor’s “understanding and knowledge of direct indexing” (29%), “lack of organizational focus” (23%) and “cost” (21%).*
Conducted by RIA Channel, the survey solicited input from 631 advisors between April 1 and May 1 2024. The advisors came from independent RIAs, 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 affluence of over $250,000 (83%).
FTSE Russell partners with 20 direct indexing platforms, representing approximately $50B in AUM. By providing a suite of robust, rules-based and transparent indexes and a team of leading research professionals and market experts, FTSE Russell enables wealth and asset managers to add value for their clients via direct indexing solutions that are carefully tailored to their specific needs and preferences.
Direct Indexing is an investment approach that allows the investor to replicate the performance of an index by purchasing the underlying shares or use an index as the starting universe for a portfolio that can be customized especially for tax optimization.
A detailed report on all of the findings will be published soon.
*Advisors with at least some familiarity with direct indexing
Contacts
LSEG Press Office
Simon Henrick/Gexler Dias
+44 (0) 20 7797 1222
newsroom@lseg.com
www.lseg.com
About FTSE Russell, an LSEG business
FTSE Russell is a global index leader that provides innovative benchmarking, analytics and data solutions for investors worldwide. FTSE Russell calculates thousands of indexes that measure and benchmark markets and asset classes in more than 70 countries, covering 98% of the investable market globally.
FTSE Russell index expertise and products are used extensively by institutional and retail investors globally. Approximately $15.9 trillion is benchmarked to FTSE Russell indexes. Leading asset owners, asset managers, ETF providers and investment banks choose FTSE Russell indexes to benchmark their investment performance and create ETFs, structured products and index-based derivatives.
A core set of universal principles guides FTSE Russell index design and management: a transparent rules-based methodology is informed by independent committees of leading market participants. FTSE Russell is focused on applying the highest industry standards in index design and governance and embraces the IOSCO Principles. FTSE Russell is also focused on index innovation and customer partnerships as it seeks to enhance the breadth, depth and reach of its offering.
FTSE Russell is wholly owned by London Stock Exchange Group.
For more information, visit FTSE Russell.
© 2024 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.
No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
