Everyone loves feeling catered to and that’s especially true of affluent and sophisticated clients, many of whom expect more than cookie-cutter 60/40 portfolios. Those are among the reasons direct indexing is gaining momentum and why it’s a critical tool in advisors’ arsenals, particularly when it comes to upping the level of “amenities” offered to high- and ultra-high-net-worth clients. Indeed, direct indexing is a strategy with perks.
“Compared to index-tracking ETFs, in both historical and forward-looking testing, the direct indexing strategies with systematic, year-round tax-loss harvesting were more likely to deliver greater after-tax returns,” according to Morgan Stanley. “Direct indexing also tended to perform better than active strategies in certain asset classes, such as U.S. large-cap core equities, over shorter time horizons and with higher-income investors.”
For advisors who are new to direct indexing or those who are apprehensive about the strategy’s efficacy as client attraction/retention tool, further examination is warranted because those advisors may well get off the fence and join the direct indexing movement.
The Survey Says…
A new survey from FTSE Russell highlights the validity of direct indexing’s status as a must-have tool for advisors. As FTSE Russell points out, “83% of current users say direct indexing helps grow and strengthen high-net-worth relationships.” But there’s more to the story.
“As advisors’ familiarity with direct indexing increases, we are seeing a corresponding rise in adoption across virtually all measures over the last year,” notes Adam Gebler, head of wealth Americas at the index provider. “Future growth depends less on the benefits of direct indexing and more on solving educational and technology challenges.”
Of course, there are challenges. Seventy-eight percent of advisors polled told FTSE Russell there is some “friction” in implementing direct indexing. Still, 86% want to bolster their knowledge of this service, confirming a broadly bullish attitude toward it.
“Well over half of advisors (57%) report being extremely or very familiar with direct indexing, up from 49% last year,” according to the survey. “Usage has increased from 33% to 41%, allocations increased from 13% to 17% of advisor AUM, and the average percentage of clients per advisor increased by 25% (from 16% to 20%), indicating that direct indexing is becoming more deeply embedded in advisor practices.”
Yes, There’s Something In It for Advisors and Clients
With each new “gadget” (a product or service) that comes along aimed at making advisors’ lives easier and improving client outcomes, advisors are right to ponder “What’s in it for me?” and the truly savvy fiduciaries ask “How does this benefit my clients?” Those queries are commonplace with artificial intelligence (AI) and other tech aimed at easing advisor burdens. When it comes to direct indexing, the answers regarding the benefits are clear and compelling.
“As expected, tax benefits topped perceived benefits with over four in 10 current users (42%) mentioning tax efficiency/tax-loss harvesting as a reason they expect to increase their use of direct indexing over the next 12 months,” notes FTSE Russell. “Most advisors (83%) are currently using or plan to use direct indexing in the next 12 months, up from 76% in 2025. Current and planned usage by channel jumped significantly, with wirehouse/traditional firms rising from 47% to 63% and the RIA channel doubling from 15% in 2025 to 30% this year.”
Speaking of AI, more than eight in 10 advisors believe that technology will accelerate direct indexing adoption while smoothing some of the associated adoption bumps.
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