Blog Post Banner Image
04 May 2023

The Rise of Direct Indexing: Personalizing Portfolios at Scale

Ask any industry analyst, technologist, or investment pro, and they’ll all say that the ultimate goal of wealth management has become “personalization at scale.” Particularly now that much of the investment management value chain has been commoditized by technological improvements and the resulting cost efficiencies.

Most notably, the entrance of the “robo advisors” a decade ago showed that for just a few basis points (and now zero basis points), digital players could provide simple asset allocation recommendations and low-cost security selections to construct a portfolio and provide ongoing rebalancing services – basically, the bread and butter of what investment focused financial advisors were charging 100 basis points and more to do.

So, in today’s modern, digital age, how can advisors decommodify investing and reinvent their investment management services to deliver personalization at scale and justify premium pricing? 

The answer lies in the form of direct indexing. Although this approach to personalizing portfolios has been around for quite some time, today, many firms have limited this function to large portfolios only due to the time and costs involved. However, with dramatic innovations in trading and rebalancing technology, fractional share availability, combined with no more trading costs in commissions and direct indexing is now affordable and applicable to portfolios of all sizes[1].

Cerulli research shows by 2026, direct indexing will grow at a 12% annualized rate, with assets expected to reach $800 billion[2]. In addition, direct indexing enables firms to customize and personalize portfolios by holding the underlying securities to mimic a separate account structure to track an index or adhere to a model portfolio to accommodate for constraints and opportunities in that portfolio, such as tax loss harvesting, concentrated positions, and ESG mandates.

Despite these powerful client benefits, many advisors point to the time and costs involved in building out a direct indexing capability, along with the necessary tools, technology, and skill sets, as why they have yet to adopt direct indexing widely. The good news, however, is that with powerful advancements in technology, it is now easier than ever to integrate direct indexing into advisors’ investment management services.

According to a recently released whitepaper from SS&C, Direct Indexing: A Differentiator for Advisors in a Commoditizing Industry,

Fortunately, more tools, solutions, and service models are in development today to help advisors surmount these obstacles and start putting in place the foundations of a DI offering. Automated rebalancing capabilities will be particularly valuable, enabling advisors to process all of their DI clients simultaneously, leveraging various rules and settings capabilities to account for separate holdings and other factors, especially in times of market volatility. The ability to rebalance and generate trades at scale will be critical to the efficient execution of direct indexing strategies, especially in a period of market volatility that creates rebalancing and tax loss opportunities.

Many advisors leveraging direct indexing are directly communicating the tax-loss harvesting opportunities they are delivering to clients as a “tax alpha” that can more than make up their additional fees for actively managing the portfolio. This use case naturally extends itself to transition management, in which advisors can recommend dedicated tax loss harvesting strategies to reduce the investor tax burden associated with onboarding new taxable client portfolios. As a result, direct indexing may not only justify the higher fees for investment management services but also streamline proposal generation and back-office services to enhance growth and profitability.

To learn more, download our recent whitepaper, Direct Indexing: A Differentiator for Advisors in a Commoditizing Industry.



[2] The Case for Direct Indexing: Differentiation in a Competitive Marketplace, Cerulli Associates, December 1, 2022