Friday, 01 March 2024 03:11

The Clients That Need Direct Indexing

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Direct indexing offers solutions for complex financial challenges but isn't suitable for every investor. Identifying which clients may benefit involves considering factors like tax-loss harvesting, ESG preferences, factor investing, and managing large positions or capital gains. 


High-net-worth clients with significant capital gains and taxable equity holdings stand to gain the most from daily tax-loss harvesting, potentially doubling their harvested losses. For clients passionate about ESG criteria, direct indexing allows for precise customization, albeit with a slight fee premium and potential tracking error. Factor investing via direct indexing suits clients with specific customization needs beyond prepackaged ETFs, although advisors must weigh the added complexity against potential benefits. 


Transitioning large existing positions into diversified portfolios using direct indexing offers tax efficiency, particularly for clients with concentrated holdings or restrictions on selling.

Finsum: Advisors need to gauge their clients benefits from direct indexing strategies, and the costs and concerns aren’t always a net positive. 


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