Displaying items by tag: direct indexing

According to Cerulli, wealth management firms vying for high-net-worth clients should increase their focus on personalization and private markets. With traditional wealth management, it’s increasingly challenging for advisors to differentiate their services. Additionally, it doesn’t fully meet the needs of clients, especially given unprecedented amounts of uncertainty in terms of the economy, monetary policy, and geopolitics.

A consequence of this uncertainty is unpredictability in terms of return and risk in terms of major asset classes, highlighting the need for effective asset allocation. The report also showed that direct indexing is utilized by 55% of advisors who are looking to provide active management and customization to clients. 

The firm also projects growth for separately managed accounts given high net worth investors’ growing demand for customization and private market investments. As a result, these trends underscore the need for effective account aggregation and performance reporting. 

This enables the alignment of solutions across different areas such as financial planning, investing strategy, banking, estate planning, etc. Equally important, this type of comprehensive reporting and consolidation eases the transition to having higher allocations to alternative investments. 

Finsum: Cerulli conducted a survey of advisors and high-net-worth clients. The findings highlight the importance of providing access to private markets and personalized services.

Published in Wealth Management
Tuesday, 14 May 2024 10:19

Untapped Opportunities With Direct Indexing

Direct indexing has many advantages, such as lower costs, boosting after-tax returns, and providing more flexibility to clients. However, some advisors are failing to properly implement the strategy, which means some portion of the benefits are not being realized. 

According to Barret Ayers, the CEO of Adhesion Wealth, advisors should offer direct indexing through unified managed account (UMA) frameworks. Currently, only 2% of direct indexing assets are managed through UMAs, with the majority in separately managed accounts (SMAs) or as a standalone model.

By going through a UMA, tax-loss harvesting strategies can be fully implemented and optimized. With standalone accounts, or SMAs, it’s burdensome to manage rotations out of losing positions or transfer holdings when necessary. As a result, many losses cannot be captured due to penalties or restrictions on wash sales. 

Another benefit of direct indexing through a UMA is that advisors can most effectively leverage core-satellite strategies to build a portfolio. This entails a core portfolio allocated to indexing with smaller pockets of higher-risk, higher-return investments in inefficient asset classes. Within a UMA, this strategy's efficacy can be maximized as it allows for efficient rebalancing, changes in asset allocation, and reduced time spent on administration.

Finsum: While direct indexing is surging in popularity, many clients and advisors are failing to fully take advantage of its benefits. Here’s why direct indexing in a UMA is the best approach.

Published in Wealth Management

Direct indexing, via separately managed accounts, is rapidly gaining traction as an investment strategy in the United States, particularly beneficial for those with significant holdings in company stocks, and is already proving to be major movement among prominent investment firms in 2024.


This approach allows investors to replicate index performance while retaining control over individual securities, utilizing automated programs for systematic trading. Once limited to the ultra-wealthy, recent technological advancements have made direct indexing accessible to investors of varying levels, with assets projected to reach $2 trillion by 2024.


Direct indexing offers customization, diversification, and risk mitigation, enabling investors to tailor portfolios to their preferences and goals while reducing reliance on specific stocks. With its tax efficiency and customization benefits, it’s easy to see why it’s so appealing in an SMA format and companies like Goldman Sachs are already making huge strides in this subsector. 

Finsum: The hybridization of products has been one of the defining features of the 2020’s and integrating vehicles like SMAs with direct indexing will continue the rest of the decade. 

Published in Wealth Management

Last year, assets in passive mutual funds and ETFs overtook assets in active mutual funds and ETFs. This is remarkable considering that passive funds accounted for 31% of total assets in 2015. The trend has been gaining steam since 2008 due to the strong performance of market-cap, weighted indices, and a greater preference for lower fees. 

In 2023, only 47% of active managers outperformed their passive benchmarks. Over the last decade, only 12% of active managers have survived and outperformed their benchmarks. Due to this, it’s not surprising to see that passive strategies are being adopted in separately managed and unified accounts. Currently, it accounts for 32% of assets in these accounts and is forecast to grow at a 12% rate over the next 4 years, faster than growth in ETFs and mutual funds. 

Direct indexing is a customizable, passive investing strategy. It’s designed to track a benchmark but allows for customization for tax purposes or to align investments with a client’s values. According to research, direct indexing can add between 85 and 110 basis points to a portfolio’s after-tax returns. 

Direct indexing also allows advisors to offer clients more personalization while retaining the benefits of passive investing. Already, asset managers and custodians are responding by offering direct indexing solutions at scale to advisors. 


Finsum: Passive strategies have overtaken actively managed strategies in terms of their share of assets. Direct indexing is one factor, as it is a way for advisors to retain the benefits of investing in an index with greater customization and tax efficiency

Published in Wealth Management

Direct indexing continues its ascent and is forecast to exceed $1 trillion in assets within the next decade. In essence, direct indexing retains the primary benefits of passive investing while allowing for greater tax efficiency and personalization. 

It achieves this by buying the actual components of an index in a separately managed account (SMA). This means that tax losses can be harvested by selling losing positions and reinvesting the proceeds into positions with similar factor scores to ensure that the benchmark continues to be tracked. According to research, direct indexing can boost after-tax returns by 1 to 2% due to these savings. The effect is even more potent in periods with elevated volatility.

Direct indexing also allows for more customization to account for a client’s unique situation. For instance, if an investor has an oversized position in a specific company, that company would not be included in the index, and/or the specific sector could be underweighted. Similarly, if a client is sitting on large, unrealized gains, direct indexing can help reduce the tax burden while helping to construct a more diversified portfolio.

Direct indexing can be a way for advisors to give clients a strategy that accomplishes their financial goals in the long term, reduces tax payments, and aligns their investments with personal values and/or situation. This can help differentiate advisors in a competitive market and create a richer experience that leads to a stronger and deeper relationship with clients. 

Finsum: Direct indexing continues to experience rapid growth as it offers the benefits of passive investing with more tax efficiency and customization. For advisors, it also presents an opportunity.

Published in Wealth Management
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