Direct index investing, identified primarily for low-cost tax optimization, has risen dramatically over the previous 5 years as a tailor-made funding technique, hitting $864.3 billion in belongings by the tip of 2024. Nonetheless, in accordance with the newest analysis from Cerulli Associates, registered funding advisors nonetheless use it in restricted portions.
In response to the Boston-based consultancy, solely 18% of advisors reported utilizing direct index methods, up considerably from 2023’s 16%. And the hill appears steep for extra advisors to begin implementing them, with 26% of advisors selecting to not use direct indexing with purchasers regardless of getting access to it and 12% not even figuring out what it’s.
“Adoption of those monetary options amongst monetary advisors has but to match the obvious reputation throughout the business,” the consultancy wrote.
Direct indexing has change into a much-discussed technique for customizing an index funding for a shopper for tax technique functions, to fulfill investor preferences, or to higher observe a rules-based funding technique. Wealth administration platform suppliers reminiscent of Envestnet and Orion supply advisors entry to direct indexing, as do the wirehouses and impartial dealer/sellers.
In the intervening time, it’s getting used principally by wirehouse advisors who’re utilizing individually managed accounts, the automobiles used to manage them, in accordance with Cerulli.
“I might are likely to agree that advisors within the impartial dealer/supplier channel are extra inclined to undertake direct indexing,” mentioned Cerulli analysis analyst Michael Manning. “Analysis from Cerulli’s advisor survey means that (dealer/sellers) throughout all channels at the moment undertake SMAs at the next price than RIAs. Advisors have been additionally requested about their anticipated product use by means of 2026, and this development is anticipated to stay constant.”
In an interview with WealthManagement.com earlier this 12 months, Brandon Thomas, co-founder and co-chief funding officer at Envestnet, famous that direct indexing is the fastest-growing product on the Envestnet platform.
He attributed its reputation to its low value, transparency by way of goal, technique and consequence in comparison with actively managed investments, tax administration advantages, and ease of customization that aren’t accessible in ETFs, index mutual funds and lively individually managed accounts.
In response to Cerulli, these traits will not be reaching most of the advisors who would think about implementing them, partly as a result of they get blended up with the automobile that can be utilized to manage them—individually managed accounts.
“Many monetary advisors both don’t perceive direct indexing or don’t perceive it to the diploma needed to debate it with purchasers and implement it into their portfolios,” the agency wrote.
The demand for SMAs that supply direct indexing methods seems to be there if suppliers can talk the message, in accordance with Cerulli.
In response to a survey of distribution executives, 53% mentioned model-delivered SMAs have been in excessive demand from wirehouses and dealer/sellers, and 44% mentioned manager-traded SMAs have been in excessive demand.
SMAs have been much less in demand amongst advisors however nonetheless confirmed first rate curiosity at 34% for manager-traded SMAs and 27% for model-delivered.
Cerulli cited one government at a turnkey asset administration program supplier, who mentioned: “[We still see] important direct indexing progress. About 5 to 10 years in the past, [demand] was extra institutional, however, more and more, wealth platforms are enabling motion and entry downmarket to advisors.”
The highest direct indexing suppliers are seeing progress. In response to Cerulli, in each 2021 and 2024, the compound annual progress price for corporations that reported belongings over the three-year interval was 22.4%.
The beneficiaries are concentrated among the many high 5 early movers, who account for 86.9% of whole belongings. They’re Morgan Stanley (by way of its Parametric direct indexing enterprise), Goldman Sachs Asset Administration, Northern Belief, BlackRock and Constancy Investments.
“Regardless of the present focus, there may be room for disruption,” Cerulli wrote, noting “asset managers with present wholesaler groups, monetary advisor relationships, and pipelines into key platforms (e.g., dealer/sellers (B/Ds), turnkey asset administration applications (TAMPs), enterprise registered funding advisors. (RIAs))”
Envestnet, for its half, seems at No. 9 by way of direct indexing belongings, LPL Monetary at No. 11, Robert W. Baird at No. 12, Ameriprise Monetary at No. 13, and Orion Advisor Options at No. 19.
Cerulli wrote that dealer/supplier corporations have the potential to construct their very own direct indexing possibility or purchase a supplier.
One dealer/supplier government advised the researchers: “We don’t have the dimensions of use to require it [right now], though if demand will increase for direct indexing options, we might think about constructing [internally].”
Impartial RIAs, in the meantime, will doubtless be listening to from direct index suppliers they’ll use as distributors.
Cerulli additionally floated the concept of leveraging index-based ETFs to get RIAs to contemplate direct indexing, as they’re extra well-liked amongst that set than SMAs.
“Whereas a steep problem, asset managers may look to this channel as a probably fruitful alternative,” the researchers wrote.
Cerulli famous that the direct indexing technique will not be for all advisors, writing that “sure shopper segments can not meet the excessive minimums to spend money on an SMA. Even with lowering minimums as a consequence of elevated adoption of fractional shares, the price of the product will not be well worth the tax optimization components for a lot of buyers, or buyers might not see a profit from the portfolio customization potential.”
The consultancy additionally put the greater than $864.3 billion in direct indexing advisor adoption in context: exchange-traded funds accounted for $9.4 trillion on the finish of 2024, and mutual funds held $6.6 trillion.
