Sure, I Know What Direct Indexing Is

The separately managed account industry is changing as technology, such as fractional shares, evolves and opens these strategies to new investors. And the minimum investments needed for direct indexing, one such strategy that can provide clients tax management and customization benefits, are dropping from the $100,000 to $250,000-ish range to, like, $500 at some providers.

So, direct indexing stands to gain the attention of advisors and their clients as minimums continue to fall. Right?

Well, funny thing about direct indexing. Despite the hype, and the recent platform?rollouts and expansions?by custodians and other providers, advisors' understanding of the strategy, and their adoption of it, remains pretty low.

Direct indexing can provide diversification, enable investors to improve after-tax returns with tax loss harvesting, and allow for "personalization" of portfolios to exclude sectors or stocks. Advisors (and their clients) are into all of that, but most of them just don't know?the term 'direct indexing',?Russell Tipper, general partner and head of investment advisory at?Edward Jones, told Financial Advisor IQ's sister title FundFire.

Projected allocations to SMAs, including direct-indexing offerings, are slated to rise.

Average allocations to SMAs are?expected to reach 26%?in 2025, compared to just 18% in 2023, according to a recent?Cogent Syndicated?survey of 403 registered financial advisors for analytics and advisory firm?Escalent. It also noted that allocations to SMAs for high-net-worth clients are projected to reach 31% by next year, up from 23% in 2023.

"For advisors serving high-net-worth clients, customization and tax management is key, and this is one of the factors fueling the growth of SMAs and direct indexing,"?Meredith Lloyd Rice, vice president at Escalent, said.

In a bid to appeal to high-end clients,?Commonwealth Financial Network?unveiled plans?last year to make direct indexing available to its advisors via its Preferred Portfolio Services Select program.?Peter Essele, senior vice president of investment management and research, told Financial Advisor IQ that direct indexing has "almost become table stakes" for high-net-worth clients, but also noted that the technology still has room to improve.

"Right now, it's mostly limited to the most popular indices, but as that technology advances, you'll theoretically be able to construct an entire equity portfolio of direct indexes," he said.

Direct-Indexing Minimums Can Eventually Get to $500: Exec

Fractional share trading can help managers bring investment minimums on direct-indexing strategies way down, but it may not be worth it for every investor, said?Roger Paradiso, executive chairman of?O'Shaughnessy Asset Management.

"I think it can go low," Paradiso told FundFire. "Where it makes sense, I think it starts to become less sense for smaller and smaller clients."

Click?here?or on the image below to watch the video.

Q&A: So, How Low is Too Low?

Brian Huckstep, Chief Investment Officer at?Advyzon Investment Management,?tackled some questions?from FA-IQ on how and when advisors should consider direct indexing, and where the benefits start to trail off.

Here's what he had to say on the impact that lower direct-indexing account minimums might have on the benefits the client receives:

"The percentage benefit added by direct indexing for a $10 million account is the same as a $1 million account, as a $100,000 account. We find that without the ability to incorporate fractional shares, using direct indexing for accounts under $25,000 stops making sense because the security count goes down and opportunities to tax loss harvest become scarce."

Click?here?for more from Advyzon's Huckstep on how advisors can approach adding direct indexing and why advisors' education and adoption of the strategy remains low across the industry.

Keep Reading...

• LPL Rolls Out Direct Indexing Capabilities for FAs
• Talk Personalization, Not Direct Indexing, to Win Advisors: Ed Jones Exec
• FAs Turning to SMAs over Model Portfolios
• Commonwealth Targets Big ‘Enterprise’ Teams, Next-Gen FAs with Expanded Tools
• Direct-Indexing Minimums Can Eventually Get to $500: Exec
• Q&A: How Low Should Minimums Go for Direct-Indexing Accounts?

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