Most advisors still in the dark on direct indexing

Most advisors still in the dark on direct indexing
FTSE Russell survey research covering RIAs and broker dealers shows four-fifths aren’t using it, and most aren’t clear on the tax benefits.
MAY 15, 2024

New survey research from global index provider FTSE Russell reveals that while most financial advisors currently do not use direct indexing strategies, a significant number are thinking about adopting it within the next five years.

The survey, conducted by RIA Channel among 631 advisors from various sectors including independent registered investment advisors, broker-dealers, and asset managers, found that 79 percent do not use direct indexing.

However, nearly half of the respondents (48 percent) indicated plans to start using these strategies, suggesting a growing trend toward personalized investment solutions.

"Direct Indexing has been touted as a sea change in the industry, but it’s important to understand we’re still very early in its wider adoption," Ryan Sullivan, head of buy side, Americas at FTSE Russell, said in a statement.

The survey highlighted a substantial knowledge gap among advisors. Only 34 percent of respondents described themselves as "very familiar" or "extremely familiar" with direct indexing, while many don’t have a clear understanding of the strategy’s advantages.

Among the minority of advisors who currently have direct indexing in their toolbox, 64 percent recognized "tax loss harvesting," 56 percent cited "tax efficient transitions," and 40 percent noted "reducing concentration risk" as its top benefits. However, just two-thirds (66 percent) said they “feel confident talking to my clients about it.”

A large chunk of the broader advisor population is apparently still in the dark, with 28 percent agreeing with the statement “I don’t understand the benefits over other investment options.” Nearly the same number (27 percent) agreed that “it’s easier to achieve the same goals with an ETF portfolio,” while a fifth took the view that “it’s ultimately the same offering as Separately Managed Accounts.”

Exploring the different hurdles to using direct indexing with clients, 34 percent of advisors flagged "lack of client demand" as the biggest barrier to using direct indexing with clients, followed by "understanding and knowledge of direct indexing" at 29 percent. Other advisors pointed to “lack of organizational focus” (23 percent) and “cost” (21 percent).

“While larger advisors with access to tax optimization tools can articulate the benefits of direct indexing, many non-users are unsure how to communicate the value proposition to clients,” Sullivan said. “Firms that can effectively engage with these advisors will be well positioned to ride the next wave of growth for direct indexing.”

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