Direct indexing has been one of the buzziest innovations in portfolio management—but for many financial advisors, the pitch can sound repetitive and abstract. Personalization at scale. Tax efficiency. Competitive fees. Still, some advisors remain skeptical, unconvinced that they need to overhaul portfolios that already work.
In an interview with The Wealth Advisor’s Scott Martin, Brandon Thomas, Co-Founder of Envestnet and CIO of QRG Capital Management, discussed how the company’s direct indexing capabilities through QRG is about giving advisors tools to solve real problems they face every day.
As the architect of Envestnet’s original business plan and now co-chair of the firm’s Investment Committee, Thomas brings decades of experience building scalable, advisor-centric platforms. He isn’t selling theory. He’s focused on practical implementation—and how direct indexing delivers on the original promise of separately managed accounts (SMAs).
Delivering What SMAs Were Meant to Be
When direct indexing first gained traction, it was often described as the next evolution of SMAs. But for Thomas, the relationship is more foundational.
“Direct indexing fulfills the promise of what separate accounts set out to do probably 30 years ago,” he says. “You’ve got the customization, tax management, and the ability to get asset class exposure at a very low cost.”
Many advisors still treat SMAs like mutual funds—set-and-forget vehicles with limited flexibility. But that leaves meaningful value on the table. Technology has made customizing portfolios at the individual security level possible without requiring the advisor to micromanage the positions.
For example, “if your client is a tech executive and they own a lot of their company’s stock, they may not want to own a lot more tech in their direct indexing strategy,” Thomas says. “So, we can restrict that.”
That’s just one of many dimensions advisors can use to tailor direct indexing strategies. Clients can exclude sectors, tilt toward value or dividend-paying stocks, or incorporate ESG (environmental, social, and governance) criteria. Every portfolio is built around the client’s specific profile—within the risk-managed, scalable framework QRG is known for.
Built-In Tax Management, No Extra Work
The real advantage of holding individual securities in an SMA shows up at tax time. With direct indexing, tax-loss harvesting and tax-lot optimization strategies that aim to minimize capital gains become part of the process—not an afterthought. And Envestnet’s platform automates the entire experience.
“The manager handles all the optimization, building the portfolio, rebalancing,” Thomas explains.
That’s a major shift from the old SMA playbook, where the burden often fell on advisors. Now, tax management is embedded into portfolio construction—helping advisors add value without adding workload.
Unified managed accounts (UMAs) make implementation even easier. What used to require a separate account can now exist within a broader strategy. As Thomas puts it, “Now, in a direct index strategy, a model can be included in your client’s overall UMA as a sleeve or multiple sleeves.”
That structure allows direct indexing to work side by side with exchange-traded funds (ETFs), mutual funds, and active managers, all within a single brokerage account and a single statement. The Envestnet platform handles the accounting and tax overlays automatically.
Transitioning Legacy Accounts—Without Triggering Taxes
Advisors are also using direct indexing to solve a persistent challenge: transitioning clients out of concentrated or unmanaged portfolios.
“We see a lot of clients coming into our direct indexing strategies that have had legacy positions, low-cost-basis securities that have a lot of unrealized gains built in, and they want to transition into something more diversified,” Thomas says.
That transition doesn’t need to be painful. QRG helps advisors build around the existing holdings, minimize tax impact, and gradually reshape portfolios toward better diversification. The technology enables this process at scale, with a level of precision that advisors can’t achieve manually.
Direct Indexing That Fits into a Broader Portfolio
Advisors often assume direct indexing requires a wholesale change in how they manage money. Thomas makes it clear that’s not the case.
“You could have an equity direct index in your large core, which is passive. A lot of advisors want to go passive because it’s very low cost. It is a very, very efficient asset class that is hard to outperform,” he says. “But then they’ll have a small-cap active manager or mutual fund or ETF. They’ll have fixed income or emerging markets alongside, and mutual funds and ETFs. It’s a very flexible vehicle with tax management overlaid on top. From a technology standpoint, it makes everything efficient for the advisor and the client.”
Direct indexing works best when it complements—not replaces—existing strategies. Most advisors start with large-cap equity exposure, where alpha is harder to find and customization is more valuable. From there, they can blend in active strategies or factor exposure as needed.
And the pricing makes it easy to justify. While traditional SMAs might charge 40–50 basis points, Envestnet’s direct indexing strategies often fall in the 15–20-basis-point range. “It’s a cost-effective way to get customization and personalization and asset class exposure for the client,” Thomas emphasizes.
Systematic Exposure to Factors
For advisors seeking a more active approach to capturing quantitative diversification than market tracking might provide, Envestnet’s factor-enhanced Quantitative Portfolios (QPs) offer another layer of value. These strategies tilt portfolios toward proven factors—such as value, quality, or momentum—to pursue outperformance in a structured, repeatable way.
“We call them active,” Thomas explains, “meaning we’re trying to outperform the index through these tilts toward various factor exposures.”
And when clients ask about results, the attribution is detailed and data-driven.
“Your client, your portfolio outperformed this quarter because of the overweight to quality stocks, the quality factor. And that contributed 50 basis points. The value factor contribution was 35 basis points,” Thomas says. “You had a detraction because you were overweight size, maybe 10 basis points.”
That kind of clarity strengthens the advisor-client relationship and helps justify fees. Rather than relying on vague market commentary, advisors can point to specific drivers of performance and connect the dots to the portfolio strategy.
Addressing Position Count and Client Perception
One of the few concerns advisors hear from clients relates to the number of holdings in a direct indexing portfolio. Thomas has heard it too.
“Sometimes, the client says, ‘I have a lot of positions in the account. I’m seeing many, many positions. Do I need all these positions?’”
The answer is yes—each holding contributes to the portfolio’s ability to accurately track the chosen index.
“If you’ve got a direct indexing separate account that has 150 stocks in it, we design it so that it’s tracking the index very closely,” he explains. “So, we need that one share of that one company that’s in the portfolio.”
Transparency helps resolve client doubts. Every position serves a purpose, and the portfolio is designed for both efficiency and accuracy—not excess.
Expanding into Fixed Income and Beyond
Direct indexing at Envestnet now extends far beyond large-cap equity. Fixed income QPs are growing quickly, especially in municipal and investment-grade corporate markets.
“That’s our fastest-growing suite of solutions in the direct indexing space on the Envestnet platform,” Thomas says.
The firm’s capabilities also cover alternatives, options, and ESG models. As more clients arrive with complex legacy holdings or unique constraints, QRG’s transition process becomes even more valuable.
“We can take that account in, evaluate the holdings, see which ones can transition in, which ones we can build around, which ones we will hold separately,” he explains. “Which ones the client may be okay selling from a tax perspective.”
QRG: Now the Largest SMA Manager on the Platform
Adoption numbers tell the story. QRG’s direct indexing capabilities continue to expand as more advisors incorporate the strategies into client portfolios.
That kind of scale reinforces confidence in the platform’s durability and ongoing investment in research and operations. Advisors already using the platform can explore how QRG’s capabilities can support more client scenarios.
“I would say that’s where advisors should focus: more passive, and then on the fixed income, combining those two and look to transition existing accounts,” he adds.
How to Get Started
Envestnet advisors have direct access to QRG’s capabilities and support. For help implementing the models, Thomas recommends working through your usual channels: “Reach out to your regional director or your portfolio management consultant. We work with them very closely, and they know exactly how to incorporate our models in client portfolios.”
Direct Indexing Built for Advisor Success
Envestnet’s direct indexing platform—built and managed by QRG—offers more than just personalization for personalization’s sake. It gives advisors a scalable, cost-effective way to improve client outcomes across tax, performance attribution, and customization considerations without adding complexity to their day-to-day operations.
By combining direct indexing with systematic design, tax-efficient transitions, and the flexibility of a UMA framework, Envestnet aims to help advisors deliver differentiated value at scale. The takeaway is simple: direct indexing works best when it solves real problems for real clients—and Envestnet’s tools are built to do exactly that.
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Disclosures
This is a paid advertisement. Envestnet has multiple paid engagements with The Wealth Advisor including payment for participation in America’s Best TAMPs, an annual directory of investment outsourcing organizations, with a minimum asset level of $200 million, catering to financial intermediaries.
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