FTSE Russell, the global index provider, has announced the findings from its second annual direct indexing survey. The results, based on the responses of over 400 financial advisors, suggested strong growth for direct indexing. The report provides insights that could help mitigate barriers to adoption and uncovers different advisor perceptions by age and channels.
Advisors signal strong growth for direct indexing
In a sign that advisors have accepted direct indexing as a product offering with distinct client benefits, the majority plan to use it more over the next 12 months. Of the third (33%) of advisors already using direct indexing, most (67%) intend to increase usage in the next 12 months. Additionally, more than four in 10 (43%) advisors plan to start using it during the year. Just a quarter (24%) of advisors aren’t using direct indexing and don’t plan to. The vast majority (81%) of advisors expect advancements in AI and automation will help drive the growth of direct indexing.
Usage was highest among wirehouse advisors, with 49% using direct indexing. Among all advisors using direct indexing, wirehouse advisors are most likely to plan to increase usage at 82%, compared to 60% for traditional full-service advisors, 60% for advisors at independent broker-dealers and 53% for RIAs.
NextGen and wirehouse advisors view direct indexing as vital to remain competitive in wealth management
While a majority (52%) of all advisors agree at least somewhat that direct indexing is “becoming an essential offering to remain competitive in wealth management”, 63% of NextGen advisors (defined as those under age 45), agreed with this statement versus just 47% of advisors over age 55. The disparity was even greater across channels, with 69% of wirehouse advisors supporting this view versus 49% of traditional advisors, 53% of independent broker-dealers and 34% of RIA advisors.
Most survey respondents (74%) also agree that direct indexing is an essential offering for high-net-worth/ultra-high-net-worth (HNW/UHNW) clients and prospects. The majority of advisors say the strongest level of opportunity for direct indexing is with wealthier clients, with 86% indicating a “moderate” or “strong” opportunity for ultra-high-net-worth ($10M+) and 85% for high-net-worth ($1M–$9.99M) clients. Fewer than half (49%) of advisors see a moderate or strong opportunity with affluent ($250,000–$999,999) clients and just 20% see opportunity with the mass affluent ($100,000–$250,000) segment.
Familiarity breeds adoption
Almost all (92%) advisors have some familiarity with direct indexing, with NextGen and wirehouse advisors reporting the highest level of familiarity. Not only are NextGen advisors more likely to be using direct indexing than advisors over age 55 (44% vs 26%), but they are more likely to indicate they are “extremely” or “very” familiar with direct indexing.
Perceived implementation challenge
The majority of advisors are aligned on the main benefit of direct indexing: tax management. Almost three quarters (72%) view tax-loss harvesting as a benefit, with over six in 10 (62%) seeing tax efficiency as a benefit. However, advisors have a perception that implementation is a significant challenge. Only 13% of advisors expect that implementation will be “very easy” while 79% of advisors say they “expect some level of friction” and 52% agree that “integrating direct indexing into my existing technology stack is challenging”. However, 89% of advisors currently using direct indexing indicated that implementation is “very easy” or “somewhat easy”, likely suggesting that providers should refocus educational efforts.
Barriers to entry
Advisors noted several barriers to the adoption of direct indexing, reflecting a combination of educational and operational challenges. When asked about barriers to using direct indexing with a client, “lack of client demand” was the top response (45%), followed by “complexity makes educating clients difficult” (34%) and “my understanding and knowledge of direct indexing” (27%).
Despite feedback indicating a lack of client demand, advisors indicated that their clients are actually seeking the benefits of direct indexing. “Tax-efficient investing strategies” as well as “volatility” and “risk management” rank high on the list of services and planning topics clients ask about most often.
