Advisors face a twin challenge: clients nearing retirement who must stay invested in equities for growth and younger investors who expect portfolio customization as a baseline feature. Direct indexing has emerged as a solution to both pressures, enabling advisors to deliver tax-efficient, personalized portfolios at scale. FTSE Russell’s custom indexing solutions aim to help advisors navigate the complexity by providing institutional-grade benchmarks purpose-built for direct indexing applications.
According to FTSE Russell’s latest direct indexing survey of more than 400 advisors, three-quarters currently use or plan to implement direct indexing within the next 12 months. Among advisors already using direct indexing, 67% intend to increase usage over the same period. The momentum reflects a fundamental shift in how advisors deliver value—moving from one-size-fits-all index funds toward portfolios tailored to individual client needs, preferences, and tax situations.
As wealth transfers accelerate and client expectations evolve, the ability to customize portfolio exposure while maintaining the benefits of index investing has moved from nice-to-have to competitive necessity. FTSE Russell’s direct indexing solutions aim to help advisors meet the challenge by combining world-class benchmarks with the flexibility needed to tailor portfolios to individual client needs.
Ryan Sullivan, Head of Buy Side Americas, Index Sales at FTSE Russell, sees the shift firsthand. In a recent LSEG Wealth Insider Insights interview, he outlined the dual pressures reshaping advisor practices: retirees who must stay invested in equities rather than moving to fixed income and younger investors who demand customization in every aspect of their financial lives. “This is a generation that’s come of age with tools only focused on customization,” Sullivan explains. “So, they’re looking for financial outcomes and financial products that allow them to continue to optimize and personalize their investment basis and their investment products.”
Meeting Clients Where They Are
Client demands for personalization vary by generation, and advisors are responding accordingly. While 52% of all advisors agree direct indexing is becoming essential to remain competitive, that figure jumps to 63% among NextGen advisors—those under age 45 who are building practices around younger clients’ expectations for customized solutions.
FTSE Russell’s custom indexing solutions seek to provide the flexibility advisors need to meet diverse client requirements. The firm’s approach combines comprehensive market coverage with the ability to layer customizations—excluding specific sectors, tilting toward growth or value characteristics, or screening for sustainable investment criteria—without introducing gaps or unintended exposures in portfolio construction.
Channel differences prove even more pronounced. Wirehouse advisors lead adoption, with 49% currently using direct indexing and 82% of current users planning to increase usage. A pattern emerges: advisors at firms with robust technology infrastructure and institutional resources are moving faster. According to Sullivan, the industry faces a clear imperative: Direct indexing providers must pinpoint emerging applications for advisors and simplify how these technological resources are accessed.
NextGen advisors will face an estimated $84 trillion shift in assets over the coming decades, making their early adoption patterns particularly significant. Their embrace of direct indexing signals where the industry is heading, not just where it stands today.
Addressing High-Net-Worth Client Needs
Wealthy clients face specific challenges that traditional index funds struggle to address: concentrated stock positions from equity compensation, complex tax situations requiring ongoing management, and desire for values-aligned investing without sacrificing market exposure. Direct indexing can enable advisors to tackle all three simultaneously.
Survey respondents see the opportunity clearly: 86% identify moderate or strong potential with ultra-high-net-worth clients holding $10 million or more, while 85% see similar opportunity with high-net-worth clients in the $1 million to $9.99 million range. The opportunity drops off sharply below the million-dollar threshold.
Tax-loss harvesting—cited by 72% of advisors as direct indexing’s primary benefit—can deliver the most value to clients in higher tax brackets with larger portfolios, explaining the wealth tier concentration. A client with a $5 million taxable account and a 37% federal marginal rate can harvest meaningful losses that compound over time.
Delivering on the promise to wealthy clients requires precision—not just in tax management but in how portfolios track their underlying benchmarks while accommodating customization. FTSE Russell’s custom indexing solutions are built on the Russell US Indexes, which provide comprehensive market coverage through a modular design that eliminates gaps and overlaps.
The Russell 3000 Index captures 98% of the U.S. equity market, spanning mega-cap to micro-cap companies with clear segmentation across size and style. When advisors customize portfolios, they work from a benchmark that accurately represents the market exposure they’re seeking to replicate—critical for maintaining intended risk-return profiles while personalizing holdings.
Tax Management Takes Center Stage
Client concerns about taxes, portfolio risk, and investment values create natural applications for direct indexing. Tax-loss harvesting tops the list, followed by broader tax efficiency.
Artificial intelligence and automation are accelerating adoption by making tax-loss harvesting more efficient and scalable. The survey finds that 81% of advisors expect advancements in AI and automation will help drive direct indexing growth. Technology can continuously monitor portfolios, identify loss-harvesting opportunities, and execute trades while maintaining index exposure—tasks that would overwhelm advisors managing dozens or hundreds of customized portfolios manually.
Beyond tax management, advisors see direct indexing as valuable for reducing portfolio concentration risk. Clients who accumulate significant positions in employer stock or receive concentrated equity compensation face idiosyncratic risk that traditional index funds cannot best address. Direct indexing allows advisors to replicate index exposure while excluding specific securities, helping clients gradually diversify without triggering immediate tax consequences.
“Tax-efficient investing strategies,” “volatility,” and “risk management” are top-of-mind for clients, according to survey respondents. FTSE Russell’s custom indexing solutions aim to help advisors address all three through carefully constructed benchmarks and overlay strategies.
Style overlays using the Russell Style Indexes support the ability to tilt portfolios toward growth or value characteristics. Sustainable investment overlays help advisors meet client preferences for environmental, social, or governance factors. Each overlay builds on the same rigorous foundation, seeking to ensure that allocations align with strategy requirements and avoid introducing unexpected biases.
The Foundation: Why Index Construction Matters
Advisors implementing direct indexing solutions face a choice that directly impacts outcomes: which benchmark should underpin customized portfolios? FTSE Russell’s approach starts with the recognition that index construction and maintenance directly affect an advisor’s ability to deliver personalized portfolios that perform as intended.
With approximately $19 trillion in reported fund assets under management benchmarked to FTSE Russell indexes, as of June 2024, advisors work with familiar tools. Institutional investors have relied on FTSE Russell’s indexes for decades, drawn to objective, market-driven inclusion criteria rather than committee discretion. The same transparent, rules-based methodology that appeals to institutions translates directly to direct indexing applications, where advisors need predictable reconstitution schedules and clear understanding of when and why securities enter or exit the index.
Beyond flagship indexes, FTSE Russell’s custom indexing capabilities extend across asset classes and investment styles. The firm’s research team and industry experts work with advisors and asset managers to deliver bespoke benchmarks tailored to specific requirements—whether developing strategy indexes for structured products, creating composites of underlying indexes, or building indexes with complex inclusion and exclusion parameters. The comprehensive governance structure aims to guarantee index quality and support benchmark regulatory compliance, critical factors for product issuance and advisor confidence.
The firm seeks to help wealth and asset managers add value for their clients through custom indexing solutions carefully tailored to specific needs and preferences.
The Implementation Gap
A perception problem is hampering direct indexing adoption: advisors believe implementation will prove difficult, even though a majority of current users report the opposite. Only 13% of advisors expect implementation to be “very easy,” the FTSE Russell survey finds, while 79% anticipate some level of friction. However, among advisors already using direct indexing, 89% describe implementation as “very easy” or “somewhat easy.”
The disconnect suggests a messaging challenge. Advisors contemplating direct indexing imagine complex portfolio construction, ongoing monitoring requirements, and technology integration headaches. Current users discover that modern direct indexing platforms handle much of the heavy lifting through automation. Sullivan’s observation that “providers should refocus educational efforts” speaks directly to bridging the gap between perception and reality.
Implementation concerns manifest in specific ways. More than half of survey respondents (52%) agree that integrating direct indexing into existing technology stacks presents challenges.
Index selection can either simplify or complicate implementation—advisors working with well-constructed, widely recognized benchmarks can benefit from existing infrastructure, data feeds, and client familiarity that smooth the onboarding process.
FTSE Russell’s custom indexing solutions leverage the firm’s established ecosystem of Russell US Indexes and proprietary tools such as the FTSE Index Module—a platform that allows users to quickly research and analyze index ideas, back-test potential indexes, and create production-ready indexes that meet complex portfolio mandates. The tool provides access to a comprehensive index repository with 10 years of back-tested history, enabling advisors and partners to prototype concepts with multiple inclusion and exclusion parameters before implementation.
The Education Challenge
Advisors identify “lack of client demand” as the top barrier to using direct indexing (45%), followed by “complexity makes educating clients difficult” (34%). The pairing reveals an interesting dynamic: clients aren’t demanding a solution they don’t understand, and advisors struggle to explain a strategy they perceive as complex.
Yet the same advisors note that clients regularly ask about tax-efficient investing, volatility management, and risk management—precisely the problems direct indexing aims to solve. The barrier isn’t client disinterest in outcomes but rather unfamiliarity with direct indexing as a vehicle for achieving those outcomes.
The education challenge extends in both directions. Advisors need to understand how direct indexing works and when to recommend the strategy. Clients need simple explanations of how customized portfolios can address their specific concerns—whether managing taxes efficiently, managing concentrated positions, or aligning investments with personal values.
Advisors also acknowledge gaps in their own knowledge. More than one-quarter (27%) cite their understanding and knowledge of direct indexing as a barrier. While 92% report some familiarity with direct indexing, familiarity doesn’t equal mastery.
Breaking through the education barrier requires simple, clear explanations focused on client benefits rather than technical details. Clients don’t need to understand reconstitution methodology or tax-lot accounting—they need to understand how direct indexing might reduce their tax bills and help them achieve financial goals.
Starting from a benchmark clients already recognize—such as the Russell 3000 Index or Russell 1000 Index—provides a familiar reference point that simplifies the conversation. Rather than explaining an unfamiliar proprietary index, advisors can focus on customization benefits while anchoring the discussion to a well-known market measure. Working with established benchmarks and proven methodologies can help advisors explain the strategy more confidently and address client questions about how customized portfolios are expected to perform relative to the broader market.
Looking Ahead
Direct indexing adoption continues accelerating as technology improves, client expectations evolve, and younger advisors build practices designed around personalization. The path forward requires addressing implementation concerns through better education, simplifying technology integration, and demonstrating the strategy’s practical benefits for advisors and their clients.
Advisors who master direct indexing can differentiate their practices by delivering tax-efficient, personalized portfolios at scale. Those who hesitate risk falling behind as client demands for customization intensify and competitors offer increasingly sophisticated solutions. The choice of underlying benchmark and access to custom indexing capabilities will increasingly separate successful implementations from disappointing ones.
FTSE Russell’s custom indexing solutions—combining the Russell US Indexes with bespoke benchmark development, research-driven methodology, and tools for rapid prototyping and back-testing—seek to provide the foundation advisors need to deliver on client expectations without introducing unintended risks or sacrificing precision.
The question is no longer whether direct indexing will become mainstream but rather how quickly advisors will adapt to a wealth management environment where personalization defines competitive advantage.
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