Direct Indexing Poised for ‘Tremendously Strong’ Inflows: Cerulli

December 02, 2022

Cerulli Associates released its second annual white paper commissioned by Parametric Portfolio Associates, projecting assets in direct indexing to grow at a five-year CAGR of 12.3% to reach $825 billion by 2026. 

The report, which is targeted at financial advisors, estimates direct indexing will come to represent one-third of retail separate accounts by 2026, driven by affluent clients with $2 million to $3 million in assets.  

Research Director Tom O’Shea, one of the authors of the report, says that there is a “gigantic swath of the market” serving these clients who could benefit from such a product due to their tax needs, noting that the projected rate is “aggressive” compared to other investment vehicles like separate accounts and ETFs. 

O’Shea described the flows into direct indexing over the last two to three years as “tremendously strong,” noting that the path for the concept has been smoothed somewhat by the rise of robo advisors, zero-commission trades and fractional share trading. However, there’s not a lot of awareness among advisors, according to O’Shea.  

“What we saw—which was fascinating—is very little awareness of the product amongst advisors that targeted clients with about $1 million in investable assets,” he said, citing that only 14% of advisors are actually aware of direct indexing.  

With large firms like BlackRock, Charles Schwab and Morgan Stanley entering the space, O’Shea believes that is about to change as those firms market the concept aggressively. 

 

 

In a separate Cerulli investor survey cited in the white paper, among the $2 million to $5 million of investable assets cohort, 74% of investors agree that an account must minimize their tax bill by using a tax-efficient strategy, O’Shea said. But he notes that once the assets are over $5 million, 100% of investors agree with that statement.  

“Cerulli does not believe ultra-low-minimum direct index solutions are the ripest fruit for product expansion in the short term,” the report said regarding investors with assets under $2 million.  

The white paper explores five different applications for adopting direct indexing, including tax-loss harvesting, exiting highly concentrated stock positions, planned charitable giving, adding varying degrees of ESG investing to a portfolio and creating customized fixed income ladders.  

The report even quotes an unnamed wirehouse advisor who laments direct indexing becoming more mainstream.  

“I am disappointed this is starting to become mainstream, because I think that using direct indexing right now helps me stand out from my peers,” he said. 

 

Contact Heather Bell at [email protected] 

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