What You Need to Know
- Cerulli is forecasting a 11.4% annual growth rate over the next five years vs. 11.3% for ETFs and 3.3% for mutual funds.
- Total assets of direct indexing solutions were $362.7 billion in the first quarter.
- Parametric, owned by Morgan Stanley, accounts for one-third of those assets.
Cerulli Associates projects that direct indexing assets, which currently total over $300 billion in separately managed accounts, will grow at a 12.4% annualized rate over the next five years, topping even the growth rate for ETFs, projected at 11.3%.
Initially the growth will come from “high-end advisors” serving wealthy clients but inevitably growth will move downmarket as a result of “new market entrants,” technology and low-cost trading, according to Cerulli, which just published a white paper on the topic.
The paper was sponsored by Parametric, a major provider of direct index SMAs owned by Morgan Stanley. Parametric accounts for about one-third of the $362 billion direct indexing assets, followed by Aperio, owned by BlackRock ($45 billion) and Fidelity Investments ($24 billion).
The white paper notes that a low-end direct indexing solution can act as a differentiator for advisors to attract new clients including those who are not wealthy now but will potentially inherit their family’s wealth.
As it stands now, the heaviest users of direct indexing are advisors focused on its tax benefit capabilities. Direct indexing allows advisor clients to directly own all or a customized assortment of individual securities in an index without purchasing a mutual fund or ETF.
“The tax savings generated by direct indexing are a way for these advisors to generate quantifiable value for their clients,” according to the Cerulli white paper.