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Direct Indexing Still a Stretch for Most Advisors: Broadridge

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What You Need to Know

  • Few advisors who are aware of direct indexing are using the strategy, a survey found.
  • It also found less than half of those advisors plan to do so.
  • One major sticking point: the time-consuming nature of managing portfolios.

Direct indexing has been touted by some as perhaps the next big thing to help advisors align portfolios with their clients’ values, but many advisors are not yet using the strategy.

According to a new survey from Broadridge Financial Solutions, few advisors aware of direct indexing are using the strategy and less than half who know about the strategy are planning to use it.

Broadridge surveyed 400 advisors online asking them about their familiarity with and use of direct indexing. Eight-four percent of the respondents were aware of direct indexing; 16% had no awareness of the strategy.

With direct indexing, advisors replicate an index of securities by purchasing the securities underlying an index instead of an index ETF or mutual fund, excluding some securities and overweighting others based on a client’s preferences.

Of the 84% of advisors who knew about direct indexing, only 10% were currently using the strategy and 5% had used it in the past. Less than half of the advisors who knew of the strategy said they were considering using it. Thirty-nine percent of advisors said they were not considering using it.

Direct indexing is “still not fully understood and its benefits are not fully appreciated,” said Matt Schiffman, principal of Distribution Insight at Broadridge. “The early data suggests that direct indexing will be more sold than bought. … There’s more work to be done by the asset management community.”

One of the reason for advisors’ hesitancy, according to Schiffman, is the time-consuming nature of managing portfolios. Many advisors have been outsourcing asset management and young advisors especially are tilting more toward financial planning. Acceptance of direct indexing “will be a function of how advisors see themselves,” said Schiffman.

He expects that direct indexing will continue to be more useful and attractive to high-net-worth investors and the advisors who serve them and focus their practices on more personalized portfolios. Eventually, however, says Schiffman, direct investing will move downstream to younger advisors and investors who are generally more focused on investments that focus on environmental, social and governance (ESG) factors, to align with clients’ values.

A Broadridge survey released in April found that ESG investments were most popular among female advisors and advisors under 40.

The firm’s latest survey included advisors at RIA firms, independent broker-dealers and regional firms. Advisors in the RIA channel were most familiar with direct indexing (60% were familiar or very familiar) followed by advisors at broker-dealers (53%).