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Most HNW Advisors Still Unfamiliar With Direct Indexing: Survey

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What You Need to Know

  • More investors and advisors recognize the tax advantages, the flexibility and the ability to tailor to client mandates that SMAs offer.
  • Active tax management and customized exposure are the top direct indexing customizations that advisors implement.
  • Fifty-nine percent of surveyed advisors who avoid DI entirely are satisfied with the solutions they recommend to clients.

Direct indexing is primed to grow at an annualized rate of 12% over the next five years, but more than half of advisors to high-net-worth investors in a new survey were unfamiliar with the strategy, Parametric Portfolio Associates reported this week. 

At the same time, these advisors embrace the strategy’s most valued benefits: tax management and customized exposures.

“Direct indexing” is the new name attached to custom passive separately managed accounts, according to Parametric. The firm said it has been recommending tax-managed custom SMAs to investors and advisors since 1992.

“Despite all the growth and attention direct indexing has received, our new survey shows there is still room for substantial growth in advisor awareness and of the product and the values it provides,” Parametric’s chief executive, Brian Langstraat, said in a statement. 

Assets in the strategy totaled some $362 billion in 2020, nearly one-fifth of the industry’s total retail separate account assets, Parametric said, citing research from Cerulli Associates. 

Langstraat said the survey results suggest that the next part of the growth curve could be even steeper than some have projected. 

“More and more investors and their advisors are recognizing the value — the tax advantages, the flexibility, the ability to tailor to client mandates — that these SMAs offer,” he said. “As the story of customization is told and adopted, it will help advisors fulfill unique portfolio requirements for investors across the wealth spectrum.” 

Cerulli fielded the survey in the fourth quarter among 200 independent and hybrid RIAs, wirehouses, national and regional broker-dealers, and independent broker-dealers. These advisors manage an average of $250 million in assets, and have been in their positions for an average of 20.7 years.

Key Findings

The survey found that active tax management is the top direct indexing customization that advisors implement, followed by customized exposures. 

Advisors place the highest value on the following benefits of direct indexing: tax management, tax-efficient transitions, custom-weighted indexing, values alignment and efficient charitable giving. 

Fifty-nine percent of surveyed advisors who avoid direct indexing entirely said they are satisfied with the solutions they currently recommend to clients. They prefer to project the confidence that comes with product familiarity and remaining in their comfort zone, Parametric said. 

Among the 12% of advisors that use direct indexing, broker-dealers are three times as likely as RIAs to do so, mainly because of the increased availability of direct indexing platforms in their segment. 

The survey results showed that direct indexing allocations rise with assets under management. Among advisors that manage $500 million or more, 19.2% of those assets are allocated to SMAs versus 13.7% to ETFs. 

One finding that Parametric found surprising was advisors’ hesitancy in discussing environmental, social and governance factors with individual investors. More than half of advisors said they wait for their clients to broach the subject. 

Advisors across all channels and asset brackets are more willing than ever to put client assets into passively managed vehicles, with nearly one-third noting they’re allocating 26% to 50% of their AUM to passive products.