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.