What You Need to Know
- Technology has made it easier than ever for firms to offer direct indexing to build and grow portfolios.
- The strategy aligns perfectly with millennials' desire for tailored investments and smart tax management.
- Expected annual growth rates surpass those of traditional investment products.
The transformation of direct indexing is taking center stage in wealth management. This 30-year-old passive investment strategy, once reserved for the ultra-wealthy, is now poised for wider adoption with millennial investors leading demand.
Why now? Technology has made it easier than ever for firms to offer direct indexing. The portfolio construction and optimization technology needed to power direct indexing at scale has become more accessible, changing the dynamics of traditional passive investing.
Why millennials? They’re interested in the tax strategies that direct indexing provides, as well as the customizability that ETFs and funds don’t offer.
Direct indexing aligns perfectly with their desire for tailored investments, ESG considerations and smart tax management, making it a vital tool for building stronger connections with this demographic and delivering exceptional investment results.
Next-Gen Indexing
Technology advancements and changing investor preferences have powered direct indexing’s ascension. Millennials in particular appreciate the ability to build portfolios that reflect their values and preferences while gaining tax advantages that traditional investment options like mutual funds or ETFs often lack.
There are several benefits to direct indexing: portfolio customization, lower fees and tax loss harvesting. Traditional exchange-traded funds don’t provide these benefits to the same extent — if at all.
Additionally, advisors can readily apply ESG criteria to an index, adapt portfolios according to their millennial clients’ risk tolerance, and make precise adjustments to sector exposures, ensuring diversified and highly personalized investment strategies. Or, even simpler, they can replicate an index and modify their clients’ holdings in real time.
Taking Advantage of This Trend
By embracing direct indexing, advisors not only are responding to increased demand but also are positioning themselves as leaders in offering innovative and personalized solutions to millennials.
This transformative approach to investing is notably aligned with the fintech landscape, where online brokerages are taking the lead in making direct indexing more accessible for investors with varied net worth.