The investment technique known as direct indexing is popular among a small but growing subsection of financial advisors, with data from Cerulli Associates showing that 18% of advisors used the method as of year-end 2024.
Direct indexing strategies, Cerulli’s reporting found, account for 37.6% of manager-traded assets reported by separately managed account asset managers. That’s more than double the rate measured in 2020. Likewise, the adoption of model-delivered direct indexing by advisors has more than tripled since 2021.
According to Brian Huckstep, chief investment officer of Advyzon Investment Management, and Patrick Shaddow, CEO of Syntax Data, advisors are steadily warming to the virtues of direct indexing. Interest in SMAs and model portfolios is following suit.
Advisors are able to provide clients with personalized portfolios that fit their specific situations and preferences, the duo explained in a recent ThinkAdvisor interview, while taking advantage of underlying losses in taxable accounts. If costs are kept in check, advisors can better match portfolios to clients’ risk-return profiles while keeping more of the investment proceeds.
Growing demand from advisors, in fact, is one of the primary reasons why Advyzon and Syntax entered into a formal direct indexing partnership in October. Advisors using AIM’s turnkey asset management program can deploy customized benchmark indexes or build their own core, factor, thematic or impact indexes from scratch.
The collaboration, appealing for the firms and their respective shared clients, Huckstep and Shaddow said, also reflects a broader development in the investment technology industry. Firms that serve advisors are being called upon to deliver a growing list of integrated technology tools to their clients.
Build or Partner?
Huckstep drew up a methodology to build out a direct indexing capability.
“This raises the perennial question of whether you build all the tools internally or whether you work with an established third-party provider,” he said. “We went through that exercise starting a few years ago with our direct indexing capabilities. So much of what we have built at Advyzon has been built internally, so we initially went down that route.”
It was "pretty quick," Huckstep said, that the firm realized that building the underlying software and integrating it within Advyzon’s broader advisor platform would be a major lift.
“It didn’t take all that long before we decided to start looking outside for a partner,” Huckstep said. “We quickly came across Syntax, and we saw that their system did everything we had written up in our proposal — and more.”
Syntax brought a proprietary system to the table, Shaddow noted, that includes accurate product line revenue data for more than 11,000 publicly traded companies. Additionally, Syntax Data’s output includes back-tested performance, detailed statistical analysis and an institutional-grade methodology document that offers “total transparency” into the investment process.
“We are specialists in doing this work and managing this data,” Shaddow said. “Firms like Advyzon have the capabilities of building their own indexing capabilities, no doubt, but it often makes more sense to partner with a provider like us. This is what we do, and we strive to be the best-in-class solution.”
How the tool was developed, Shaddow said, is less important for advisors than serving their clients effectively and efficiently.
“Delivering these capabilities in a white-labeled solution with the Advyzon TAMP is a big step forward for our advisor clients,” Huckstep said.
Integration Is King
During the interview, Huckstep emphasized Advyzon’s goal to build its own tools and integrate third-party solutions in a manner that relies on a single source code. That is to ensure that its platform delivers a unified user experience across the customer relationship management system, portfolio management, reporting, trading and rebalancing.
This contrasts with an approach where advisors cobble together applications via data integrations. This “best of breed” approach sounds good in theory, Huckstep said, but it often ends up with non-integrated workflows.
Huckstep also discussed the organization's growing pool of custodians, asset managers and technology providers that are directly integrating their platforms with the firm's offerings to stay ahead of advisor demand.
“Advyzon’s success underscores our belief that companies that embrace third-party integrations will ultimately win out over those companies that try to build everything themselves,” Shaddow said. “Especially when it comes to the most complex services and solutions, it’s just hard to be a true expert at everything.”
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