Direct Indexing: Wealth Management Firms Might Not Beat the S&P, But Can Always Beat the IRS

In the face of a volatile market and tax code changes, a growing number of wealth management firms are turning to direct indexing as a way to improve tax optimization, or “beat the IRS.” Beyond tax optimization, advisors and wealth managers believe direct indexing is a strong strategy for supporting ESG goals and customizing portfolios that could ultimately perform better.

There are many technology tools at play in the space and as it is very early, it’s not clear how firms will use them all. But it is clear that while the technology is cost effective, there is room for improvement and these tools can evolve their offerings to meet advisors’ expectations and provide clear value.


Direct Indexing is Growing—42% of Firms Currently Offer It and More Than Half of Those Who Don’t, Are Interested 

 Insights and Actionable Intel

  • Due to the volatile market and changes to the tax code, firms’ main reason for offering direct indexing strategies is tax optimization; other reasons include ESG, portfolio customization, FOMO and client requests
  • UHNW market segment is experiencing the fastest growth of direct indexing  
  • Of the firms already offering it, more than half (58%) say they plan to increase allocation in 2023
  • Take Action: Stop trying to beat Wall Street and beat the IRS by increasing tax optimization opportunities in a down market


Firms Cite 3 Main Reasons for NOT Engaging in Direct Indexing

Insights and Actionable Intel

  • Lack of educational material from asset managers about the benefits and accessibility of direct indexing models have left advisors feeling unsure about the value of the strategy and ease of implementation.
  • Uncertainty with the advisors leads to limited information provided to clients, who aren’t asking for the alternative portfolio solution but might be interested if the benefits (tax management, personalization, etc.) were shared with them by their advisor.
  • Take Action: Firms that have limited internal resources available to execute on direct indexing strategies can outsource the function


Direct Indexing Support Technology Falls Short of Expectations in Key Areas

Insights and Actionable Intel

  • Of firms engaged in direct indexing, 71% use a third-party tool to help manage their strategies
  • Firms have a wealth of technology options to support direct indexing; however, they say many don’t fully address their most important functionality needs
  • Conversely, firms expressed more satisfaction with areas of cost, customization capabilities and reporting than they ranked them in importance
  • Take Action: Technology firms need to bring solutions to market that address advisor pain points
Survey Information: The data in this report is pulled from a survey conducted by F2 Strategy in Aug/Sep 2022. The survey includes responses from 33 leading RIA, Wealth Management and Asset Management firms representing $3 trillion in assets.

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