The concept of Direct Indexing is pretty much as it sounds.  Instead of accessing an index through an ETF or a mutual fund – you directly own the underlying securities.  This approach has created some excitement as it can create some potential efficiencies.  Here are 3 examples:

  • Taxes – by owning the underlying stocks directly, there is greater ability to control taxes.
  • Separately Managed Account (SMA) Fees – build an index with similar exposures without the management fee.
  • Custom Indexing – provides the ability to build indices tailored to client preferences.

We think there is potential for major benefits and efficiency, and we also believe direct indexing is set to grow because of this.  But the path forward may not be what you’d expect.

Keep in mind, anybody can replicate several indices for under 10 basis points.  In addition, if done through ETFs, the tax concern is minimal to begin with.  We see the lifeblood of financial services as the $500k to $3M household and the advisors serving them.  Most of this is qualified money and we are seeing fewer and fewer advisors utilizing SMA managers. This leads to the question – What does direct indexing bring to the table for advisors, if only for a narrow range of clients and circumstances. We are seeing this in practice.

In our discussions, the greatest value in direct indexing is the ability to provide ownership of individual stocks within accounts that are managed cohesively, tax efficiently, and with a supporting story. Yes, it requires the technical ability to trade and maintain the direct indexed solutions, but it doesn’t mean advisors need to be overwhelmed with more data than necessary.

The fastest-growing segment of our model portfolio service is the version that provides exposure to individual equities.  It offers the look and feel of an SMA without the fee and potential threat of a big taxable consequence due to a manager change.  We even create custom sleeves at advisor request.  These are all mini versions of direct indexing, specifically for advisors. We see firsthand the power and appetite for this approach, even did a webinar with on this subject in December:

Riskalyze Webinar on HNW Models

We see widespread interest in owning individual stocks for clients in this $500k and up range, and direct indexing capabilities can help meet this growing demand. The best solutions will be the ones that simplify and create a sense of ownership – not the ones that create more complexity or more things to think about.

We think the concept applies to all, but the current solutions appeal to only a few.  We are working to change that.




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This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible. 

Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2103-13.