Direct Indexing: Strategy for Asset Managers

Asset managers have lived on their brands and wealth manager preferences for sleeve accounting for years, but an approach built on product silos and performance-based reporting has failed them. Obsession with product and performance creates harm on several fronts. It reinforces the client and advisor tendency to prioritize short-term results. It inflates the relative contribution of a sleeve (which may comprise only the equity component of a 60/40 portfolio) to portfolio outcomes. Most seriously, it misleads advisors by playing on their incomplete view of client assets.

Institutionalized blindness has implications for the entire value chain. Do the performance characteristics of a sleeve or any product really matter for the advisor, if much of the client portfolio is white space? The purchase of product off the shelf sabotages the relationship between advisor and wholesaler, whose stature shrinks to that of the salesman, and forestalls the development of a scalable feedback mechanism. For the asset manager, the inability to customize the manufacturing process (at either the sleeve or whole-portfolio level) to individual requirements translates into distance from the end client and the abdication of profit.

Key questions addressed in this report:

• To what extent are financial advisors adopting direct indexing?
• How does adoption reflect the profile of individual advisors, and what obstacles to adoption stand in their way?
• How should asset managers respond to the competitive challenges posed by wealth managers and technology platforms that are seizing the machinery of production?

Companies Mentioned:

Advisor Partners, Altium Wealth Management, Aperio, BlackRock Aladdin, Charles River Development, Goldman Sachs, Edward Jones, First Affirmative Financial Network, Hightower Advisors, JPMorgan Asset Management, MSCI, Northfield Analytics, Parametric, PGIM, Qontigo, Raymond James, Rowboat Advisors, Smartleaf, Vanguard Group, Vestmark, Wealthfront, YourStake