Direct indexing touted as client prospecting tool

It's a mistake to assume direct indexing is just for your wealthiest clients with complex investment portfolios, according to Randy Bullard, global head of wealth at Charles River Development.

“I think every financial advisor should be accessing direct indexing for their taxable client accounts,” Bullard said Monday at the ETF Exchange conference in Miami.

Presenting along with Ben Hammer, sales executive at Vanguard, Bullard pushed back on the general notion that direct indexing is a niche product for select clients.

“A direct indexing solution is uniquely designed to catch money in transition, and it’s suitable for all types of investors,” he said. “That’s the transition the industry is starting to go through. Once you conquer the operational complexities of direct indexing, it becomes a broad market solution.”

As direct indexing platforms pop up across the financial services industry, Hammer described the it as “giving advisors an additional edge” with clients.

But he added that given the flood of direct indexing platforms over the past year, advisors could easily become overwhelmed when entering the space.

“You have to know the basics when determining which solution to use,” Hammer said. "Think about how you’ll work with the provider for everything from online portals and email communications to after-tax reporting and tracking error, and how they do tax-loss harvesting. It gets down to service; if the technology is great, are the people behind it great too?”

In terms of practical applications, Hammer said the volatility of 2022 provided the perfect environment to showcase some of the strengths of direct indexing.

“Right now, most of the reason people are using direct indexing is for taxes, but we’re telling people not to fall in love with that after-tax return from last year,” he said. “Volatility created an opportunity last year, but the opportunity hasn’t passed by. Every year there are some stocks that fall in an index.”

Hammer said he's seeing increasing adoption of direct indexing among accounting firms that work with financial advisors.

Bullard said the ability to customize an index through direct indexing platforms is just scratching the surface of where the product is ultimately heading.

“I’ve seen financial advisors where their first use with direct indexing is with a complex client, because high-net-worth clients don’t walk in with a bag of green money, they walk in with stuff,” he said. “It’s a great vehicle for bringing in new clients, and as the complexity with how it gets implemented with technology gets easier, then it comes into the mainstream.”