Despite surging assets under management and growing institutional enthusiasm, direct indexing remains a relatively underused tool among financial advisors in the US wealth management space, according to new data from Cerulli Associates.
Direct indexing strategies closed out 2024 with $864.3 billion in assets – nearly double the level reported in 2021, representing a compounded annual growth rate of 22.4 percent. However, that still left direct indexing assets an order of magnitude below the $9.4 trillion in index-tracking exchange-traded funds and $6.6 trillion held in mutual funds.
The market remains concentrated, with the top five providers, led by Morgan Stanley, controlling nearly 87 percent of direct indexing assets.
Cerulli's research indicates strong interest in separately managed accounts (SMAs) broadly, particularly among wirehouses and broker-dealers.
About 53 percent of distribution executives in these channels identified model-delivered SMAs as most in-demand, while 44 percent cited manager-traded SMAs. The numbers are lower among RIAs – 27 percent and 34 percent, respectively – but still notable given their traditional preference for ETFs.
Direct indexing, as a subset of SMAs, now represents 37.6 percent of manager-traded assets, more than doubling since 2020. Still, model-delivered direct indexing accounts for just $17.2 billion, though that has more than tripled since late 2021.
Among financial advisors, usage remains limited. Just 18 percent reported using direct indexing in 2024, a modest rise from 16 percent the year before. Roughly one-quarter (26 percent) said they had access to the strategy but opted not to use it, while 12 percent indicated they were unfamiliar with the concept.
“Advisor education is crucial to adoption, as advisors are unlikely to recommend direct indexing strategies to their clients if they do not fully understand them,” Michael Manning, research analyst at Cerulli, said in a statement announcing the findings. “Wealth and asset managers that want advisors to adopt these solutions must make a concerted effort to educate them on potential use cases, the added benefits, and the tax optimization element.”
One other hurdle to broader use of direct indexing, according to Cerulli, comes from the high minimums needed to invest in an SMA.
"Even with decreasing minimums due to increased adoption of fractional shares, the cost of the product may not be worth the tax optimization elements for many investors, or investors may not see a benefit from the portfolio customization potential," the report noted.
The report underscored that although direct indexing is sometimes conflated with the SMA wrapper or associated only with its enabling technology, it is best understood as a strategy that combines those elements. For wealth firms, the draw comes from the strategy's capacity for customization and tax-loss harvesting – benefits that may be most valuable to clients in higher tax brackets.
“As the industry evolves and product innovation moves rapidly, industry participants must continue to monitor how their offerings fit into the changing ecosystem,” Manning said. “With both wealth managers and asset managers seeking to add these capabilities to their respective platforms, adoption likely will be unevenly distributed, with firms that create the best advisor experiences likely to gain incremental share.”
Cerulli projects that proprietary offerings from large firms, either built in-house or acquired through partnerships, will shape the next phase of direct indexing.
While first movers dominate current market share – including Morgan Stanley, which boasts $253.5 billion in direct indexing assets, and BlackRock subsidiary Aperio, which has $110.9 billion – firms such as LPL and Fidelity have begun to make inroads with their own customized solutions, Cerulli noted.
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