Direct indexing has expanded well beyond its origins as a strategy for the ultra-wealthy, with minimum account sizes dropping from roughly $5 million to $250,000. Long bull markets have created a new set of tax problems, from concentrated stock built up through the Mag 7 rally to aging portfolios that have worked through their easiest losses. Ken Lassner, direct indexing lead product strategist at Northern Trust Asset Management, argues that tax alpha keeps compounding regardless. He treats ossification less as a dead end and more as a phase that the strategy is built to outlast.
Direct indexing gives investors a portfolio built to track an index through individual stocks, with personal customization. More than 20 years ago, the strategy required a minimum of $5 million and belonged almost exclusively to the highest tier of wealthy investors. Today, Northern Trust Asset Management offers it to clients with $250,000. Each client receives what amounts to their own custom benchmark. Portfolios can reflect ESG values and account for significant holdings outside the strategy. The investment case has remained consistent over two decades; what has changed is who can access it.
The bull market has left many client portfolios concentrated. "One of the biggest opportunities that we're seeing here at Northern Trust Asset Management, or one of the biggest solutions that we're trying to provide, is around concentrated stock," says Ken Lassner, direct indexing lead product strategist at Northern Trust Asset Management. "With the run-up in the markets and especially in stocks like the Mag 7, as well as recent large IPOs, we're seeing a lot of clients that have a significant amount in a single holding or a couple of holdings that have a large unrealized gain." Many of those clients are reluctant to sell because of the tax cost of doing so.
Ossification describes what happens to a direct indexing portfolio after years of harvesting its most obvious losses. "What ossification means is that there's not as many losses in a lot of these direct indexing portfolios as there used to be, because losses tend to be front-loaded," Lassner explained. "Markets generally go up over time, and if we're taking losses on the stocks that go down and deferring gains on the stocks that go up, there's going to be less and less loss to take in the future." Losses load early. The portfolio keeps running, but the easy inventory thins out over time.
It does not, and Lassner is direct about it. "I hear that quite a bit, that after seven years or 10 years of a direct indexing portfolio, I have an expensive index fund. And that's absolutely not true, because the strategy in a separately managed account continues to deliver value, or what we call tax alpha, over the very long term." The mechanism is compounding: "you're deferring taking gains on the tax savings that you made from using the losses to offset capital gains, and those tax savings compound over time. The longer you can make that go, the better in terms of your after-tax return." The value of the strategy cannot be judged solely by the return of the direct indexing account itself.
Single-stock volatility creates fresh harvesting opportunities even when the broad market is rising. "The more idiosyncratic risk you have in the market, or single stock risk or dispersion, that's where you're going to have more opportunities no matter what the market environment is, whether the market's going up, flat, or down," Lassner says. Dispersion keeps refilling the opportunity set that ossification would otherwise drain. Lassner also extends the strategy's usefulness to estate planning, charitable giving, and family planning, all areas where the after-tax outcome determines what a client actually keeps, not the pre-tax return alone.
Advisor survey data shows the strategy's impact across several practice metrics. Meaningful planning conversations top the list: 93.2 percent of advisors said direct indexing led to more of them. Client retention ranked second at 88.5 percent, followed by gaining more wallet share from existing clients at 87.5 percent. Direct indexing helped attract wealthier clients for 80.9 percent of respondents, and 72.1 percent said it helped win business they otherwise would not have secured. Just over a third, 37.9 percent, reported an increase in referrals. No single metric dominates; the strategy appears to strengthen multiple dimensions of an advisor's practice at once.
The infrastructure supporting direct indexing has changed significantly over two decades. "Through technology, automation, lower or in a lot of cases no commission costs, and fractional shares, we're able to really significantly lower the minimums," Lassner says, "to make it more widely available for more investors." Northern Trust Asset Management, which reported $1.6 trillion in assets under management as of June 30, 2026, now gives every client what amounts to their own custom benchmark at the $250,000 threshold. Advisors who want to explore Northern Trust Asset Management's direct indexing approach further can learn more through the firm's dedicated spotlight. Advisors looking for further analysis on direct indexing, tax strategy, and practice growth can explore InvestmentNews premium sponsored reports.
Ken Lassner: direct indexing lead product strategist, Northern Trust Asset Management; more than 20 years of experience with the strategy; oversees a direct indexing offering available to clients from $250,000.