Wall Street has spent years trying to solve a specific problem for wealthy investors: how to stay exposed to rising equity markets while still generating enough losses to reduce the tax burden attached to years of accumulated gains.
The challenge has only grown as more investors sit on highly appreciated positions, whether from concentrated holdings in “Magnificent Seven” stocks, broad index funds held through a long bull market, or equity compensation tied to fast-rising technology companies.
For a growing share of those investors, the solution has been direct indexing. Rather than buying an ETF or mutual fund that tracks an index such as the S&P 500, investors own the underlying stocks individually. That structure allows for much more precise tax management, because specific positions can be sold or retained based on their tax profile while the overall portfolio continues to resemble the benchmark. It is a niche no longer: according to The Cerulli Edge, direct indexing assets ended 2025 at $1.2 trillion[1], and the firm projects that direct indexing will grow faster than ETFs, mutual funds and traditional separate accounts over the next five years.
Ken Lassner has been working inside this space for more than two decades. Now Lead Product Strategist at Northern Trust, the third-largest direct indexer in the industry, he joined the firm about 18 months ago to help extend a capability Northern has refined over 35 years to the broader intermediary channel. His vantage point is less about hype and more about how the strategy functions inside real client portfolios, and what advisors tend to miss when they weigh direct indexing against familiar tools like ETFs.
Lassner finds, “When you’re thinking about when to use direct indexing over an ETF, there’s really two main reasons,” he says. “One is tax management and the other is customization.”
The core mechanism is tax-loss harvesting. In any broad index, some stocks rise while others fall. An ETF investor experiences that dispersion only in aggregate. In a direct indexing portfolio, the manager can selectively sell positions trading below their purchase price, realize those losses, and replace the names with similar stocks so the portfolio continues to track the benchmark on a pre-tax basis. “If you invest in the S&P 500 or any broad stock market index, some stocks are going to go up, some stocks are going to go down,” Lassner says. “If you’re in an ETF, you really have no capability to take advantage of that volatility. But if you’re in a separately managed account, you do.”
Over three to five years, and out to ten or twenty, Lassner estimates the process can add “approximately the range of 1 to 2% per year of excess return after taxes versus an ETF, which can build up substantially due to compounding over time.”[2]
The same structure enables customization that pooled vehicles cannot offer. Lassner points to a common example: a corporate executive holding a large stake in their employer’s stock. A broad-market ETF likely holds that same name, increasing concentration risk. “In a separately managed account direct indexing portfolio, we have the capability to exclude that stock or even exclude the whole industry if they’re really worried about the risk of being very exposed to that industry,” he says. The same tools can implement values-based screens or factor tilts, though Northern Trust treats the process as consultative rather than open-ended. “We want to help them understand any kind of changes that they’re putting into their portfolio and that they make sense for them but also understand any risks that might be involved.”
Historically, this level of individualization was feasible only at the high end. When Lassner first entered the direct indexing space, minimum investment levels were typically much higher. Today, they have become significantly more accessible. “Because of technology and automation, we’re able to deliver the same type of customization for every single client, all while paying attention to things like wash sales and other tax considerations in the portfolio.”
Ossification, education and the long-term view
One of the most persistent misconceptions Lassner encounters concerns what happens after the early years of a direct indexing program. The industry refers to the later phase as ossification: after five to seven years, as gains accumulate and cost bases reset, the number of positions available to harvest begins to shrink.
Lassner agrees the pattern is real, but challenges the conclusion that direct indexing’s value is exhausted once a portfolio ossifies. “There’s a perception that ossification is a bad thing, meaning that there’s no more value. And that’s absolutely not true,” he says.
“The benefit is not only offsetting gains today, but deferring taxes over long periods so capital can continue compounding,” he says. There are also practical steps to refresh a portfolio’s tax profile, he notes, “things like adding cash or donating some of these positions to charity.”
For Lassner, the larger issue is education. Northern Trust has surveyed direct indexing “super users” — advisors who have fully integrated the approach across RIAs, banks and wirehouses. They found the strategy transformative for their business, but many “wish they started earlier and they wish they had engaged in more education about direct indexing,” he says. “Education is very critical, not just for advisors, but also for end clients.”
At Northern Trust, direct indexing now sits at the core of almost every wealth and family office client portfolio that meets the minimums and fits the right tax profile. “For clients that can meet the minimums and are of a certain tax bracket and have capital gains from other investments, direct indexing just can make a lot of sense,” Lassner says. “It’s that combined with the customization that makes it very attractive.”
For advisors, the appeal is becoming less about accessing a niche strategy and more about solving a structural tax challenge with tools that have finally become scalable.
Footnotes
[1] The Cerulli Edge, U.S. Managed Accounts Edition, Q1 2026.
[2] Shomesh E. Chaudhuri, Terence C. Burnham, and Andrew W. Lo. 2020. “An Empirical Evaluation of Tax-Loss-Harvesting Alpha.” Financial Analysts Journal 76:3, 99–108.
IMPORTANT INFORMATION
This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of Northern Trust Asset Management (NTAM). The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult an NTI representative.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide a recommendation or give investment advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and/or its affiliates may receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing, and other services rendered to various proprietary and third-party investment products and firms that may be the subject of or become associated with the services described herein. Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
© 2026 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
Saba pushed; the justices pushed back - and the SEC keeps the gavel.
Two restrictive covenants gone in one ruling - and the drafting flaw is everywhere.
Clients' everyday realities, anxieties, and aspirations naturally change as they go up the wealth scale – and that has profound implications for advisors helping them find what "enough" really means.
The RIA technology giant's new office features a fitness center, café and outdoor community spaces, including a beehive, picnic area and herb garden for over 100 employees.
Liquidity risk overtakes access as the top concern for E&Fs as private markets dominate portfolios.
As $84 trillion prepares to change hands, advisors who treat estate planning as peripheral are quietly building a sieve, not a book.
In volatile markets, the advisors who win aren't the ones with the best calls - they're the ones whose clients stay the course.
