Issue link: https://resources.envestnet.com/i/1537367
Direct indexing has experienced a tremendous rise in popularity, leading to increased questions from investors, and forcing advisors to develop a perspective on whether direct indexing fits within their broader offering to clients. As more and more providers have brought direct indexing capabilities to the market, differentiating between these offerings has become difficult. To simplify the landscape, common narratives have formed, often narrowing the scope of direct indexing's usefulness to ultra-high-net-worth clients looking to generate losses – or tax offsets. The objections below are all common examples of pushback about direct indexing that we think misunderstand the nature and breadth of the benefits direct indexing can provide. Changes in technology and trading commissions have led to the decline in investment minimums for direct indexing, and a seven-figure portfolio is no longer required to support these accounts. In fact, some direct indexing providers offer solutions for portfolios below $100k. Most importantly, under today's circumstances, the benefits of direct indexing – tax efficiency and customization – remain salient across account sizes. In fact, younger professionals with sound and growing income streams may be strong candidates for direct indexing. These clients may desire: a) More optimal tax outcomes b) Security restrictions to account for existing financial exposures c) The ability to incorporate their values in their portfolios "Direct indexing doesn't make sense without a multi-million-dollar portfolio." Direct indexing can (and should) be a core portfolio solution rather than simply a high net-worth tool. "ETFs are tax efficient. Why potentially pay more for direct indexing?" Investors often focus on fees and pre-tax returns, but after-tax returns are what matter for taxable investors and direct indexing strategies may in fact cost less than a common fund model that advisors run. While exchange-traded funds (ETFs) are tax-efficient, security-level tax loss harvesting common in direct indexing strategies provides even greater tax efficiency. Why? Even in rising markets, an often-large subset of names has negative returns. Direct indexing allows you to harvest these securities – which would otherwise be inaccessible in a fund structure – leaving investors with portfolios that can generate positive overall returns while also passing through realized losses to reduce current and future tax liability. The potential for improved after-tax performance that investors can earn through direct indexing can more than offset any excess fee that may be associated with direct indexing. 20250701-4620699 █████████████████ Ì200009WWG8Î