Survey Report: The Direct Indexing Opportunity 2022

Direct indexing is expected to be a key growth driver in financial services. FTSE Russell surveyed the wealth industry and explored the capabilities of direct indexing.

Summary

Five years ago, hardly anyone in the financial services industry – outside of a small group of specialised, mostly tax-focused firms – had awareness of direct indexing (DI). Fast forward to 2022, and there is broad industry agreement that DI is expected to be a key growth driver in the industry – especially for wealth firms. It’s no surprise that the industry finds broad agreement that direct indexing is undergoing significant growth and that this growth is expected to accelerate over the next three to five years.

A total of 21 individuals participated in an online survey conducted by Aite-Novarica Group from March to June 2022. Survey participants spanned the wealth industry, including wealth management firms, asset management firms, investment platform providers and digital/robo advice providers. Given the size of the sample, the data in this report is considered to be a directional indication of conditions in the market. Of the firms surveyed, 81% have high interest in offering direct indexing solutions to advisors and 76% ranked direct indexing as a top priority over the next 12 months. The majority (90%) believe direct indexing will allow their advisors to better demonstrate value to clients by delivering personalised solutions such as tax-loss harvesting, efficient management of concentrated positions and portfolio customisation especially related to ESG preferences – all the top drivers of demand.

The survey results indicate that firms may be underestimating what puts the ‘index’ in direct indexing. The foundation of direct indexing involves the timely capture, calculation and maintenance of accurate, investment-grade index data. Only 10% of surveyed firms ranked custom indexes or performance benchmarking as top obstacles to implementing and scaling a direct indexing solution. Almost half (48%) indicated they would rather build these capabilities in-house than purchase them from a  third party.