Direct Indexing is an approach to investing where the individual investor owns the individual stocks that make up a basket, or index, of stocks. The contents of the customized index, or portfolio, mirror the composition of an index (e.g., S&P 500) with the added investor preference for certain exposures, such as risk tolerances, ESG interests, or tax optimizations. Rather than a plug-and-play type portfolio designed for all investors, Direct Indexing is unique to the investor.

Direct Indexing replicates an index by purchasing its underlying individual securities, therefore enabling customized portfolio construction and tax benefits:

Direct Indexing is not new. The terminology (“Direct Indexing”) is a revamp of “SMAs” (Separately Managed Accounts); the practice of customized portfolio construction has been around for decades, although primarily reserved for the UHNW and HNW due to the expense associated with creating and owning these personalized portfolios. What is new, is the access to customized portfolios by a broader swath of clients (e.g., the Mass Affluent ("MA")) and the capability to create these customized portfolios to a greater degree than before, for all investors.

My upcoming report will explore how the application of mature technologies is driving a major industry shift and will ultimately have a profound effect across asset managers, wealth managers, and the individual investor.