Majority of HNW Advisors Remain Unfamiliar with Direct Indexing, Finds Survey From Parametric and Cerulli

SEATTLE--(BUSINESS WIRE)--Parametric Portfolio Associates LLC (Parametric), the leading direct indexing provider, today released findings from a survey of advisors serving high-net-worth (HNW) investors. Sponsored by Parametric and conducted by Cerulli Associates, the survey revealed that even though direct indexing is primed to grow at an annualized rate of more than 12% over the next five years, the majority of advisors surveyed were unfamiliar with the strategy despite embracing the most valued benefits of it – tax management and customized exposures.

Fielded in Q4 2021, The Advisor Perspective on Direct Indexing survey indicated this surprising statistic – more than 50% of HNW advisors remain unfamiliar with direct indexing. This comes at a time when the strategy is experiencing rapid growth, totaling over $362 billion in assets in 2020, nearly one-fifth of the industry’s total retail separate account assets.1

“Despite all the growth and attention Direct Indexing has received, our new survey shows there is still room for substantial growth in advisor awareness and of the product and the values it provides,” said Brian Langstraat, CEO of Parametric. “This suggests that the next part of the growth curve could be even steeper than some have projected. More and more investors and their advisors are recognizing the value—the tax advantages, the flexibility, the ability to tailor to client mandates—that these SMAs offer. As the story of customization is told and adopted, it will help advisors fulfill unique portfolio requirements for investors across the wealth spectrum.”

Additional highlights from the survey include:

Key Findings:

• Active tax management is the top direct indexing customization that advisors implement, followed by customized exposures.
• Tax management, tax-efficient transitions, custom-weighted indexing, values alignment and charitable giving are among advisors’ most valued benefits of direct indexing.
• Among advisors who avoid direct indexing entirely, the majority claim they’re satisfied with the solutions they currently recommend to clients, preferring to project the confidence that comes with product familiarity and remaining in their comfort zone.
• Among the 12% of advisors currently using direct indexing, broker-dealers are three times more likely to use direct indexing than RIAs, largely due to the increased availability of direct indexing platforms in their segment.
• Direct indexing allocations rise with AUM. Among advisors managing $500 million or more, 19.2% of those assets are allocated to SMAs versus 13.7% to ETFs.
• Surprisingly, these advisors are hesitant to discuss ESG with individual investors. More than half of advisors wait for their clients to broach the subject.
• Advisors across all channels and AUM brackets are more willing than ever to put client assets into passively managed vehicles, with nearly one-third noting they’re allocating 26% to 50% of their AUM to passive products.

This survey follows Cerulli’s comprehensive report published in August 2021, Improving Client Experience: Customizing with Direct Indexing, which defined direct indexing, presented a five-year growth projection of more than 12% and identified opportunities for advisors. The new survey, The Advisor Perspective on Direct Indexing, is available for download here. For more information on how advisors can strengthen their partnerships with investors and add value for their clients in a progressively more passive market, visit Parametric’s website.

About Parametric

Parametric, part of Morgan Stanley Investment Management, the asset management division of Morgan Stanley (NYSE: MS), uses investment science to build and manage systematic investment strategies and to implement custom portfolio solutions providing clients with targeted investment exposures with control of costs and taxes. Based on principles of intellectual rigor, ingenuity and transparency, Parametric seeks to deliver repeatable client outcomes with consistently high levels of service and maximum efficiency. As of December 31, 2021, Parametric managed $428+ billion in assets on behalf of institutions, high-net-worth individuals and fund investors. Headquartered in Seattle, Parametric also has offices in Minneapolis, New York, Boston and Westport, Connecticut. For more information, visit parametricportfolio.com.

1 Cerulli Associates, “Improving Client Experience: Customizing with Direct Indexing,” August 2021.