Don’t poison your clients’ portfolios with Direct Indexing!

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Direct indexing sucks – don’t do it. Here are the reasons it will ruin your clients’ portfolios and you should run away as fast as you can.

For those of you who are new to my blog/podcast, my name is Sara. I am a CFA® charterholder and financial advisor marketing consultant. I have a weekly newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.” So please subscribe!

Sara Grillo, CFA is a highly fun and slightly crazy marketing consultant based in NYC.
I am an irreverent and fun marketing consultant for financial advisors.

Scott Salaske of Firstmetric and I have one major thing in common – we both hate Direct Indexing. We cover it in depth in the podcast, but here are the major reasons.

#1 Direct indexing is not really indexing

Wall Street has engineered this term “direct indexing” to capture the attention of fee only advisors who are obsessed with John Bogle. Direct indexing, once personalized and/or sampled, will result in a portfolio that resembles an index no more than a plate of scrambled eggs does.

So the term “direct indexing” is a misnomer but for the purposes of editorial simplicity we’ll use that term for this article.

I prefer the term “overly diversified SMA account” ; it’s more suitable to describe these structures.

#2 Tax harvesting benefits are exaggerated

All the direct indexing providers advertise the benefits of tax loss harvesting. But they are not providing you with the other half of the story:

  • In most cases you don’t really need to tax harvest on a consistent basis. You can do very well for clients by harvest tax losses occasionally when the market dips.
  • The role of the wash sale rule and the 60 day dividend rule are downplayed whereas both of them can interfere with the tax benefits that tax harvesting through direct indexing is supposed to create.
  • Tax loss harvesting can also be very hard to control. You may wind up with way more tax losses than you need, and you can only apply a small amount of the loss to each year’s taxes – the rest you have to carry forward.

#3 Direct indexing’s real goal is to get the client stuck for the benefit of Wall Street and the AUM peacocks

Just like whole life insurance, annuities, private equity, hedge funds, and interval funds (did I miss anything?), direct indexing is designed to lock up the clients’ portfolio into the hands of the financial advisors who put it there.

Let me ask everyone reading this blog.

Have you personally ever owned 500 stocks?

Or even 100 stocks?

Nobody is going to want to unwind a portfolio of 500 stocks.

Now you get it – the real objective is to put the portfolio in a place where the options are limited, which means for job security for the financial advisor AUM peacocks.

There are alot of arrogant financial advisor AUM peacocks strutting around - avoid working for them!

#4 The fees are obfuscated and embedded in confusing ways

Most financial products are a Christmas Tree of fees; direct indexing is no different.

Just add another layer!

If you look at any direct indexing provider’s “fee schedule” (if it may be called that) the language is usually ambiguous and confusing and lacking disclosure of all applicable charges that the portfolio will incur.

We dissect one of them in the podcast.

If you are going to invest your clients’ money into anything, all the charges matter. Even if they don’t seem material to you – they matter. Get a list and map out what happens at every point from start to finish in terms of fees charged to the portfolio, and verify every aspect. Don’t just trust what the provider says.

#5 Direct indexing is a better deal for the financial advisor and Wall Street than the client

As you can see, direct indexing really sucks for the clients but is probably one of the best deals to happen in a while for Wall Street and the financial advisors who allow their clients’ portfolios to be lit on fire. I hope you won’t do this. If you need more convincing, listen to the podcast.

It’s just another example of not putting the clients’ interest first, chasing shiny objects.

Add it to the long list.

When is this going to end? Where are all you “fiduciaries” out there who are supposed to be valiantly defending the needs of the client?


If you want more reasons direct indexing is bad for clients, I wrote a pretty long blog about why you should >run away from direct indexing. Enjoy!

Sara’s Upshot on direct indexing

What’d ya think of my blog on direct indexing? Was this helpful?

If yes…

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See you in the next one!

-Sara G