The industry’s attention around direct indexing has surged over the past five years. However, adoption of these solutions among financial advisors has yet to match the perceived popularity across the wealth management landscape, according to the report The Cerulli Edge–U.S. Managed Accounts Edition.
According to the Boston-based global consultancy, overall demand for separately managed accounts (SMAs)—including direct indexing strategies—remains high throughout the wealth management sector.
At the end of 2024, direct indexing assets totaled $864.3 billion, compared to $9.4 trillion in indexed ETFs and $6.6 trillion in mutual funds. Adoption of direct indexing models remains low at $17.2 billion, but this has more than tripled since Q4 2021.
About half of distribution executives in 2024 cited model-based SMAs (53%) and manager-directed SMAs (44%) as the most in-demand products for wirehouses and broker/dealers.
While demand is not as strong among independent registered investment advisors (RIAs)—with 27% demand for model-based and 34% for manager-directed—there is still substantial interest in these strategies.
By the end of 2024, direct indexing strategies accounted for 37.6% of manager-traded assets declared by SMA asset managers, more than doubling since 2020.
Although the sector has seen strong growth in direct indexing, there is still a long way to go, as only a small segment of financial advisors has adopted the solution.
In 2024, 18% of advisors reported using direct indexing strategies, up from 16% in 2023. More than a quarter of advisors (26%) choose not to use it despite having access to the strategy, and 12% do not know what direct indexing is.
“Advisor education is crucial for adoption, as it’s unlikely that advisors will recommend direct indexing strategies to their clients if they don’t fully understand them,” explained Michael Manning, research analyst at Cerulli.
“Wealth and asset managers who want advisors to adopt these solutions must make a concerted effort to educate them on potential use cases, added benefits, and the tax optimization element,” he added.
Although both the buzz around direct indexing and the interest from industry firms are significant, it’s important to remember that the core goal of these strategies is to deliver better outcomes for clients to help them meet their objectives.
“As the industry evolves and product innovation moves rapidly, stakeholders must continue to monitor how their offerings fit into the changing ecosystem,” said Manning. “Both wealth and asset managers are working to add these capabilities to their platforms, so adoption is likely to be uneven, and firms that create the best advisory experiences will gain market share,” he concluded.
