What is Direct Indexing? How Delivering Personalization Helps Grow and Scale Your Business

Direct indexing is an investment approach that allows investors to replicate the performance of an index by purchasing the underlying shares of that index to create a customized portfolio. While this method has existed for some time, recent technological advancements have made it more accessible and scalable, leading to increased adoption among financial advisors who seek to provide clients with both personalization and tax management through customized portfolios.

What is Direct Indexing?

Personalized Strategies for Unique Goals

At its core, direct indexing enables investors to passively track an index—such as the S&P 500 or the Russell 2000—by purchasing the underlying positions. However, it goes beyond simple replication. Direct indexing allows for the selection or personalization of the subset of underlying positions, offering nearly limitless opportunities for customization to meet an investor’s specific needs. Investors can blend indices or select positions based on quantitative factors or evolving objectives, with the goal of outperforming a benchmark or aligning with personal investment goals.

Meeting Values-Based Investment Objectives

Direct indexing is particularly well-suited for investors focused on ESG (Environmental, Social, and Governance) or values-based investments. Investors can choose individual securities to include or exclude, creating a personalized investment experience. Unlike mutual funds or ETFs, direct indexing enables investors to avoid or swap out positions that do not align with their preferences. For example, environmentally conscious investors can invest in sustainable companies and avoid those that do not meet their standards.

Proactive Tax Management for All Clients

One of the most appealing features of direct indexing is its tax benefits. By owning the underlying positions directly, investors have multiple opportunities for tax management, such as harvesting losses to offset gains and optimizing the portfolio for taxes during rebalancing. Personalized direct indexing strategies can be optimized for tax efficiency, allowing positions to be selected or omitted based on their tax implications. This can lead to improved after-tax returns, reduced overall tax burden, and better management of capital gains when buying or selling within the portfolio.

At Orion, custom indexing begins with selecting a target investment mandate that aligns with the client’s values, goals, and objectives. Advisors can then customize the portfolio across various options, including tax transitioning, setting capital gains budgets, applying social screens, or imposing security restrictions.

Grow With Scalable Technology

As investors increasingly expect personalized services, direct indexing serves as a valuable differentiator for advisors. Previously, offering personalized portfolios and tax optimization required significant resources and was typically reserved for high-net-worth clients. Today, digital investing platforms and fractional share trading make direct indexing accessible to a broader audience. Advisors can now:

• ​Offer personalized, tax-efficient portfolios to a wide client base
• ​Manage clients’ tax liability through tax transition, tax loss harvesting, capital gains budgets, and tax-optimized portfolio rebalancing
• ​Appeal to ESG-focused and values-based investors
• ​Optimize and monitor client portfolios continuously
• ​Attract and retain high-net-worth clients with tailored solutions
• ​Leverage technology to streamline processes and reduce manual operations
• ​Discover additional revenue opportunities to grow their advisory business

Value Beyond Returns

Direct indexing enables advisors to quantify the tax savings value they provide to clients, enhancing discussions around fees. Technology platforms can simplify the process, making it easy to customize portfolios with tax transitioning, capital gains budgets, social screens, or security restrictions. Advisors can save time and streamline trading, reporting, and account maintenance by implementing custom indexing through integrated technology solutions.

Deliver Personalized Investment Portfolios with Tax Advantages

As investor expectations for personalization and investment technology evolve, direct indexing is expected to grow in popularity. From tax-loss harvesting and tax transitioning to ESG, direct indexing equips advisors with a valuable tool to offer bespoke, professionally managed portfolios tailored to the unique needs, values, and goals of their clients.