Introduction
Direct indexing is becoming an increasingly adopted approach to portfolio construction. By allowing investors to hold individual securities from an index, it combines low-cost, diversified exposure with customizable features such as tax-loss harvesting and ESG filters.
Unlike traditional pooled funds, direct indexing provides greater transparency, control, and potential tax advantages at the security level. For RIAs, family offices, and wealth managers, it enables scalable portfolio customization aligned with individual client preferences.
Aris Investing supports firms in implementing direct indexing through real-time tax optimization and integrated advisor workflows. This article outlines the growing interest in direct indexing and how it may fit within a modern advisory toolkit.
The Surge of Direct Indexing
Direct indexing has grown significantly in recent years, driven by technological advancements and shifting investor expectations. According to Cerulli Associates (2024):
- Assets in direct indexing accounts reached $864.3 billion by year-end 2024, up from $518 billion in 2021, a 66% increase in just three years.
- The sector is projected to grow at a 12.3% compound annual growth rate (CAGR) through 2027, reaching $1.35 trillion, projected to grow at a 12.3% CAGR through 2027, according to Cerulli Associates, based on certain assumptions and market conditions.
Table 1: Asset Growth by Investment Vehicle (U.S., 2020–2027 Projected)
| Investment Vehicle | 2020 AUM ($B) | 2024 AUM ($B) | Projected 2027 AUM ($B) | CAGR (2020–2027) |
| Direct Indexing | 375 | 864.3 | 1,350 | 12.3% |
| ETFs | 5,250 | 9,450 | 13,380 | 11.3% |
| Mutual Funds | 16,500 | 18,120 | 20,310 | 3.3% |
Source: Cerulli Associates, 2024. Estimates subject to change.
Disclosure: This third-party data is believed to be reliable but has not been independently verified by Aris Investing.
This growth reflects a broader trend: investors and advisors are prioritizing personalization and tax efficiency. Unlike ETFs and mutual funds, which offer standardized exposure, direct indexing provides a dynamic, client-centric solution that aligns portfolios with individual goals while optimizing after-tax returns.
Why Direct Indexing Now?
Several converging trends are making direct indexing a compelling choice for investors and advisors:
- Technological Advancements
Innovations like fractional share trading, commission-free platforms, and automated portfolio rebalancing have democratized direct indexing. Previously reserved for ultra-high-net-worth clients with millions in assets, direct indexing is now viable for portfolios as small as $100,000, broadening its appeal. - Rising Tax Complexity
High-net-worth and ultra-high-net-worth clients face increasing tax burdens, including federal capital gains taxes (up to 20%), net investment income taxes (3.8%), and state-level taxes (e.g., California’s 13.3%). Industry studies suggest that, under certain market conditions and assumptions, tax-loss harvesting may provide incremental after-tax benefits. Actual results will vary and may be higher or lower than these estimates. - Demand for Personalization
Investors increasingly expect portfolios that reflect their values, whether environmental, social, and governance (ESG) priorities, religious principles, or sector-specific exclusions (e.g., avoiding fossil fuels or tobacco). Direct indexing enables these customizations while seeking to maintain diversification and minimize tracking error; however, customization may affect performance relative to the index. - Advisor Differentiation
With low-cost ETFs providing commoditized market exposure, advisors must offer value beyond beta. Direct indexing allows firms to deliver personalized, tax-optimized portfolios, positioning them as trusted partners in wealth preservation and growth.
Unlocking Value: The Tax Advantage
Direct indexing’s ability to aim at improving after-tax outcomes under certain conditions is a key differentiator. The following pie chart illustrates the sources of performance enhancement:
Sources of After-Tax Performance Enhancement
Disclaimer: This illustration is for informational purposes only and is not intended to represent actual or projected investment performance. The sources of after-tax performance shown are based on general assumptions and may not reflect real client outcomes. Tax-loss harvesting opportunities, portfolio customization, and other features of direct indexing involve risks and are not guaranteed to improve performance. Results will vary based on market conditions, individual tax situations, and portfolio implementation decisions. Investors should consult their tax and financial advisors before making any investment decisions. Aris Investing does not provide tax or legal advice.
Tax-loss harvesting is the primary driver, and may provide incremental after-tax benefits under certain market conditions and assumptions. These results are not guaranteed and involve risks, including tracking error. For example, in a volatile market, direct indexing can identify and sell underperforming securities to offset gains elsewhere, a granularity unavailable in ETFs or mutual funds. Combined with values-based customization and factor tilts, direct indexing delivers a holistic approach to performance optimization.
Direct Indexing vs. ETFs and SMAs
Direct indexing combines elements of index-based investing with the ability to personalize holdings, subject to limitations. Here’s how it compares to traditional vehicles:
Feature Comparison
| Feature | Direct Indexing | ETFs | Mutual Funds |
| Customization | High (client-specific) | Low (standardized) | Low (standardized) |
| Tax-Loss Harvesting | Security-level | Fund-level | Fund-level |
| Transparency | Full | High | Moderate |
| Minimum Investment | ~$100K (falling) | Very low | Very low |
| Performance Tracking | Index-replicating | Index/Active | Active/Index |
| Control Over Holdings | High | None | None |
Direct indexing offers the low-cost, diversified exposure of ETFs while providing the customization and tax control of active strategies, making it a versatile solution for modern portfolios.
Aris Investing: Powering Direct Indexing at Scale
At Aris Investing, we empower wealth advisory firms, family offices, and RIAs to deliver direct indexing with precision and efficiency. Unlike off-the-shelf model providers, our platform is designed to integrate seamlessly into your workflow, offering:
- Tax-Aware Portfolio Construction
Our proprietary engine monitors portfolios in real time, identifying tax-loss harvesting opportunities and optimizing trades to maximize after-tax returns while minimizing tracking error. - Values-Aligned Customization
We support a wide range of client preferences, including ESG filters, faith-based screens, industry exclusions, and factor-based tilts, all executed at scale without operational complexity. - Unified Investment Oversight
Aris centralizes model portfolios while enabling client-specific customizations, ensuring consistency, compliance, and governance across accounts. - Institutional-Grade Infrastructure
Built for firms managing $500M to $50B+, our platform provides robust audit trails, intuitive advisor tools, and seamless integrations with major custodians like Schwab, Fidelity, and Pershing.
Who Benefits from Direct Indexing?
Direct indexing offers additional flexibility compared to traditional pooled vehicles.
- Single/Multi-Family Offices: Standardizing tax-sensitive strategies across diverse client portfolios.
- RIAs: Differentiating through personalized, value-added services that deepen client relationships.
- Institutional OCIOs: Aligning centralized investment models with client-specific outcomes.
If you serve tax-sensitive, high-net-worth, or values-driven clients, direct indexing can be an important tool depending on client needs and objectives.
Overcoming Barriers to Adoption
Perceived Barrier: Direct indexing is only for ultra-high-net-worth investors.
Reality: Technological advancements, including fractional shares and automation, have lowered the entry point to $100,000, making it accessible to a wider audience.
Perceived Barrier: It’s just a rebranded separately managed account (SMA).
Reality: Unlike SMAs, which offer productized strategies, direct indexing builds client-specific portfolios around a benchmark, offering additional flexibility and potential tax management features compared to traditional SMAs, subject to certain limitations.
Perceived Barrier: It’s too complex to scale.
Reality: Aris’s platform automates personalization, tax optimization, and rebalancing, enabling firms to manage hundreds of accounts without additional overhead.
Implementing Direct Indexing: A Roadmap
Adopting direct indexing requires a strategic approach. Here’s how firms can get started:
- Assess Client Needs: Identify clients who prioritize tax efficiency, personalization, or values-based investing. Focus on those with portfolios of $100,000 or more.
- Select the Right Platform: Partner with a provider like Aris Investing that offers scalable technology, custodian integrations, and robust support.
- Integrate with Existing Workflows: Ensure the platform aligns with your firm’s investment models, compliance requirements, and reporting processes.
- Educate Clients: Highlight the benefits of direct indexing, such as tax alpha and customization, to drive adoption and satisfaction.
- Monitor and Optimize: Use real-time analytics to track tax-loss harvesting opportunities and portfolio performance, ensuring continuous improvement.
By following these steps, firms can seamlessly incorporate direct indexing into their offerings, aimed at providing potential benefits such as personalization and tax-aware implementation to clients.
The Future: A Unified Investment Value Chain
Direct indexing is more than a strategy, it’s a framework for integrating:
- High-conviction research and model portfolios from CIOs and investment teams.
- Tax-aware, values-based personalization tailored to individual clients.
- Scalable technology infrastructure that streamlines operations and compliance.
This unified value chain bridges the gap between strategic insights and client-specific outcomes, fostering loyalty and driving long-term performance.
Conclusion
The investment landscape is at an inflection point. Clients demand portfolios that reflect their values, minimize taxes, and deliver strong performance. Advisors need scalable tools to differentiate in a world of commoditized products. Direct indexing meets these challenges head-on, offering a powerful solution for personalization, tax efficiency, and client satisfaction.
At Aris Investing, we make direct indexing accessible, efficient, and impactful. Our platform empowers firms to deliver personalized portfolios at scale, backed by cutting-edge technology, real-time tax optimization, and institutional-grade infrastructure. Whether you manage $500 million or $10 billion, Aris equips you to lead the next wave of wealth management.
Take the Next Step
Visit arisinvesting.com or schedule a consultation to discover how direct indexing can transform your firm’s offerings and provide value through customization and tax management options, depending on client circumstances.
Disclosures: This material is for informational purposes only and does not constitute investment, legal, or tax advice. Past performance is not indicative of future results. All investments carry risk, including possible loss of principal. Aris does not provide legal or tax advice. Investors should consult with their advisors before making any investment decisions. Any references to tax benefits or after-tax improvements are hypothetical, based on certain assumptions, and are not guarantees of future results. Individual results will vary
