Over the last five years, direct indexing has been talked about as the next frontier in investment management, and demand for these strategies continues to rise. As of the end of 2024, there were $864.3 billion in direct indexing strategies, according to Cerulli Associates.
Several asset managers, speaking at the Future Proof Festival in Huntington Beach, Calif., this week, confirmed the demand for personalized and customized investment strategies. But they also warned against “over-customization.”
“Personalization can mean vastly different things when it comes to investing,” said Andrea Lisher, head of Americas, Client, J.P. Morgan Asset Management. “If you look at long-term track records, it’s very, very difficult to beat the markets, and if every individual could do that—do their own thing—you wouldn’t need firms like ours who spend hundreds of millions of dollars on research and traders and risk managers and generating alpha.”
Lisher said it’s one thing if a client wants to invest based on their personal values and they’re willing to make the tradeoffs, or if a client has a concentrated stock position.
“That’s not what I’m talking about,” she said. “I’m talking about the notion that personalization has gone too far, I think, erodes the value of really great active management with really great risk management wrapped around it.”
She added that direct indexing must be a delicate balance of art and science, and it’s very difficult to get right.
Jaime Magyera, head of BlackRock’s U.S. Wealth Advisory business, said it comes down to client segments.
“For let’s call it 80% of investors out there, a strategic asset allocation, long-term asset allocation that’s diversified across equities and fixed income is the path to success,” she said. “There is a segment—that high-net-worth investor, someone who has deep beliefs—where they want to align the S&P 500 but they want to customize that.”
The tax management aspect of direct indexing is designed for high-net-worth investors, she said, who actually have enough capital gains to benefit from the strategy. It’s not for everyone.
“I worry about getting a little overcustomized, overpersonalized and over-direct indexed when a portfolio of ETFs across equity and fixed income with a strategic asset allocation is a very fine solution,” she said.
Kristie Feinberg, president and CEO of Manulife John Hancock Investments, agreed that personalization has different meanings for different people, and that overcustomization could be an issue. But she said there’s a real benefit to providing tailored solutions, and technology can make it easier.
“I do think there is a real need for personalization within portfolios,” she said. “That’s what we do today; we create plans that are personalized. To be able to do that in a way that brings in technology to make it more efficient, to make it more effective, is where you’re going to see the real power.”
Both BlackRock and J.P. Morgan have made big bets on direct indexing. In 2020, BlackRock announced its acquisition of Aperio, a creator of tailored index strategies. That same year, J.P. Morgan announced plans to acquire 55ip, a fintech startup that provides advisors with automated tax technology and a tax-smart investment strategy engine.
BlackRock’s Magyera said direct indexing is one of the fastest-growing areas of the market, especially for higher-net-worth clients looking for real after-tax returns.
“If you’re going to win with that segment, you do need to have differentiated, unique solutions, like direct indexing, like option overlays.”
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