Wall Street has a habit of falling in love with its own ideas.
Sometimes, that passion pays off—ETFs revolutionized access to low-cost, diversified portfolios. But other times, in its eagerness to scale institutional tools for a broader market, Wall Street misreads the actual users—especially financial advisors and their clients.
We’re now seeing this play out again with direct indexing.
On paper, the idea is powerful: customization, tax efficiency, control—the ability to own the index, not just invest in a fund that tracks it. And for ultra-high-net-worth clients and institutions, direct indexing is effective. It was created specifically for them.
But as the industry rushes to bring direct indexing downstream to the retail and mass affluent markets, it’s repeating a familiar pattern: packaging a solution with institutional DNA into something advisors are expected to deliver at scale.
The result? Portfolios with 250 to 500 individual securities, complex overlay engines, and jargon-heavy value propositions centered on tax-loss harvesting. Ask advisors if they want to manage that level of operational complexity across dozens of accounts, and most will tell you it’s more burden than benefit.
The mismatch is increasingly obvious. Direct indexing, as offered today, is operationally burdensome, difficult to communicate and often not differentiated enough to justify the effort. Even the terminology is part of the problem. “Direct indexing” sounds like a mash-up of passive investing and stock-picking—vague enough to confuse clients and advisors alike.
If the goal is to deliver tailored, tax-efficient exposure through transparent equity portfolios, we need a better descriptor—one that captures the simplicity and structure clients expect. Schwab has begun using the term “personalized indexing,” which is certainly an improvement. Likewise, rather than leading with “tax-loss harvesting,” a term that makes many clients uneasy, the conversation should center on “after-tax performance”—the actual outcome investors care about.
This isn’t a call to abandon direct indexing; it’s quite the opposite. The core value is real, but it needs a lighter, more advisor- and client-friendly touch. To succeed in the advisory channel, the strategy must prioritize what advisors actually need: simplicity, scalability, practical customization, and messaging that resonates.
Direct indexing can work for advisors and their clients if it’s engineered with usability in mind. That means fewer holdings, intuitive index tracking, streamlined statements, and a focus on better after-tax outcomes—not technical jargon. It also means avoiding the need to include dozens of marginal, thinly followed stocks simply to replicate an index—names that many advisors may not recognize and few clients will ever ask for. In short, it requires a structure that matches how advisors deliver advice and how clients absorb it.
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