As Direct Indexing Moves Downmarket, Firms Must Determine Customization Strategy
March 30, 2021 — Boston
This issue of The Cerulli Edge—U.S. Monthly Product Trends analyzes mutual fund and exchange-traded fund (ETF) product trends as of February 2021, explores why direct indexing is moving downmarket, and discusses the critical role technology plays in creating an optimal financial advice model.
Highlights from this research:
- Mutual fund assets increased to $18.5 trillion during February, up 1.9% from a month prior. Growth was spurred by equity markets and positive net flows ($52.7 billion), although growth was dragged down by the bond market’s overall decline during February. ETF assets increased for the fourth straight month, climbing nearly 3.5% during February to close the month at $5.7 trillion. Investors poured more than $90.0 billion in net flows into the vehicle, with most going to equities ($81.2 billion).
- Direct index products have traditionally been marketed to ultra-high-net-worth advisors, family offices, and multi-family offices because their clients have sufficient wealth to meet the large account minimums required of this product category. The growing adoption of fractional share trading, the elimination of commissions, the greater acceptance of algorithmic portfolio construction, and the widespread investor demand for beta exposure have combined to make it possible for these products to move downmarket, into the affluent and mass-affluent investor tiers. As firms bring direct indexing to less wealthy investors, they must create products that offer elements of customization, such as ESG and other factor tilts that go beyond tax optimization.
- When asked what the most important factors are when they seek a new financial advice relationship, affluent investors’ responses include a mix of elements that is optimally served through a combination of human and digital support. Clients have come to realize that their advisors cannot be experts in every aspect of managing their financial lives and that a team approach actually benefits them, while at the same time highly appreciating the personalization intrinsic to an advisor relationship. By offering platforms that encourage collaboration in crafting truly personalized portfolios, providers can strengthen the perceived value of their platform to both advisors and investors.
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