Direct Indexing Moves Downmarket as Possible Solution for Affluent and Mass-Affluent Clients

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Direct Indexing Moves Downmarket as Possible Solution for Affluent and Mass-Affluent Clients

August 2020, BOSTON—This issue of The Cerulli Edge—U.S. Monthly Product Trends analyzes mutual fund and exchange-traded fund (ETF) product trends as of July 2020, explores asset managers’ latest assessment of direct indexing, and discusses the next iteration of asset allocation model portfolios.

 

Highlights from this research:

  • ETF assets increased 5.6% to $4.6 trillion and mutual funds jumped 4.1% to more than $16.1 trillion in July. Mutual fund assets surpassed $16 trillion in July for the first time since January. ETF flows eclipsed $40 billion during July, while mutual funds managed to add $3.3 billion.
  • Traditionally, direct indexing has been a high-net-worth product, but advances in algorithmic portfolio techniques, the collapse of trading fees, and the growth of fractional shares have opened the product to affluent and mass-affluent clients. Creating customized index portfolios requires much back-and-forth among clients, advisors, and asset managers as they determine how to minimize tracking error to an index while simultaneously accommodating a client’s constraints. To do this at scale will require creation of a technological interface between asset managers and the advisors and their clients.
  • The prevailing industry sentiment on asset allocation model portfolios is that they are a great tool for clients with smaller account balances. However, Cerulli finds that advisors are also using models for larger accounts. Almost 40% of model users are always using models for larger/more complex client accounts and another 55% report sometimes using them for these clients. Model providers appear to be aware of this and are focusing their next-generation model product development on expanding the customization potential of their firm’s models and incorporating different investment vehicle wrapper options into their model offerings.

 

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NOTES TO EDITORS:

These findings and more are from The Cerulli Edge—U.S. Monthly Product Trends, August 2020 Issue.

 

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