Tech Has Simplified Direct Indexing, and That's Not the Only Reason Financial Advisers Should Make the Leap

While ETFs and mutual funds are the backbone of many portfolios, they have limitations for clients and advisers. Thanks to advances in tech, direct indexing can serve everyone better. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.You are now subscribedYour newsletter sign-up was successfulWant to add more newsletters?Delivered dailyKiplinger TodayProfit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. 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Many advisers rely on ETFs and mutual funds to gain equity exposure, typically by allocating across broad categories, such as domestic and international, large‑cap and small‑cap stocks. While this approach is convenient, it introduces meaningful limitations.Advances in direct indexing technology now address many of these issues, providing a compelling alternative to portfolios built with wrapped products.This article examines the structural challenges of pooled vehicles and highlights how rules‑based direct indexing can deliver more precise, transparent and targeted equity exposure.Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special IssuesProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.Profit and prosper with the best of expert advice - straight to your e-mail.There are five primary limitations associated with using pooled vehicles to construct public equity portfolios:About Adviser IntelThe author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.Direct indexing allows advisers to define and target a specific market portfolio through a transparent, rules‑based framework.The approach can be implemented in a more passive manner to closely track a chosen benchmark, or it can incorporate factors and other portfolio construction tools to pursue differentiated or potentially enhanced outcomes.Key benefits include:Advances in technology have simplified the implementation of direct indexing and made it easier to scale. To fully leverage these benefits, advisers must adapt in several key areas:Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.The pooled vehicle approach remains viable but carries structural limitations, including limited look‑through control, wrapper‑level tax management, overlap risk, exposure drift driven by manager decisions and valuation regimes, and layered fees. Advances in technology have made rules‑based direct indexing easier to implement and well suited to address these challenges.Direct indexing provides greater control over holdings, enables more precise tax‑loss harvesting, reduces uncertainty around overlap, and supports alignment with portfolio targets through systematic rebalancing. Because direct indices are held in separate accounts, they are easier to integrate with AI‑driven tools that enhance portfolio analysis and client communication.Importantly, direct indexing is flexible and scalable. A direct index can serve as a model portfolio that can be applied across clients with similar objectives, while remaining easily customizable to reflect individual preferences.For advisers accustomed to allocating across pooled vehicles, multiple target direct indices can replicate exposure across geographies, market capitalizations and other desired dimensions. Taken together, rules‑based direct indexing offers advisers a modern, transparent and scalable framework for improved portfolio construction and client service.This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.Paul R. Kenney Jr. is a senior investment professional with extensive experience across asset management, institutional investing and financial technology. He is the Senior Vice President for Client Solutions at Syntax Data, where he provides investment professionals with data-driven insights across public and private markets. In this role, he leverages the Syntax Direct platform to help financial advisers and investment managers create direct indexing solutions tailored to diverse client objectives at scale. Kenney's career spans significant leadership roles, including serving as a Partner at NEPC, LLC, where he served as a practice leader advising corporations and nonprofit boards on asset allocation and governance.