Ben Hammer, the Head of Client Development for Vanguard, recently spoke to an audience of financial advisors about direct indexing. The asset manager clearly sees it as a major growth avenue especially as most advisors and investors remain unfamiliar with the concept and its benefits.

According to surveys of investors and advisors, the most appealing part of direct indexing is the potential tax savings which is not possible with traditional passive investing. By recreating indexes within an individual investors’ account, losing positions can be sold while stocks with similar factor scores are added in substitution to maintain consistency with the benchmark. Another benefit is customization as investors can adjust a portfolio’s holding based on their own situation, values, or preferences. 

Hammer also stressed that direct indexing wouldn’t be available to a wide swathe of the investing universe because of its cost and complexity. However, these issues have been solved by technology as trading costs have plummeted, while software handles the regular scans for tax loss harvesting opportunities and rebalancing.

Still, direct indexing is probably not necessary for most investors. It can be the perfect solution for those who want more tax savings and customization while retaining the benefits of passive investing. 

Finsum: At a recent conference for financial advisors, Vanguard’s Ben Hammer spoke about the evolution of direct indexing and its growth prospects.