Direct Indexing’s Next Test: Making Personalization Meaningful

Direct indexing has moved from a niche offering for the ultra-wealthy to an increasingly mainstream tool in advisors’ portfolios. But as access to the strategy becomes commoditized, the real differentiator for advisors is shifting: it’s no longer about who can offer direct indexing, but who can make it meaningful and understandable for the right clients. Ken Lassner, Direct Indexing Lead Product Strategist, Northern Trust Asset Management, has spent more than 20 years working in this space and has seen firsthand how implementation done well can unlock conversations that go far beyond tax management.

Lassner addresses how advisors can identify the emotional and behavioral drivers behind different client personas, when direct indexing should — and shouldn’t — be used, and how a thoughtful, client-specific approach can turn a tax strategy into a springboard for broader financial planning

CM: Direct indexing is often introduced as a tax-loss-harvesting strategy. Why do you believe that framing is too narrow?

KL: Tax-loss harvesting is an important benefit of direct indexing, but it is far from the whole story. At its core, direct indexing is a tax-managed portfolio customization and planning tool that can help investors address concentrated stock diversification, portfolio transitions, charitable giving, estate planning, and personal preferences while maintaining broad market exposure. Advisors who use it most effectively view it as a planning tool that connects investment management to a client’s broader financial goals, rather than simply a tax strategy.

CM: You have identified three investor types, the Achiever, the Individualist and the Pragmatist. How do these client profiles differ in their motivations, decision-making styles and expectations of an advisor?

KL: The Achiever values sophistication, strategic control, and solutions that can address complex financial situations. The Individualist wants a portfolio that reflects personal values, priorities, and family goals. And the Pragmatist is focused on measurable outcomes and wants a clear understanding of how strategies work, costs, trade-offs, and expected benefits. Each profile requires a different conversation with their advisor, even if the underlying direct indexing strategy is similar.

CM: What questions can advisors ask to uncover a client’s emotional and behavioral motivations before recommending the strategy?

KL: Rather than starting with investment features, advisors should begin with discovery. Questions such as, “What financial goals matter most to your family?” “Do you have concentrated stock positions, charitable goals, or upcoming liquidity events?” “Are there investments you prefer not to own?”, and “What would make you feel more confident about your portfolio?”. These conversations can reveal whether a client is motivated by control, personalization, or efficiency.

CM: Which account types and sources of funding are best suited to direct indexing?

KL: Direct indexing is generally most effective in taxable accounts where investors can benefit from both tax management and customization. Common funding sources include cash for clients looking for market exposure and capital losses, appreciated portfolios that need to be transitioned over time, concentrated stock positions, and proceeds from liquidity events.

CM: When does direct indexing make more sense than a low-cost ETF or mutual fund?

KL: ETFs and mutual funds remain excellent solutions for investors seeking simple, low-cost market exposure. Direct indexing becomes more compelling when an investor wants that same broad exposure but also needs tax management and customization through a more personalized approach to portfolio construction. An important consideration is that investors can use the tax losses to offset capital gains now or in the future. The investor utilizing direct indexing is in a relatively high tax bracket.

CM: Is there a practical asset threshold below which direct indexing may not justify its operational complexity, trading costs or advisory attention?

KL: There is no universal asset minimum because technology, automation, and fractional-share capabilities have significantly expanded access to direct indexing. However, advisors should evaluate whether the client has enough taxable assets, customization needs, or tax-management priorities to justify the additional considerations. If tax benefits and personalization opportunities are limited, a traditional ETF or mutual fund may be the more appropriate solution. Typical minimums are $250,000, and some go down to $100,000.

CM: What are the most common mistakes advisors make when incorporating direct indexing into client portfolios?

KL: One of the most common mistakes is presenting direct indexing solely as a tax-loss-harvesting strategy and overlooking its broader planning applications. Another is focusing on portfolio mechanics before understanding the client’s goals, values, and motivations. Finally, advisors sometimes recommend direct indexing too broadly; the most successful practitioners recognize that fit matters and that some clients are better served by simpler, lower-cost solutions.