Which Direct Indexing Provider Fits a Broker-Dealer Program Built Around the Whole Account?

Quick Answer 

The best direct indexing provider for a broker-dealer runs direct indexing as one sleeve inside the firm's managed account program, applies tax management across the entire account, and gives the home office the controls and records to supervise it across an advisor network. 

Compare how far tax management reaches, who runs the portfolio, which custodians and models the provider connects to, how an existing program moves over, and how fees are shown. Vestmark delivers this through VAST.

What Is a Direct Indexing Provider for Broker-Dealers? 

Direct indexing means owning the individual securities of an index in a separately managed account instead of owning a fund that holds them. Each security carries its own tax lots, which gives a manager more positions to sell at a loss than a single fund share does. The manager can also apply a client's restrictions, such as excluding a company or a sector. 

A direct indexing provider supplies the pieces that make that work: the index data, the optimizer that decides what to buy and sell, the trading, the tax-lot accounting, and the reporting. Providers differ in which of those jobs they perform. Some supply a strategy for another platform to run. Others run the whole account. 

For a broker-dealer, the provider is chosen once and used by the whole network. That changes the selection test: 

• Program fit. Direct indexing has to sit beside the models, SMAs, and funds the firm already approves, and advisors should not have to reconcile it with them by hand 
• Delivery. The firm decides whether the provider supplies a strategy, software, or the trading and tax management for the account 
• Governance. The home office needs to set which indices, minimums, and restrictions apply, and to see what happened afterward 
• Migration. Many firms already have direct index accounts with an asset manager or an earlier provider, so the move is part of the choice 

Vestmark sees the category from the infrastructure side. Vestmark has supported leading direct indexing providers for more than a decade, and VestmarkONE, its tax-lot level sleeve accounting engine, supports six of the top 10 managed account program sponsors. 

VAST is Vestmark's own outsourced tax-managed service, delivered through Vestmark Advisory Solutions (VAS). This page is written for the home-office teams that select, configure, and supervise a direct indexing provider.

What Does the Best Direct Indexing Solution Look Like? 

The best direct indexing provider for a broker-dealer works across the whole advisor network, from the first pilot group onward. 

It has eight traits: 

1. Tax management covers the entire account, so a loss in the index sleeve can offset a gain realized elsewhere in it 
2. It is delivered as an outsourced service with portfolio management, so the firm does not staff a tax desk 
3. Optimization runs daily, and an account is not locked out of harvesting after a harvest event 
4. The client's dollar tax limit and personal federal and state rates drive each trade 
5. Wash sales are checked across related accounts in the household 
6. Restrictions and values-based screens apply at the security level, with firm-wide lists the home office controls 
7. It connects to the firm's custodians and works beside the models in the firm's marketplace 
8. Reporting shows tax losses generated next to tracking error against the index 

A provider that meets three or four of these in a demo can still fail at firm scale. The sections below turn the traits into evaluation dimensions, warning signs, and questions for vendors.

What Should Broker-Dealers Expect from a Direct Indexing Provider?

Nearly every provider says it offers direct indexing with tax-loss harvesting, so the label does not separate one from another. The differences sit in how far tax management reaches inside the account, who runs the portfolio, and what the home office can control and review.

Those differences decide whether a broker-dealer gets one consistent program or a set of separate products that advisors reconcile on their own. They also decide how much operating work stays with the firm after launch.

The table below lists nine dimensions a home office should compare and shows why each one matters at network scale.

What Types of Direct Indexing Providers Can Broker-Dealers Choose From?

Broker-dealers usually encounter five provider types. The type determines how far tax management reaches inside the client's account and how much of the work stays with the firm.

Which Direct Indexing Providers Offer Tax-Loss Harvesting? 

Most direct indexing providers include tax-loss harvesting, because the lot-level structure of a direct index account exists to support it. The more useful question is how each provider harvests. 

Four differences separate them: 

1. Cadence: daily, monthly, quarterly, or at year-end 
2. Reach: the index sleeve alone, or the entire account 
3. Limits: a flat percentage of gains, or a dollar amount the client sets, with the client's own tax rates 
4. Wash sale coverage: one account, or the household 

VAST harvests daily across the entire unified managed account. Accounts do not experience monthly or quarterly lockup periods following a harvest event, so optimization can continue on an ongoing basis. 

The tax-loss harvesting page for broker-dealers covers harvesting controls, the compliance record, and netting rules at network scale.

Does Direct Indexing Provide Better Tax-Loss Harvesting, and How Does It Handle Wash Sales? 

Direct indexing can create more harvesting opportunities than a fund because the account holds many individual securities, each with its own lots. A single stock can fall below its cost while the index rises. 

A fund cannot show that loss, because the client owns one share of the fund. Whether the added opportunities turn into value depends on the client having gains to offset, how often the account is optimized, and the tax limit in place. 

How Direct Indexing Handles Wash-Sale Restrictions 

A wash sale disallows a loss when the same or a substantially identical security is bought within 30 days before or after the sale. A direct index account sells individual stocks, so the optimizer has to choose replacements that keep the account close to the index without repurchasing what it sold. The rule also reaches other accounts, including a spouse's account and an IRA. 

For a firm, three questions show how a provider handles it: 

• Which accounts does the provider check? 
• Does the check cover the household, or only the account being optimized? 
• Who supplies the household grouping, and does the check reach accounts at other custodians? 

In VAST, the optimizer checks replacement purchases against recent harvests elsewhere in the household, and potential conflicts are flagged before trades are released. 

Household grouping depends on information from the advisor, so the firm needs a process for supplying related accounts and keeping that list current. A provider can check only the accounts it can see.

Can Direct Indexing Manage Taxes Across a Full Portfolio? 

It depends on the provider. A direct index sleeve manages the taxes of the securities inside it. A full portfolio also holds funds, SMAs, and legacy positions that generate gains of their own, and a sleeve-level manager does not see them. 

In VAST, direct indexing works alongside all underlying assets in the unified managed account, so tax management and optimization apply to the entire allocation. A typical Vestmark illustration combines a direct index SMA, a manager-traded fixed income SMA, a model-delivered value SMA, international ETFs, and cash. Losses harvested in the direct index sleeve of an account like that can offset gains realized anywhere else in it. 

Two other VAST capabilities extend tax management past the index sleeve: 

1. Tax overlay on any model: VAST offers a tax-managed overlay for any investment strategy that can be delivered as a model portfolio, so a firm can add tax management to the models it already approves 
2. Tax transition: money moving across firms, across advisors, or from a legacy offering into a tax-managed offering is transitioned over time instead of in one taxable event

What Is the Difference Between Direct Indexing and a Separately Managed Account? 

Direct indexing is an investment approach. A separately managed account (SMA) is an account structure. Most direct indexing is delivered inside an SMA: the client owns the individual securities in an account of their own, and a manager makes the trading decisions. An SMA can also hold actively selected stocks or a fixed income portfolio. A direct index SMA holds the securities of an index and manages them for taxes. 

In a unified managed account (UMA), several SMAs and funds sit in one account as sleeves, and a direct index SMA can be one of them. In VAST, the direct index sleeve sits beside other SMAs, funds, ETFs, and models, and the tax overlay works across all of them. VAS acts as the investment adviser on the direct index SMAs it manages and keeps responsibility for end-to-end portfolio management, including discretionary trading.

How Do Advisors Combine Direct Indexing with ETFs, Mutual Funds, and Other Investments? 

Direct indexing works with ETFs and mutual funds when the provider supports funds as sleeves in the same account. Advisors typically set a target allocation and assign each portion to a vehicle: a direct index sleeve for core equity exposure, a manager-run SMA for fixed income or active equity, and ETFs or mutual funds where a fund is the better fit. For a broker-dealer, the firm decides which of those combinations are on the program menu. 

What a UMA Needs for Tax Management 

• Tax optimization that runs across every sleeve, including the funds 
• A tax limit set at the account level 
• One set of client and firm restrictions enforced across sleeves 
• Support for third-party managers and the firm's own models beside the direct index sleeve 

In VAST, a single account can combine direct indexing, equity and fixed income SMAs, mutual funds, ETFs, interval funds, and subscription-based alternatives. A custom UMA can include VAST indices, third-party models, home office models, and individual ETFs and mutual funds, with active tax management, tax transition, and direct indexing. 

For how models reach advisors, see Wealth Management Model Marketplace Platforms for Broker-Dealers.

Is Direct Indexing Worth It for Taxable Accounts?

Direct indexing is worth considering when a client has a taxable account, has or expects gains to offset, and wants some customization. It adds little in a tax-deferred account such as an IRA, because losses harvested there have no tax use.

A firm can turn those conditions into eligibility rules, so advisors do not have to decide account by account.

What Account Size Makes Direct Indexing Worthwhile, and How Much Does It Cost? 

Account Size 

Minimums exist because holding dozens or hundreds of securities takes enough dollars per position to track the index closely. A firm usually sets eligibility rules for the whole network, so it needs the provider's minimums stated clearly. 

At Vestmark, minimums are stated by sleeve and by product. The minimum for a direct index sleeve differs from the minimum for the account that holds it, and minimums for third-party SMA and alternative sleeves are generally set by the asset manager or fund sponsor and not by Vestmark. 

Above the minimum, the benefit depends on the client's situation: 

• Gains available to offset, from planned sales, funds, or a concentrated position 
• The client's federal and state tax rates 
• The size of the account relative to share prices, because small accounts can struggle to hold high-priced stocks at index weight, so ask how a provider handles whole-share rounding 
• The fee compared with the after-tax benefit the provider reports 

How Much Does Direct Indexing Usually Cost? 

Direct indexing fees are usually a percentage of assets and typically run higher than an index fund's expense ratio, because the provider manages tax lots, optimization, and trading. 

In a broker-dealer program, several layers can apply to one client: the advisor fee, a fee for the overlay or tax management, a fee for each manager or model, and a platform fee. Providers structure these differently, so one headline figure can hide the real cost. 

At Vestmark, pricing is tiered by investment vehicle, so a direct index sleeve, an SMA, and a fund model are priced differently within the same account. Ask for a sleeve-by-sleeve schedule, ask how the layers appear on the client's statement, and compare the total with the after-tax benefit the provider reports.

Who Runs the Direct Indexing Program, the Firm or the Provider? 

A broker-dealer can buy a direct indexing strategy, license software to run one, or outsource the portfolio management. The choice decides how much staff the firm needs after launch. 

VAS is a Vestmark subsidiary and an SEC-registered investment adviser that acts as a paid sub-advisor and overlay portfolio manager for VAST. The firm does not need its own tax management desk. 

Whatever the provider, a home office should ask: 

• Which party holds discretion over the direct index sleeve, and which party generates and executes the trades? 
• Who is responsible when a trade list needs review or a restriction is flagged? 
• How is support organized, through the home office, through advisors directly, or both? 
• What does the provider expect the firm to do each day, and what does it handle on its own? 

Software without portfolio management can fit a firm that wants to run trading itself. A firm that expected the provider to carry that work should choose a provider that offers portfolio management.

Which Custodians and Models Does a Direct Indexing Provider Need to Connect To? 

A direct indexing program that works at one custodian leaves part of the network on a different product. The provider has to connect to every custodian where the firm's clients hold assets, and it has to work with the models the firm already distributes. 

Vestmark has data and trading connections to Schwab, Fidelity, Pershing, and Goldman Sachs. Connectivity depends on the custodian's managed account program and the firm's relationship type, so confirm the setup for each program during scoping. 

On the model side, VAST can apply a tax overlay to any strategy that can be delivered as a model portfolio, which lets direct indexing and the firm's marketplace models run in the same account. 

Ask any provider to list the custodian programs it supports today, which ones are in progress, and whether the same account structure works at each.

How Hard Is It to Move an Existing Direct Indexing Program to a New Provider? 

Many broker-dealers already have direct index accounts through an asset manager or an earlier provider. Moving them is a program in itself. 

Four questions decide how hard it is: 

Do holdings and tax lots carry over in kind, or does the move require selling and rebuying? 

How does the provider treat embedded gains, and can it spread the move over time within each client's tax limit? 

Do existing client restrictions and household groupings carry over? 

Can the move be staged by advisor group, so the home office can start small and widen? 

In VAST, the tax transition process handles money moving across firms, across advisors, or from a legacy offering into a tax-managed offering. Vestmark Proposals imports tax lots automatically and supports proposing and enrolling multiple accounts, so ask about current limits on batch size. 

The tax transition page for broker-dealers covers sequencing and firm-level tax limit policy in detail.

What Should a Firm Decide Before Launching a Direct Indexing Program?

A direct indexing program has more settings than most firms expect. Some belong to the home office because they affect every account. Others belong to the advisor and client because they reflect one person's situation.

The table below lists the decisions to settle before launch. It reflects suggestions for how a home office can divide the work, and it does not describe a required Vestmark process.

Why Does Direct Indexing Provider Selection Matter for Broker-Dealers? 

A direct indexing program touches several systems and teams at once, including: 

• Custodian feeds that supply cost basis and tax lot data 
• The optimizer that proposes sells and replacement buys 
• The index or model the account tracks 
• Client and firm restrictions and values-based screens 
• Household and account group structures 
• The model marketplace and manager relationships that supply other sleeves 
• Reporting on realized gains and losses, tax savings, tracking error, and fees 

Without coordination across those pieces, broker-dealers often experience: 

• A direct index sleeve that harvests losses while gains elsewhere in the account are taxed in full 
• Different products at different custodians, which leaves advisors explaining two programs 
• Restrictions applied unevenly, which produces exceptions that compliance finds after the trade 
• Tracking error that grows because tax and rebalancing decisions are made separately 
• A tax and trading desk the firm did not plan to staff Fee layers that clients cannot add up

What Are the Warning Signs of a Weak Direct Indexing Provider?

Weak providers are hard to spot in a pilot, because a pilot has few accounts and close attention from the vendor. The problems appear when the program reaches more advisors, more custodians, and accounts that already hold appreciated positions.

A broker-dealer can check most of them in a sample account, a custodian list, and a migration plan. The table below pairs each sign with what it costs the firm in practice.

How Does the Right Direct Indexing Provider Support a Broker-Dealer's Growth? 

• The firm can offer a tax-managed program to advisors who would not build one themselves 
• Direct indexing, SMAs, funds, and models sit in one account, so advisors serve a client's whole portfolio in one program 
• Advisors answer "what is the tax benefit?" the same way across the network 
• Advisors win appreciated client books because the firm has a way to move them without a large tax bill 
• Compliance and operations have one process to document and review, so supervision scales with the number of accounts 

A firm that can offer one tax-managed program across its custodians and models removes one reason advisors give for keeping tax management outside the program.

How Does Vestmark Approach Direct Indexing? 

Vestmark delivers direct indexing through VAST, part of Vestmark's Investment Advisory solutions, managed by Vestmark Advisory Solutions (VAS). 

Within VAST: 

• VAS acts as sub-advisor and overlay portfolio manager, so the firm does not staff its own tax management desk 
• Direct indexing works alongside every other asset in the unified managed account, and tax management and optimization apply to the entire allocation 
• A tax-managed overlay is available for any investment strategy that can be delivered as a model portfolio 
• Accounts are optimized daily, with no lockup period after a harvest event 
• Decisions use the client's personal federal and state tax rates and a dollar-based capital gains budget, or Tax Reserve 
• Replacement purchases are checked against recent harvests elsewhere in the household, and potential conflicts are flagged before trades are released 
• Security, sector, and industry restrictions apply at the security level 
• Tax transition moves money arriving across firms, across advisors, or from a legacy offering into a tax-managed offering over time 
• Multiple indices across asset classes and styles are available for direct index strategies 
• Data and trading connections exist for Schwab, Fidelity, Pershing, and Goldman Sachs, depending on the custodian's program 
• Vestmark supports more than $2 trillion in platform assets and six of the top 10 managed account program sponsors, and VAST won first place in the Direct Indexing/Technology Providers category at the 2023 WealthManagement.com Industry Awards

How Should Broker-Dealers Evaluate Direct Indexing Providers When Selecting One? 

1. How far does tax management reach inside the account? 

If the answer stops at the direct index sleeve, the rest of the client's account is unmanaged. Ask how the provider treats funds, SMAs, models, and legacy holdings in the same account. 

2. Who runs the portfolio? 

A provider that supplies strategy or software leaves trading, tax management, and exception handling with the firm. Ask who holds discretion, who executes trades, and what the firm does each day. 

3. What does it connect to? 

Ask for the list of custodian programs and the models the provider supports today. A program that works at some custodians splits the network across products. 

4. How does an existing program move over? 

Ask whether holdings and lots carry in kind, how embedded gains are handled, and whether the move can be staged by advisor group. 

5. What can the home office control and see? 

If the firm cannot set the index menu, restriction lists, and eligibility rules, and cannot see activity across the network, supervision depends on what advisors report.

What Questions Should Broker-Dealers Ask Direct Indexing Providers?

Explore Direct Indexing with Vestmark 

Broker-dealers comparing direct indexing providers can see how VAST applies daily optimization, client-specific tax limits, and tax management across a full unified managed account. 

Learn more about Vestmark's Investment Advisory solutions, or visit Vestmark's page for broker-dealers and banks.

Key Takeaways 

• The best direct indexing provider for a broker-dealer manages taxes across the whole account, with the index sleeve as one part of it. 
• Most providers harvest losses. Cadence, reach, tax limits, and wash sale coverage separate them. 
• A firm should decide who runs the portfolio, because software without portfolio management leaves the tax desk with the firm. 
• Custodian connectivity and model compatibility decide whether the whole network gets one program. 
• Existing direct index accounts and appreciated holdings need a transition plan before launch. 
• Vestmark delivers direct indexing through VAST, which optimizes taxable accounts daily and runs on infrastructure that supports six of the top 10 managed account program sponsors.

_{Important Disclosures: Vestmark Advisory Solutions, Inc. ("VAS") is an SEC-registered investment adviser subsidiary of Vestmark, Inc., acting as a paid sub-advisor and/or overlay portfolio manager offering VAST and tax optimization services. Investing involves risk, including loss of principal; past performance does not guarantee future results. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit. Investment strategies that seek to enhance after-tax performance may be unable to fully realize strategic gains or harvest losses. There are limitations inherent in the use of an optimization methodology to manage accounts relative to a designated index, and direct index accounts can deviate from the index. Optimization tools may seek to estimate individual tax circumstances but cannot incorporate all individual tax information, which can lead to inaccuracies. UMAs are not suitable for all investors. The tax rules described on this page are general and may not apply to every client. They are not tax advice, and clients should consult a tax professional.}