92% of Top Advisors Cite After-Tax Returns as the Reason They Use Direct Indexing

Direct indexing and alternative investments are no longer side dishes in wealthy households' portfolios, according to a survey of top-ranked financial advisors by PGIM Investments and SHOOK Research that drew trade-press coverage on January 25, 2026. The study, focused on households with $5 million to $30 million of investable assets, finds that taxes, more than performance chasing, are what is pushing both strategies into the core of client accounts.

What the survey found

SHOOK started from a database of more than 25,000 advisors and narrowed the field to 236 who oversee at least $500 million in client assets and rank in the top quintile of its rating scale. The published study reports that 51% of responding advisors call direct indexing very important relative to other strategies and another 32% call it slightly important. Only 27 of the advisors who answered the direct indexing questions said they do not use it at all.

How it is used matters as much as whether it is used. Thirty-seven percent treat direct indexing as a core allocation and 38% as a key but non-core component, while 24% keep it as a niche tool. The motivations are overwhelmingly tax-related: 92% cite a higher after-tax return, 73% cite customization and 71% cite the ability to exit highly concentrated stock positions. About three in four advisors believe the approach can help with generational wealth transfer, and the same share expect changes in tax law and regulation to add to demand.

On alternatives, the most common target range is 6% to 15% of a client's assets, chosen by 53% of advisors, while 15% of advisors put more than 20% into alternatives. Interest is shifting toward less liquid vehicles: 53% plan to increase semi-liquid alternatives over the next three years and 47% plan to add illiquid ones, compared with 40% for liquid alternatives, which 31% of advisors say they do not favor at all. Diversification was the most cited reason for owning alternatives, named by 97%.

Why taxes sit at the center

A traditional index fund owns hundreds of stocks inside one wrapper, so an investor cannot sell the individual losers to realize losses. A direct indexing account holds the stocks separately, which lets a manager sell positions that have fallen, book the capital loss and buy a similar holding to keep market exposure. Those losses can offset gains realized elsewhere, including gains from selling a concentrated position built up through equity compensation or a business sale.

The study cites industry projections that direct indexing assets will reach $825 billion by the end of 2026. It also notes that high-net-worth households make up less than 2% of the US population while holding nearly half of its wealth, and that an estimated $84 trillion is expected to pass to heirs and charities over the next 25 years.

The after-tax math

PGIM's own illustration assumes a top-bracket investor paying 37% federal income tax plus the 3.8% net investment income tax, a combined 40.8% on short-term gains. A simplified example in round numbers shows why that matters.

The $28,560 difference is real cash in the year it occurs, but it is largely a deferral rather than a permanent saving. Harvested positions are replaced at lower cost basis, so more gain is embedded in the account for later. The benefit becomes more durable when those embedded gains are never sold, for example when appreciated shares are donated or held until death, when basis is generally stepped up for heirs. Harvesting opportunities also tend to shrink as an account ages and most positions sit at a gain. State treatment varies, and not every state lets capital losses be carried forward.

Points worth discussing with an advisor

• Whether the realistic benefit is deferral or permanent, given plans for gifting, charitable giving and estate transfer.
• How a direct indexing account would coordinate with other accounts to avoid wash-sale problems when similar holdings are bought elsewhere within 30 days.
• How semi-liquid and illiquid alternatives are taxed, including the timing of K-1 reporting, and how limited liquidity fits upcoming cash needs.
• The fees and minimums involved, which the survey lists among the adoption hurdles alongside client education, cited by 39% of advisors as the biggest challenge.

What to watch

Survey respondents expect tax policy to keep shaping demand. With the higher federal estate and gift exemption now written into law and market volatility creating harvesting opportunities, the next signals to watch are fee compression among direct indexing providers and whether semi-liquid alternative funds keep gaining share on advisor platforms.

After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.