Advisers should expect direct indexing to become more common in the UK because there is "clear demand" for what it offers, according to the guests on the latest edition of the FTAdviser podcast
Direct indexing consists of an investor building a personalised index which is then tracked by a fund or portfolio.
It has been taking off in the US in recent years, with companies like Vanguard and BlackRock investing heavily in it but platform Fundment recently became the first to offer it in the UK.
Jonathan Warren, head of innovation at Altus, said that access to direct indexing was likely to broaden.
He said: "We know that consumers are looking for personalisation. We know they are becoming much more discerning, with ESG being the most prevalent and high profile example.
"You can now track the index but you can remove ethics, you can reduce weightings in certain sectors because you think macroeconomic conditions are not favourable to that sector or simply not hold stocks you don't want to own."
Mike Barrett, consulting director at the Lang Cat, said: "There's a danger sometimes in financial services that we get very, very clever propositions and everyone can look at it and think it is intellectually really quite smart but there is virtually no client demand for it and they are trying to solve a problem that doesn't exist.
"But with the custom indexing side, there is clear demand from a segment of consumers for [increased personalisation in ESG] and that can be quite dangerous and difficult for an adviser or an investment manager to implement without technology really helping not only implementing but also explaining to the customer what's happening with potential returns."
Both Warren and Barrett said direct indexing was likely to be a service distributed mainly through financial advisers in the UK.
Warren said: "The risk when you get into custom indexing is that you do begin to move away from pure tracking. If a direct investor wants to do without suitable checks and balances the outcome, ultimately through tracking error, could be very different to tracking the index.
"What you might see is providers building up propositions that are guarded. You can track the index but there is some pre-set configurability in terms of taking out ESG preferences or adding a certain stock to a 'don't but list'."
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damian.fantato@ft.com