What long bull markets do to direct indexing
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Northern Trust is expanding the strategy beyond simple loss harvesting as concentrated stock and aging portfolios create tougher tax problems
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KEN LASSNER remembers tracking client customization requests with sticky notes stuck to the side of a computer monitor. That was more than 20 years ago, when direct indexing required a minimum of $5 million and belonged almost exclusively to the highest tier of wealthy investors.
That barrier has fallen considerably. Technology, automation, fractional shares, and lower trading costs have made direct indexing available to a much wider group of investors. But broader adoption and long time horizons has introduced a different question: What happens after a portfolio has spent years harvesting its most obvious losses?
Today, as direct indexing lead product strategist at Northern Trust Asset Management, Lassner oversees a version of that
Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments in efforts to realize their long-term objectives. Entrusted with US $1.6 trillion assets under management as of June 30th, 2026, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take − in all market environments and any investment strategy.
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“What ossification means is that there’s not as many losses in a lot of these direct indexing portfolios as there used to be, because losses tend to be front-loaded”
Ken Lassner,
Northern Trust Asset Management
same strategy available to clients with $250,000, each receiving what amounts to their own custom benchmark.
That gap, from $5 million to $250,000, is why advisors are looking for new solutions alongside direct indexing, such as tax-managed long-term strategies. The problems these potential solutions solve together are ones that were far harder to address at scale a decade ago.
One of the issues that shows up over time is what happens after a direct-indexing portfolio has already worked through most of its easy tax losses. Before getting to that, though, Lassner starts with a more immediate problem advisors are bringing to him.
The problem concentrated stock creates Lassner points to a specific issue showing up more often in client portfolios: concentration.
“One of the biggest opportunities that we’re seeing here at Northern Trust Asset Management, or one of the biggest solutions that we’re trying to provide, is around concentrated stock,” he says. “With the run-up in the markets and especially in stocks like the Mag 7, as well as recent large IPOs, we’re seeing a lot of clients that have a significant amount in a single holding or a couple of holdings that have a large unrealized gain.”
Many of those clients are reluctant to sell, he says, “mostly because of the tax implications of writing that hefty check.” Direct indexing, in his view, offers advisors a way to provide diversification while reducing the tax impact.
Direct indexing gives advisors a source of capital losses that can potentially be used against those gains. In that sense, Lassner argues, the value of the strategy cannot be judged solely by the return of the direct-indexing account itself. Part of its job is to create flexibility elsewhere.
That’s also why he places tax efficiency earlier in the portfolio construction process, rather than treating it as a year-end fix. He extended the same logic to estate planning, charitable giving, and family planning, all areas where the after-tax outcome, not just the pre-tax return, determines what a client actually keeps.
But even a well-built portfolio can run into a potential complication of its own making over time.
Why older portfolios don’t run out of value There’s a term Lassner uses for what happens to direct-indexing portfolios over time: ossification. The portfolio may still be doing its job, but the inventory of easy losses starts to thin out.
“What ossification means is that there’s not as many losses in a lot of these direct indexing portfolios as there used to be, because losses tend to be front-loaded,” he explained. “Markets generally go up over time, and if we’re taking losses on the stocks that go down and deferring gains on the stocks that go up, there’s going to be less and less loss to take in the future.”
That pattern has led some advisors to a conclusion Lassner disputes directly. “I hear that quite a bit, that after seven years or 10 years of a direct indexing portfolio, I have an expensive index fund,” he says. “And that’s absolutely not true, because the strategy in a separately managed account continues to deliver value, or what we call tax alpha, over the very long term.” The reason, he says, is that “you’re deferring taking gains on the tax savings that you made from using the losses to offset capital gains, and those tax savings compound over time. The longer you can make that go, the better in terms of your after-tax return.”
He also points to market dispersion as a counterweight to ossification. “The more idiosyncratic risk you have in the market, or single stock risk or dispersion, that’s where you’re going to have more opportunities no matter what the market environment is, whether the market’s going up, flat, or down,” he says. That’s the reason he treats ossification less as a dead end and more as a phase, one that dispersion can improve.
What changed to make this available at scale The investment case for direct indexing hasn’t changed much over 20 years. What has changed, according to Lassner, is the infrastructure supporting it. “Through technology, automation, lower or in a lot of cases no commission costs, and fractional
Published October 5, 2026
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“I hear that quite a bit, that after seven years or 10 years of a direct indexing portfolio, [an advisor has] an expensive index fund. And that’s absolutely not true, because the strategy in a separately managed account continues to deliver value”
Ken Lassner,
Northern Trust Asset Management
93.2%
Increased your client retention rates or made assets more "sticky"?
88.5%
Helped you gain more wallet share from existing clients?
87.5%
Helped you attract wealthier clients?
80.9%
Won business you otherwise wouldn't have secured?
72.1%
Increased the number of referrals you receive?
37.9%
Advisors cited top three most positive impacts
Meaningful conversations
1
2
Client retention
3
Share of wallet
Minimums have fallen from about $5 million to $250,000
Direct indexing at scale
Technology and automation have reduced implementation costs
Fractional shares have made customization easier at lower account sizes
Clients can effectively receive their own custom benchmark
Portfolios can account for ESG preferences and outside holdings
shares, we’re able to really significantly lower the minimums,” he says, “to make it more widely available for more investors.”
Northern Trust gives every single client their own, in effect, custom benchmark. They can customize around their ESG values, and around their other investments if they have significant holdings outside the portfolio.
The assumption Lassner asks advisors to reconsider is ossification, and the idea that an aging direct indexing portfolio eventually stops adding value. He didn’t hedge on it: tax alpha compounds, dispersion keeps creating opportunity, and the strategy’s usefulness has no expiration date. The gains build quietly, deferred year after year.
Northern Trust Asset Management has decades of experience managing tax-advantaged equity strategies and implementing direct indexing solutions for taxable investors. Learn more here.
POTENTIAL CONSIDERATIONS FOR DIRECT INDEXING ACCOUNTS
The ability to generate losses may be lower than expected, especially in markets that are rising significantly. Furthermore, the continuing benefits may not be fully realized in flat or falling markets because reinvested tax savings could potentially be low or negative.
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