Direct Indexing for Law Firm Owners—The Smartest Move You Haven’t Considered?
The Big Picture
If you run your own law firm, you already know how important it is to be strategic—not just in your practice, but in how you build and protect your wealth.
For years, most investors have defaulted to mutual funds or ETFs to “own the market.” It’s simple, it works, and it’s cheap. But there’s a newer, more flexible option that’s starting to catch on: direct indexing. And for certain law firm owners, it can be a game-changer for taxes, customization, and long-term control.
So, What Exactly Is Direct Indexing?
Instead of buying shares of an index fund (like an S&P 500 ETF), direct indexing means you own each stock in that index directly. If the S&P 500 has 500 companies, you own all of them—right in your account.
That small difference changes a lot. You can decide what to keep, what to avoid, and when to sell. It’s like having the diversification of an index fund, but with a much higher degree of control. Investopedia explains it well here.
Why It’s Getting Popular (and Why It’s Worth Your Attention)
1. Tax Savings You Can Actually Control
With a traditional ETF, if part of the index drops in value, you can’t just sell those specific stocks—you’re stuck with the whole package. With direct indexing, you can sell the losers, harvest the losses, and use them to offset gains elsewhere.
For high-income earners (which many law firm owners are), this can mean keeping thousands of dollars in your pocket each year. Barron’s estimates that in some cases, this strategy can boost after-tax returns by more than 2% annually.
BlackRock calls tax-loss harvesting “one of the biggest levers” in direct indexing, and Morgan Stanley agrees it’s the primary reason many investors are making the switch.
2. A Portfolio That Reflects You
You can exclude industries you don’t want to support, tilt toward sectors you believe in, or integrate ESG factors. For example, if you’re passionate about environmental issues, you can build a portfolio that reflects that—without giving up the benefits of broad market exposure. Morningstar dives into this customization here.
3. More Transparency and Fewer Surprises
With ETFs or mutual funds, you don’t see every move being made under the hood. With direct indexing, you do. You know exactly what you own, what’s changed, and why. That’s a big deal if you want to avoid overlap with other investments or firm-related holdings.
4. Lower Barriers to Entry
This used to be a high-net-worth-only strategy—think $1 million minimums. Now? Fidelity offers it starting at $5,000, Schwab at $100,000, and Vanguard at $250,000. Some fintech firms are even going lower.
That’s part of why research firms like Cerulli predict the space could hit $800 billion in assets by 2026.
A Few Things to Keep in Mind
• It’s More Involved – You (or your advisor) will need to stay on top of tax lots, rebalancing, and IRS wash-sale rules. FINRA explains the risks here.
• It Can Cost More – Fees are generally higher than passive ETFs, though still competitive compared to actively managed funds.
• Performance Can Differ – If you customize heavily, your portfolio might not match index performance exactly.
• Tax Benefits Don’t Last Forever – Over time, opportunities to harvest losses may decrease unless you’re adding new money or rebalancing often. Morningstar covers this nuance.
Who It’s Best For
Direct indexing tends to work best for:
• High-income law firm owners who want to actively manage taxes.
• Those with large taxable accounts (not just retirement savings).
• Owners who care about aligning investments with personal values.
• People willing to work with an advisor who can execute and monitor the strategy.
If you’d rather keep things simple, stick with low-cost ETFs—they’re still a fantastic option.
How to Explore Direct Indexing for Yourself
1. Review Your Current Portfolio – Identify where you might be able to offset gains with losses.
2. Talk to an Advisor – Choose someone who understands both the tax side and the law firm owner’s perspective.
3. Set Your Rules – Decide on exclusions, sector tilts, and rebalancing frequency.
4. Stay Engaged – This isn’t a set-it-and-forget-it investment; it works best with ongoing attention.
Bottom Line
Direct indexing isn’t just another investment buzzword—it’s a tool that can give you real control over your taxes and how your money is invested. For the right law firm owner, it’s a way to align your portfolio with your goals, values, and growth plans—without sacrificing diversification.
If you’d like to talk through whether direct indexing fits into your wealth plan, we can set up a strategy session. It might just be the smartest investment move you make this year.
Frequently Asked Questions About Direct Indexing for Law Firm Owners
1. Is direct indexing better than ETFs?
Not always—it depends on your situation. ETFs are simple, cheap, and efficient. Direct indexing gives you more control, especially for tax-loss harvesting and customization. For high-income law firm owners with taxable accounts, that control can be worth the extra complexity.
2. Can I use direct indexing in my retirement accounts?
You can, but the biggest benefits—like tax-loss harvesting—don’t apply inside IRAs or 401(k)s. Most people use direct indexing in taxable accounts where tax efficiency really matters.
3. How much money do I need to start?
It depends on the provider. Fidelity starts around $5,000, Schwab around $100,000, and Vanguard at $250,000. Newer fintech platforms are lowering the bar even more.
4. Will I still match the market’s performance?
Mostly—but if you make big customizations (like cutting out entire sectors) or do a lot of tax harvesting, you might see some tracking error. That’s just the trade-off for personalization.
5. Is direct indexing worth it for small portfolios?
Usually, no. If your portfolio is smaller, the tax savings might not outweigh the costs and complexity. Low-cost ETFs are often the smarter choice until you reach a size where direct indexing’s benefits really show.