Direct indexing (separately managed account)

Direct indexing buys an index’s stocks one by one in a separately managed account instead of through a pooled fund, so every position carries its own cost basis and its own chance to realize a loss. There is no fund-level expense ratio; the cost is the advisory fee for running the program, plus the trading cost of keeping several hundred names in line with the index, roughly 5 to 15 basis points a year.

The advisory fee is a channel decision more than a product decision. Bought direct, Frec prices the engine at 9 basis points and Fidelity’s Managed FidFolios starts at 40 with a $5,000 minimum, both named as examples of the mechanism rather than a pick. Routed through an adviser, a TAMP, and a wirehouse platform, the same harvesting logic stacks up differently: an 18-basis-point engine fee on Merrill’s own rate sheet, a TAMP layer Kitces puts at 25 to 35, and a median advisor fee of 65 over $3 million, for an all-in cost near 115 basis points.

Dividends on the stocks are taxed the same as if held directly, ordinary or qualified depending on the stock; the realized losses, and any realized gains, flow straight to the investor’s own return every year, a different profile from a fund’s single distribution line. The harvesting has no use inside a tax-deferred account, so this route fits taxable money only. A program is picking hundreds of individual lots, so both tracking against the index and the investor’s own trading behavior carry more risk than a single fund.