How Custom Indexes Deliver a Win-Win-Win for RIAs, Advisors, and Clients

As the wealth management landscape evolves, clients expect more personalization, greater transparency, and improved tax outcomes — all while RIAs strive to maintain their fiduciary obligations and operational efficiency. A growing number of firms are turning to custom indexing and portfolio overlay management software to meet these demands.

In a recent webinar hosted by EVO Wealth Consulting, VettaFi, and Helios, industry experts outlined why custom indexing is no longer a niche institutional strategy — it’s now a scalable, compliant, and client-centric solution for RIAs of all sizes.

What is Custom Indexing?

Custom indexing is a rules-based investment strategy made up of individual securities selected from a defined universe like the S&P 500 or Russell 1000. Unlike traditional ETFs or mutual funds, a custom index allows you to:

• Directly own the underlying securities in a client account
• Apply firm-specific or client-specific tilts (factors, size, sectors, etc.)
• Optimize tax management at the strategy, account, or household level
• Reduce reliance on high-cost active managers

RIAs can build or license a custom index, implement it as part of a client portfolio, and manage it across accounts with new tools like portfolio overlay management software — enabling scale without sacrificing customization.

Real-World Use Cases

Pete Dietrich, from VettaFi, shared compelling use cases:

• A family office reduced concentration risk and added tax sensitivity to an existing ETF strategy by replacing it with a custom index.
• A boutique RIA used custom indexing to replicate its existing proprietary SMA strategy and deliver it as an ETF so it became accessible to smaller-balance accounts.
• Firms creating private-label strategies to deliver differentiated investment solutions while reducing costs, automating parts of portfolio trading and increasing tax-efficiency.

“Most RIAs don’t realize they can access this technology today,” Pete noted.

Why Now?

Although custom indexing has existed for decades, it was traditionally accessible only by large, institutional firms due to high costs and complexity. That’s changed. Technology advancements, platform/ custodian enhancements, and equity trading costs close to or at zero now allow wealth firms to easily implement custom indexes at speed and scale.

The Portfolio Overlay Advantage

One of the key unlocks in the process is incorporating a portfolio overlay management solution. Some examples are software or TAMPs like Smartleaf, Adhesion, GeoWealth, or SmartX. The software allows the advisor to deliver and manage the custom index across individual accounts with high levels of automation and the ability to trade the accounts directly through to the custodian when selected as a sub-advisor. This enables:

• Tax loss harvesting and tax optimization
• Portfolios and households managed to each clients unique preferences (think IPS)
• Rebalancing and personalization at scale

When combined with a custom index, overlay management transforms portfolio delivery into a compliant, automated, and tax-efficient engine.

Quantifying the Value

Consider this: a blended ETF and mutual fund portfolio might cost 40 bps annually[i]. A custom index could cost as little as 5 bps to build or license. The RIA could even add 5 bps as a strategy management fee in addition to their advisory fee. Then include approximately 15 bps for the portfolio overlay management solution, and the total strategy fee would only cost around 25 bps. This is about 15 bps less than an average fund portfolio.

More importantly, portfolio overlay managers have published reports documenting 1%–2% in average annual tax savings[ii]. Lowering portfolio fees and tax-drag could produce an additional 1.15% in annual after-tax return. This can have a massive impact on the probability of success due to compounding returns over a 30-year financial plan. If sustained, a starting portfolio of just $1 million dollars could end with an additional $2 million in assets over that time period.

Fiduciary and Compliance Alignment

Paul Felsch of Helios shares how custom indexing, when implemented properly, supports an advisor’s duty of care and loyalty. Key best practices include:

• Clear client agreements outlining services
• Suitability assessments linking investor and strategy profiles
• Monitoring to ensure alignment and performance
• Define and substantiate the term “Custom”
• Transparent disclosures and stated conflicts of interest

This raises the following question: If custom indexes can deliver better outcomes and are not being considered as a portfolio management option, could that potentially be considered as not acting in the client’s best interest?

Why It Matters Now

The RIA industry is experiencing massive growth. With that comes greater competition for HNW+ clients that are expecting more services. The ability to deliver a differentiated client experience and create the capacity to serve more clients is a tremendous challenge. Custom indexing, powered by modern infrastructure, can deliver a true Win-Win-Win scenario.

Clients win by lowering portfolio costs, reducing tax-drag, and aligning their portfolio to their personal preferences.

Advisors win by delivering a competitively differentiated experience, having a documentable process for tax optimization, and creating capacity by leveraging technology to automate portfolio management.

RIA firms win by creating an operationally consistent advisor experience, increasing AUM and revenue with a scalable platform, and reducing compliance risk by embedding consistent processes for portfolio management across all advisors and clients.

Next Steps:
Firms interested in learning more about custom indexes, portfolio overlay software solutions, and the compliance implications can visit www.riacsuite.com/custom-index to watch the webinar, explore additional strategy guides and articles, or request a conversation with Mike, Pete, or Paul.

[i] Based on average portfolio fund fees published by portfolio analytics providers like BlackRock

[ii] Based on multiple reports from portfolio overlay managers like Smartleaf, AQR, Vanguard, and Parametric