Tax-Loss Harvesting and Direct Indexing: The Operational Work Behind the Strategy

Direct indexing is moving further into the mainstream of wealth management.

In FTSE Russell’s 2026 survey of 400 U.S. financial advisors, 41% said they currently use direct indexing, up from 33% in 2025. Across current and planned adoption, 83% said they use or plan to use direct indexing within the next 12 months. Tax-loss harvesting remains a major part of the appeal, cited by 66% of advisors as a benefit.

But growing adoption brings another question into focus:

What happens operationally when tax-aware investment strategies need to scale across more clients, accounts, securities, and transactions?

Tax-loss harvesting and direct indexing are often discussed in terms of their potential value to investors, including tax management, greater personalization, and more control over portfolio construction.

Behind those benefits is a considerable amount of operational work.

As portfolios become more individualized, investment operations teams need to manage the data, transactions, reconciliations, reporting, controls, and exceptions that keep those strategies running.

The investment strategy may get the attention, but the operating model helps determine whether that strategy can scale.

What are tax-loss harvesting and direct indexing?

Tax-loss harvesting involves selling investments at a loss to realize those losses for tax purposes, typically while maintaining the portfolio’s intended market exposure through other investments.

Direct indexing allows an investor to own individual securities that represent an index rather than gaining exposure solely through a pooled vehicle such as an ETF or mutual fund.

Together, these capabilities can give advisors greater flexibility to manage portfolios around individual client circumstances.

The operational difference is significant.

Instead of managing exposure through a relatively small number of pooled positions, teams may need to support substantially more securities, transactions, tax lots, account-level data, and portfolio-specific activity.

That flexibility is valuable, but it also creates complexity.

Why does the operational side matter?

Having access to direct-indexing technology is not the same as having an operating model capable of supporting it efficiently.

As portfolios become more personalized, the operational environment becomes more complex. More accounts, securities, transactions, and client-specific requirements create additional work around data, reconciliation, controls, reporting, and exceptions.

That raises practical questions for investment operations teams:

• Who validates the data?
• Who reconciles activity across systems?
• Who investigates exceptions?
• Who maintains the controls?
• Who ensures downstream reporting reflects what actually happened?

The technology may enable the strategy, but these workflows help determine whether the strategy can operate efficiently as it grows.

More personalization means more account-level complexity

Direct indexing moves portfolio management closer to the individual account.

That can create more flexibility, but it also means more moving parts.

Positions, transactions, tax lots, restrictions, and other account-level information need to remain accurate across the systems and teams using them.

Portfolio customization can also mean that different clients no longer follow exactly the same investment path. As the number of personalized portfolios increases, small operational inefficiencies can become much larger problems.

For operations teams, the challenge becomes maintaining accuracy and consistency without allowing additional portfolio complexity to create the same increase in manual work.

More transactions create more downstream work

Tax-loss harvesting can create ongoing trading activity as opportunities are identified and portfolios are adjusted.

The operational work does not end when a trade is executed.

Transactions still need to settle correctly. Positions and cash need to be reconciled. Records need to remain aligned across custodians, portfolio management platforms, accounting systems, and reporting environments.

That creates a chain of downstream activity.

When transaction volumes increase, so does the importance of having repeatable processes around validation, reconciliation, exception handling, and reporting.

This is where a strategy designed to create value at the portfolio level can create pressure at the operational level if the supporting workflows are not prepared to scale.

Automation helps, but exceptions still need owners

Technology is essential to making tax-aware investment strategies scalable.

Portfolio management platforms, trading systems, reconciliation tools, and automation can reduce the amount of repetitive work required.

But automation does not mean every account will move through every workflow without intervention.

Data can arrive incorrectly. Positions may not reconcile. Transactions can fail. Corporate actions can require additional handling. Client restrictions can introduce circumstances outside a standardized process.

This is where the role of people becomes particularly important.

The question is not only how much work can be automated. It is who owns the work when something does not follow the expected path.

As more routine activities become automated, investment operations teams can increasingly focus on exception management, validation, controls, analysis, and continuous improvement.

What happens when direct indexing scales?

A process that works well for a limited number of portfolios may behave very differently when deployed across hundreds or thousands of accounts.

Consider what increases alongside adoption:

• Individual securities and tax lots to track
• Account-level transactions
• Data requiring validation
• Reconciliation activity
• Portfolio-specific restrictions
• Reporting requirements
• Exceptions requiring investigation

None of these activities individually defines the investment strategy.

Together, however, they determine how much operational infrastructure is required to support it.

This is why scalability should not be viewed only as a technology question.

Can the operation absorb more complexity without creating the same increase in manual work, errors, or internal workload?

That is a different test of scalability.

People, process, and technology need to scale together

Investment organizations do not necessarily need more people for every increase in portfolio volume.

They need the right operating model.

That starts with understanding how people, process, and technology work together.

People provide investment operations expertise, judgment, accountability, and exception management.

Processes establish how work moves across systems and teams, where controls occur, how exceptions are escalated, and how quality is maintained.

Technology automates repeatable activities, manages data, supports portfolio workflows, and provides greater visibility into operations.

Weakness in any one of these areas can limit the others.

Adding technology to an inefficient process does not automatically fix the process. Adding people to absorb growing workloads may increase capacity without addressing the underlying source of the workload.

The stronger question is:

How should the operation be designed so that increased portfolio sophistication does not create unnecessary operational complexity?

Where can external investment operations support fit?

Not every part of a tax-aware investment strategy needs to be supported internally.

Portfolio construction, investment decisions, client relationships, compliance responsibilities, and other strategic activities may remain closely held by internal teams.

Recurring operational workflows may provide a different opportunity.

Depending on the organization’s operating model, specialized external support can complement internal teams across areas such as:

• Reconciliations
• Data validation
• Transaction support
• Reporting preparation
• Exception investigation
• Accounting support
• Other middle- and back-office workflows

At Infinit-O, the objective is not simply to add resources to an existing process. It is to understand where specialized operational support can strengthen the client’s existing team, processes, and technology as operational requirements grow.

The right division of responsibility will vary by organization.

What matters is identifying where internal expertise creates the most value and where recurring operational work can be supported more effectively.

Operational scalability deserves the same attention as investment scalability

The benefits of tax-aware investing are increasingly understood. The operational question is whether the infrastructure behind those strategies can keep pace as adoption grows.

For investment organizations, that means looking beyond the technology itself.

The ability to personalize a portfolio is one capability. The ability to support that personalization across growing numbers of accounts, transactions, systems, and exceptions is another.

Scaling successfully requires both.

A sophisticated investment strategy needs an operation capable of keeping up with it.