I’ve been writing about active management’s shortcomings for so long now that it’s sometimes hard not to feel cynical about it, not to mention a little angry.
After all, around the world, there are thousands of people retiring every day with pension pots very much smaller than they would have been if they had simply invested in a portfolio of low-cost index funds and resisted the temptation to tinker with it.
For some of my fellow commentators, active management was an elaborate conspiracy, a rigging of the system, an industrial-scale hoax designed to transfer wealth from the many to the few. Though I can see why people think that, I’m sure the reality was very different.
The rise of active management was neither planned nor orchestrated. It just happened. Why? Well, there were several things that allowed it to flourish, such as the prevalent use of adviser commissions, light-touch regulation, the industry’s political influence and, perhaps most important of all, a sustained period of strong performance by global equities; as long as the value of their portfolios continued to rise, few investors stopped to ask whether active management was actually adding any value.
Combined with the general ignorance and innate behavioural biases of the investing public, this proved a potent mix, and, as assets under management grew, a host of other intermediaries increasingly benefited too. These included investment consultants, ratings agencies, stock analysts, custodians, platforms and fund supermarkets. Inevitably, knowing which side their bread was buttered, these gatekeepers also became vocal cheerleaders for actively managed funds.
Another consequence of the growth in active management’s popularity was that it generated huge budgets for PR, marketing and advertising. The 1980s and 90s saw a mushrooming of the financial media, largely funded by industry advertising. Journalists had a constant appetite for stories to fill air time and column inches, and the industry was only too happy to provide them. This, in turn, gave the markets and asset management a far bigger place in our lives; it made us trade far more often than we should have done; and, of course, it perpetuated the myth of the star fund manager who, in return for what seemed like a relatively modest fee, could help us to beat the market.
So then, were those fund managers, all those intermediaries and media outlets, conspiring to deprive us of our rightful share of our own investment returns? Of course they weren’t. They were simply doing their jobs. It was lucrative work; they took advantage of it; and, who can say that the rest of us wouldn’t have done the same in their situation?
No, active management wasn’t a conspiracy. It was a chronic market failure. And the root cause wasn’t deviousness or greed; it was simply the fact that not enough people asked the right questions. And I’m not just talking about financial advisers, journalists, politicians or regulators here, but consumers as well. Yes, me included.
The industry had a party for more than 30 years at our expense — and it got away with it because we let it.
ROBIN POWELL is a freelance journalist and the founding editor of The Evidence-Based Investor. Based in Birmingham, England, he founded Ember Television and Regis Media, and he specialties in helping disruptive financial firms to grow. He also campaigns for a fair, transparent and sustainable investing industry. You can follow him on Twitter at @RobinJPowell.
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
