With billions upon billions of dollars generated in trailer fees and commissions every year in Canada, it should come as no surprise that there are a lot of people making a lot of money selling active management. Active management costs more because you have to compensate managers and research staff, and you have to pay for more transactions (either directy if you own individual stocks, or indirectly if you own mutual funds which themselves trade positions). You also have to pay for advertising, marketing and ancillary services (in some cases).
If you have been reading up on investing for a while now, you will have seen the mountain of academic research which indicates that passive investing (investing in ETFs or index mutual funds) will outperform the majority of active investors (on a dollar weighted basis). You will have seen how fees can kill performance. You will have seen how lower portfolio turnover reduces tax drag, and so on. Yet when financial advisors promote passive investing, there is a tonne of backlash both from within official channels from financial advisory firms, and indirectly from other financial advisors who have built their careers peddling active funds and active management exclusively.
The problem is that the rebuttals are rarely based on academic support (because there is none). So it’s a sad commentary on the state of affairs that the advisors who stand behind science, common sense and due diligence get ostracized by their colleagues. Shouldn’t it be the other way around? Shouldn’t anyone who promotes active management be subject to the same direct and indirect scrutiny (and quite frankly, malice) for supporting a philosophy that has failed for decades when applied in most advisor-client relationships?
To be clear, I believe there is room for passive AND active management within investor portfolios – it’s not an either-or proposition. For some people, active is the way to go. For others, they are 100% passive. The massive middle will probably be better served with a mix of the two.
Great post Preet,
It is very frustrating when you are restricted from expressing your deeply held beliefs and opinions. Especially when they are backed by the very best academic research in the world.
regards,
Mike Bayer, CFP
Preet,
You said it well, but I sense a fear of baring your soul. I went further than you: http://blog.mdwoptions.com/options_for_rookies/2009/05/integrity-where-is-it-hiding.html
“So it’s a sad commentary on the state of affairs that the advisors who stand behind science, common sense and due diligence get ostracized by their colleagues”
It’s normal behavior. These guys are protecting their income stream and the best interests of the client come in a distant second.
Don’t we see this all the time? Corrupt policemen are protected by a code of silence, when everyone would be better served if those bad guys were identified and fired.
Don’t the unqualified doctors get protected by their peers? If those quacks lost their licenses, then malpractice insurance would cost much less (at least in the States, don’t know if doctors need that insurance in Canada), benefiting everyone.