Every now and then someone writes a piece that opens your eyes and really makes you think. John Rekenthaler at Morningstar has been doing exactly that again and again since 1988.

In mid-February, he published an article about how indexing won the war for the asset management industry. In the mid-1990s, he notes, the editors at Money magazine were stunned when he predicted that index funds might someday account for 30% of all mutual fund assets.

In fact, that figure recently topped 50%, and Rekenthaler now predicts it could reach 70%. This has naturally upended the world of active fund managers. When confronted about their inability to outperform the indexes, these active managers have pointed to indexing’s market irrationality and the herd mentality it fosters. But, Rekenthaler notes, if indexing has done what its critics claim it does—caused markets to become irrational gambling casinos driven by swings between exuberance and dystopia, not valuation and fundamentals—then active managers should have been major beneficiaries. They weren’t. The exuberance of the 1990s, in hindsight, was less about the wild swings wrought by indexes and more about a generational investment boom meeting the advent of the internet; together they spawned a valuation bubble in stocks. Laying the blame for that at the feet of index funds is dubious.

But even indexing pioneer Jack Bogle voiced concerns about indexing’s dominance. “Not in American history have so few controlled so much money, possessed by so many,” Rekenthaler writes.

Rekenthaler’s article has caused me to reflect on the vast changes sweeping through the advisory business, because the movement of investors to funds has ramifications for what advisors do, too. They likely see it as one of their main jobs to sort through the maze of funds for investors easily confused by the plethora of options. When I started covering the financial advice industry in 1990, there were 2,679 mutual funds, according to Statista; as of 2022, there were 7,393. (At the same time, the number of company share issues has declined: Over the last 25 years, the number of publicly traded stocks has declined by roughly 50%.)

Many advisors have developed their own sophisticated models to analyze and select funds, as have software companies like Morningstar and Zephyr. So if one were to ask advisors which of their services deliver the most value to clients, many would likely say asset allocation.

It remains a prized service. But thanks in part to the indexing boom, this too has become increasingly commoditized, and advisors have had to respond by strengthening a host of comprehensive services many of them once paid lip service to. If indexing has been bad for active managers, it has been good for holistic planning.

The upshot for financial advisors is rosy. Clients need advisors who think more about their needs and goals and less about products. Progress, as Rekenthaler concludes, is “inevitably fitful.”

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