“We’re only halfway there,” she said. “I don’t think it goes far enough. The DOL has forced the SEC’s hand, and they’ll have to act.”
Missing The Point
A tumultuous ongoing debate between proponents of active management and adherents of passive indexing is damaging Americans’ ability to save and invest, said Phillips
“The line has been drawn between index and active, one has been sainted, one has been vilified,” Phillips said. “The movement towards indexing isn’t coming out of the crummy super-expensive active funds, it’s coming out of good funds from companies like Franklin Templeton and American. It’s not that passive is bad, I just think it’s overdone."
The often negative tones of the debate, where each side is accused of passing on excessive fees to investors, providing little value to justify a fund’s expenses, or of exposing investors to an undue amount of market risk, scares middle class investors away from investing, Phillips said.
The active-versus-passive argument misses the point, said Phillips, since the main driver of investment returns is actually cost: A low-cost active fund is likely a better option for investors than an overpriced index fund.
“The main benefits of passive are the low cost and the low turnover,” said DuQuesnay. “Now we’re blurring the line between what is really passive and active with rules-based investing, which is a new version of low-cost active.”
Bernstein said as that rules-based indexing strategies like smart beta catch on, they might become a victim of their own success.
“The real danger happens when the smart beta is overwhelmed by the dumb money,” Bernstein said. “You’re going to see a lot of people piling into these funds, and then piling back out of them when those risk factors turn negative.”
A Silicon Silver Lining
On the bright side, the advent of robo-advisors and other automated systems and processes enables advisors to serve a broader range of clients and could push the middle class into investing more of their assets for retirement.