The asset management industry deserves much of the criticism it gets. That’s because it should do a better job of providing value, and that means some managers should stop misrepresenting their products. They should stop running their so-called actively managed funds as closet index funds.

Those were some of the comments on Tuesday at the Natixis Global Asset Management media luncheon in Manhattan.

John Hailer, president and CEO for the Americas and Asia of Natixis Global Asset Management, complained that the industry has “a lot of lazy advisors” and there are many “mediocre firms.” Hailer also contended that advisors are too often paying excessive attention to star ratings and not to what would best fit into an effective financial plan.

He had critical comments for some in the industry, especially Wells Fargo’s former leader, saying parts of the advisory industry have brought on regulatory problems. “How the hell did something like that happen?” Hailer asked. We have to get better or the regulatory environment will get even tougher for us,” Hailer said.

Another speaker, Daniel Nicholas, client portfolio manager with Harris Associates’ Oakmark Funds, say the asset management industry also has other problems. Too many managers are running actively managed funds and taking top fees, yet providing little value, he said.

Nicholas agreed that closet indexers are in many parts of the industry, but he argued that good stock pickers, running actively managed funds, can make a big difference for the average retail investor.

Still, he said actively managed funds can sometimes do “a terrible job” of branding themselves. And Nicholas contended the recent popularity of passive investing is a good thing.

Why? He says it will drive out many poor active managers and will make the virtues of active management more apparent. More competition forces active funds to prove that they are not closet indexers.

In the meantime, active and passive management are sparring for the dollars of investors. This competition is good, Nicholas said. “When passive comes into a country overseas, it makes active better.”

Nicholas said at home, he is using his decided active style as a way of beating indexes.
“We are using active shares to differentiate ourselves and that is a good thing,” Nicholas said. To survive, he added, active managers are going to work at their philosophy as will those of the opposite school.

“You’re either going to be really active or really passive,” he maintained. Oakmark has returned 8.50 percent a year over the 10 years ending September 30, slightly better than the S&P 500 in the same period (7.24 percent). It’s five-year numbers are about the same as the index, and so far this year it is beating the index, 9.29 percent versus 7.84 percent.

An active fund pretending to be one thing but not really that will lose in the competition between these two schools, he added.

How does one identify a true actively managed fund and not just one pretending to be actively managed to obtain the higher fees?

“You ask if your weights are different than the benchmark,” Nicholas asked. “Are you saying what you are doing?”