8. To some, fiduciary equals passive strategies. We at CFA Institute stand in favor of a fiduciary rule. Yet in the fog of this debate, being a fiduciary has been interpreted by some as a dictate to go passive. Being a fiduciary means an advisor has to put his or her clients first. Both active and passive investment funds can be appropriate choices in this scenario.
9. Passive managers play no role in capital allocation. Whatever happened to the search for growth and value? And to the proper purpose of the capital markets—to allocate capital to where the best risk-adjusted returns can be found? This is how the investment management profession truly benefits society at large and is an active management activity. Passive managers play no role in this noble work.
10. Ignore alternatives at your peril. For more sophisticated portfolios, surely alternatives can play a role. Yet the vast majority of these products remain active in nature. Should they be ignored?
All forms of asset management have their place. It’s their correct usage—whether they are fit for purpose—that we at CFA Institute worry about. Many active managers clearly have a place—but many also have a fee problem. Active managers need to come up with an alternative value proposition: they should experiment more with portfolios that are not constrained, have longer lockup periods, and charge less. Incentive fees based on performance may be a path to a brighter future.
If active managers redefine themselves and their goals, if they become more willing to put their profits at risk based on performance, if they hone their fund lineups and consolidate, the battle may recommence. But in the meantime, let’s not be blind to the broader issues.
Paul Smith is president and CEO of CFA Institute.