Active No Longer The Default

September 13, 2017

Relationship Argument

The most common argument I hear about why advisors don’t switch to index investing is, “What about the relationship I’ve had with XYZ funds for 20 years?”

While relationships are important, I don’t believe investors want to hear that their advisor bet their entire life savings on a more expensive option with a small group of funds because their golf buddy works there. Investors often only get one chance to build up retirement assets.

XYZ fund company may have gotten nearly 100% of clients’ assets in the past, but they’re going to have to make ends meet with 50% or less in the future. Trust me, they’ll still be OK.

Index Investing Doesn’t = Totally Passive

Some investors have yet to make the change to index investing because they think it is “passive.”

I hate the word “passive” to describe index investing. Many of the professionals I know who run index-based investments work very hard, and there are actual necessary job functions involved with the concept, such as the index provider and the portfolio manager of an ETF. Indexes and ETFs don’t just happen with no effort and by nature they are not fully passive.

Likewise, much of the added value has simply moved to the portfolio level. Instead of advisors focusing on underlying funds adding value, the value is now created in the asset allocation decisions using indexes.

We call TOPS, our primary investment strategy, “A Strategic Approach to Active Indexing™.” We put in thousands of hours of total time each year researching and managing our portfolios. Likewise, we adjust allocations and hire and fire ETF providers consistently.

Passive investing is simply a misconstrued word in this context—not much different than the ills of the term “smart beta.”

It Will Be OK, Just Different

Change is disconcerting for almost everyone. However, the only constant is change, to paraphrase Heraclitus. In the case of index investing, the long-term results of the change are good for investors as well.

It is my belief that nearly all investors should have at least 50% of their money in indexes, and most investors should have all their portfolio in indexes. When I started managing ETF portfolios, there were less than 100 ETFs available. Now, there are more than 2,000. Likewise, there are now famously more indexes than stocks!

Instead of picking stocks, or trying to pick other folks who will pick the right stocks, we will continue to primarily add value for our investors by managing well-diversified portfolios of ETFs.

ValMark Advisers Inc. is the manager of the TOPS Portfolios of ETFs. ValMark started managing "TOPS" separately managed accounts of ETFs in 2002. The firm manages more than $5.1 billion in ETFs for retail and institutional clients in multiple investment products. Email: [email protected]; phone: 800-765-5201. For a complete list of relevant disclosures, please click here.


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