Adviser as the ultimate active manager

It's not breaking news that, for the most part, index funds continue to outperform actively managed funds. When the stock market is climbing, as it has for most of this year, active managers have a harder time than usual beating indexes, although some achieve that feat. Investors have heard that message loud and clear, and have responded by putting more of their hard-earned money into index funds. According to the Investment Company Institute, actively managed domestic-equity mutual funds had net outflows of $575 billion between 2007 and 2013. Over the same six years, index domestic-equity mutual funds and exchange-traded funds received $795 billion in cumulative net new cash and reinvested dividends. Last year, the average index equity fund had more than $4.4 billion in assets, compared with just $1.5 billion for the average actively managed equity fund. Wall Street is nothing if not innovative. The advent of liquid alternatives — mutual funds that offer investors hedge-fund-like strategies wrapped in "40 Act funds, daily liquidity and all — might be considered a renewal of active fund management. But liquid-alt funds can be passive, too. What's more, the fees investors pay for them are closer to those for actively managed mutual funds than index funds. So what's an adviser to do?

NOT A ZERO-SUM GAME

The debate over the value of active versus passive will be waged for years to come. That's OK — thoughtful debate can lead to new thinking and new ways of doing things. Level-headed investors, however, will understand it's not a zero-sum game. There are places in a portfolio where index investments make the most sense (large-cap exposure, for example) and places where actively managed funds are logical investments (emerging markets, perhaps). Above the fray, financial advisers should consider themselves the ultimate active managers, because they are the ones who help clients determine the best mix of active and passive investments. More than that, they are the ones who can set the best asset blend, make sure allocations are rebalanced regularly and shift them at the best times. So the message is, don't get bogged down in the noise over active versus passive investing and just be the best active manager your clients have.