VERY NOW AND THEN SOMEONE WRITES A PIECE THAT opens your eyes and really makes you think . John Rekenthaler at Morningstar has been doing exactly that again and again since 1988 .

In mid-February , he published an article about how indexing won the war for the asset management industry . In the mid-1990s , he notes , the editors at Money magazine were stunned when he predicted that index funds might someday account for 30 % of all mutual fund assets .

In fact , that figure recently topped 50 %, and Rekenthaler now predicts it could reach 70 %. This has naturally upended the world of active fund managers . When confronted about their inability to outperform the indexes , these active managers have pointed to indexing ’ s market irrationality and the herd mentality it fosters . But , Rekenthaler notes , if indexing has done what its critics claim it does — caused markets to become irrational gambling casinos driven by swings between exuberance and dystopia , not valuation and fundamentals — then active managers should have been major beneficiaries . They weren ’ t . The exuberance of the 1990s , in hindsight , was less about the wild swings wrought by indexes and more about a generational investment boom meeting the advent of the internet ; together they spawned a valuation bubble in stocks . Laying the blame for that at the feet of index funds is dubious .

But even indexing pioneer Jack Bogle voiced concerns about indexing ’ s dominance . “ Not in American history have so few controlled so much money , possessed by so many ,” Rekenthaler writes .

Rekenthaler ’ s article has caused me to reflect on the vast changes sweeping through the advisory business , because the movement of investors to funds has ramifications for what advisors do , too . They likely see it as one of their main

If indexing has been bad for active management , it has been good for holistic planning .

jobs to sort through the maze of funds for investors easily confused by the plethora of options . When I started covering the financial advice industry in 1990 , there were 2,679 mutual funds , according to Statista ; as of 2022 , there were 7,393 . ( At the same time , the number of company share issues has declined : Over the last 25 years , the number of publicly traded stocks has declined by roughly 50 %.)

Many advisors have developed their own sophisticated models to analyze and select funds , as have software companies like Morningstar and Zephyr . So if one were to ask advisors which of their services deliver the most value to clients , many would likely say asset allocation .

It remains a prized service . But thanks in part to the indexing boom , this too has become increasingly commoditized , and advisors have had to respond by strengthening a host of comprehensive services many of them once paid lip service to . If indexing has been bad for active managers , it has been good for holistic planning .

The upshot for financial advisors is rosy . Clients need advisors who think more about their needs and goals and less about products . Progress , as Rekenthaler concludes , is “ inevitably fitful .”

Evan Simonoff

Email me at esimonoff @ fa-mag . com with your opinion .

8 | FINANCIAL ADVISOR MAGAZINE | MARCH 2024 WWW . FA-MAG . COM