Clients deserting pricey investment products in favor of cheaper alternatives have pushed not just the asset management industry but also retirement advisors to change their ways.

A Financial Times report says that the rise of exchange-traded funds, to the tune of some $1.3 trillion, has accounted for much of the $1.6 trillion drop in active equity fund investments. Figures from fund manager Bernstein indicate that the lower-cost alternatives have pushed investment managers to look at other ways to do business as income falls for active fund managers.

Even BlackRock, which offers both active and passive products and is the the world’s largest fund manager, laid off several stockpickers back in March and has expanded its use of technology to make investment decisions.

Although index funds just came into existence in the 1970s, their growth has been such that Vanguard, which helped spur such funds to success, has brought in an average of more than $1 billion in assets a day just in the first half of this year. And in August, Fidelity crowed about its latest cut to index fund fees, challenging Vanguard.

Bernstein analysts predict that by this coming January, low-cost passive products will represent half of all U.S. equity AUM.

And as disenchantment with active managers grows, investors are expanding their discontent; many now challenge the advisors overseeing defined contribution retirement accounts to channel more assets into cheaper funds.

“Investment committees are hearing more from participants about the investment lineups and specifically the passive and lower-cost options,” Harris Gignilliat, an FT 401 advisor who oversees more than $1 billion in retirement assets, is quoted in the report. Gignilliat adds, “We’ve had several investment committees bring up passive [management] because of discussions with participants.”

And that goes for 401(k)s, too, particularly in the teeth of lawsuits by participants against plan providers for using expensive investment options. “We’re seeing at least one new 401(k) lawsuit each week,” Ben Johnson, director of passive funds research at Morningstar, says in the report. He adds, “Participants have been paying a hefty price over time and they’re trying to claw back some of the money they’ve put in.”

While Gignilliat predicts a return to active funds, through a combination of reduced fees and higher performance, it hasn’t happened yet—and of course some managers are hanging onto the reins, believing that active is superior.

Investors, it seems, aren’t quite convinced.

Instant Insights /

Trend in cheaper investments pressures asset management industry

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