The twentieth century saw substantial growth in financial companies dedicated to active investment management. During the second half of the century, analysts would directly analyze data obtained either by visiting the companies, from market studies or from regulatory disclosures. Those who had access to more data and had the necessary analytical capabilities could make investment decisions that were ahead of the curve, achieving healthier returns that compensated for their higher fees.

Increased access to information in the internet boom of the 1990’s, as well as greater scrutiny by regulators, reduced this competitive advantage and the spread between the best and worst active managers. This is when portfolio indexing, ETFs and passive investments mushroomed. These changes brought an opportunity for investors to substantially reduce portfolio management costs, with little or no reduction in returns.

During the last few years, it has been shown that more than 85% of active managers are not able to consistently beat their benchmarks or referenced index. More importantly, there is evidence that portfolio returns are impacted at least as much by asset allocation and accurate portfolio construction as they are by the selection of specific managers or securities. Considering all this, with little chance to surpass benchmarks after fees that, in many cases, are 10 times higher than their passive counterparts, we must ask ourselves: why do so many investors still entrust their assets to active managers who do not achieve their goals consistently and who put their own economic interests before their clients?

The main problem lies in the business model of most asset managers. Instead of focusing on meeting investors’ goals, such as liquidity, necessary cash flow, investment horizon, risk aversion, etc., most money managers are looking at how much compensation they will obtain by managing their clients’ money.

The twentieth century saw substantial growth in financial companies dedicated to active investment management. During the second half of the century, analysts would directly analyze data obtained either by visiting the companies, from market studies or from regulatory disclosures. Those who had access to more data and had the necessary analytical capabilities could make investment decisions that were ahead of the curve, achieving healthier returns that compensated for their higher fees.

Increased access to information in the internet boom of the 1990’s, as well as greater scrutiny by regulators, reduced this competitive advantage and the spread between the best and worst active managers. This is when portfolio indexing, ETFs and passive investments mushroomed. These changes brought an opportunity for investors to substantially reduce portfolio management costs, with little or no reduction in returns.

During the last few years, it has been shown that more than 85% of active managers are not able to consistently beat their benchmarks or referenced index. More importantly, there is evidence that portfolio returns are impacted at least as much by asset allocation and accurate portfolio construction as they are by the selection of specific managers or securities. Considering all this, with little chance to surpass benchmarks after fees that, in many cases, are 10 times higher than their passive counterparts, we must ask ourselves: why do so many investors still entrust their assets to active managers who do not achieve their goals consistently and who put their own economic interests before their clients?

The main problem lies in the business model of most asset managers. Instead of focusing on meeting investors’ goals, such as liquidity, necessary cash flow, investment horizon, risk aversion, etc., most money managers are looking at how much compensation they will obtain by managing their clients’ money.