The WSJ posted an Other Voices column written by financial planner Chuck Levin who said he gave up on active management when he hung his own shingle. Based on the article it seems as though the big reason for him was the expense of active management noting that active funds charge an average of 1.3% (his number, I don't know if it is correct). He alludes to the difficulty of beating the market but my take is that his focus is the expense.
Passive versus active is one of many questions that an investor needs to answer for themselves but frankly the way the article was framed it seemed to not take into account many years of changes in the world, changes in investment products and changes in how do-it-yourselfers have a much easier time accessing information and commentary on the Internet.
To be clear, the point here is not convince anyone that active is better than passive, this is something people need to figure out for themselves. Both are valid and my conclusion is to prefer active.
Mr. Levin seems to imply that the active manager's role is solely to beat the market, which I disagree with. In my opinion the role of any investment professional is to give their client they best shot possible of having enough when they need it and then helping them effectively manage the withdrawal phase so they don't run out of money seven years after retiring.
Anyone who wants to hire an investment manager should be buying into investment philosophy not performance. Any manager, passive or active, will have years where they are ahead or behind an index like the S&P 500 (even a passive manager will have a combination of different asset classes owned through index funds).
If you hire a passive manager then you are buying the philosophy of low expense, tax efficiency and capturing whatever the market is doing, good or bad. The hard part for the advisor and client both is enduring large declines without panicking (panic on the part of the client and the ability of the advisor to prevent the client from succumbing to panic).
If you hire an active manager than you are buying whatever philosophy the manager believes in and of course you have to to be fully onboard, believing that his philosophy will work. We have a philosophy for long term investment success and while I have unyielding faith in our strategy I am equally certain it is not right for everyone; no investment strategy can be right for everyone.
Long time readers will be familiar with my contention that someone could generally outperform the market over time but easily run out of money if their savings rate is inadequate and conversely someone could generally lag the market over time but accumulate plenty for their needs by having a high savings rate.
A huge part of the job of being an advisor, as alluded to above, is making sure clients don't commit financially self-destructive behavior. All too often people do themselves in, we know this because otherwise there would be no such thing as behavioral finance.
Taking the example of the passive manager above who prevented clients from selling at the low in March 2009, they've done their clients a huge service. The market is back at an all time high. Yes the result for the last 13 years has not been great but it would have been far worse for anyone throwing in the towel four years ago.
Our big thing is trying to smooth out the ride. If the black line is the ups and downs of the market we trying to look like the green line. If we are successful then that means there will be times that we are ahead but also times that we lag. The big picture is as simple as that; right for some people but not others -- just like any investment philosophy.