Active's losing decade turns advice into the product

It was another forgettable year for active U.S. large-cap managers. Only 27% of them beat passive funds in the year through June 30, after fees, according to Morningstar data cited by Financial Planning. Over a decade, the share falls to 13%.

Investors made their choice long ago. Passive U.S. funds held $21.88 trillion at the end of June. Active funds held $18.83 trillion, according to the Investment Company Institute. Morningstar's numbers give advisors a way to talk about that shift with clients.

Financial Planning's report treats the figures as an opening for advisors to present themselves as tax planners and service providers, not fund pickers. That is a plausible reading. It also invites a question: why does active management survive all this evidence?

Randy Bruns at RIA Model Wealth says he is "shocked" by how many advisors still run active portfolios. "We have decades of evidence showing how difficult it is to consistently beat an index after fees," he told Financial Planning. "And Morningstar's latest numbers are simply more evidence of that."

Bruns blames the way those firms are built. Large banks and brokerage firms create their own funds and field "armies of financial advisors incentivized to sell them," he said. At least one academic paper has also tried to cast doubt on the after-fee performance conclusions.

Monica Dwyer, a wealth advisor and vice president at Harvest Financial Advisors in West Chester, Ohio, adds a practitioner's nuance. Her firm does not pay outside providers for active management, but it runs some active sleeves in-house. Much of the market's recent gains, she notes, have come from a handful of technology stocks, especially chipmakers. Outpacing the S&P 500 in that environment means catching those winners early, a skill that rarely shows up in a track record.

The Morningstar record leaves room for an exceptional active manager. The typical client, however, should not pay for the attempt. Advisors who have been easing away from fund selection now have a defensible explanation: the figures move the discussion from prospectus to plan.

The shift was already in motion. RIAs have been moving trust and estate services in-house faster than they can staff them, Wealth Advisor Daily reports. Morningstar's tally makes that move easier to justify: when a fund fee no longer buys returns, the planning fee is what the client pays for.

When stock-picking cannot justify its fee, the fee itself has to justify the advisor. That works if the advisor sells decisions rather than picks. Dwyer's in-house management is a reminder that the fee, not the strategy, is what matters. An advisor who wants an active tilt inside a passive core can do that without outsourcing it to a fund family.

Clients are likely to see the numbers before the advisor raises them. The one-year figure, 27%, will circulate through the next earnings season. The ten-year average, 13%, survives an up quarter. Advisors who would rather not raise the subject should expect clients to bring it first.