Practical Applications of “An Index Isn’t a Fiduciary” and What That Means for Active Management

Abstract

In <b><i>“An Index Isn’t a Fiduciary” and What That Means for Active Management</i></b>, from the Spring/Summer 2021 issue of <b><i>The Journal of Index Investing</i></b>, author <b>Adam L. Berger</b> (of <b>Wellington Management</b>) critiques widely held views about active versus passive investing. Nowadays, many investors avoid actively managed funds, which they view as having a limited and unrealistic purpose: trying to beat the average performance of the market, net of management costs. But active investing also has a fiduciary purpose; investment managers must allocate assets in ways that align with their clients’ goals. Passive investments like index funds are designed merely to match a performance benchmark while minimizing costs, with no thought of alignment. Berger says the “active vs. passive” debate misses the mark because investors may benefit from both strategies. Investors can take a fiduciary approach to choosing investments by considering whether a market capitalization–weighted index is aligned with their goals or whether a manager can construct a better-aligned portfolio, after costs. Different investors have different goals, so treating passive investing as the default option ignores the important fiduciary purpose of active investing.