Active Asset Managers as a Group Fail

By Bob Peters || July 6, 2025

The Real Roles of Asset Managers and Financial Advisors

Let’s start by clearing up a common point of confusion: asset managers and financial advisors are not the same thing-and their roles in your financial life are very different.

Asset managers focus on managing investments. They’re required to disclose how they invest, what strategies they use, the risks involved, and what kind of returns you might expect. Most of them specialize in a particular asset class-like U.S. large-cap stocks, international bonds, or commodities. They don’t typically interact with individual investors directly; instead, they work through financial advisors, who act as a distribution channel.

Financial advisors, on the other hand, work directly with you, the investor. They help you decide what mix of investments makes the most sense for your situation-balancing risk and return to arrive at a sound asset allocation. They might recommend a blend of asset classes and help you implement that strategy using products from various asset managers. Importantly, asset managers don’t help you figure out your ideal asset mix; that’s where the advisor comes in.

Let’s say, for example, you meet with a financial advisor. Based on your age, goals, and risk tolerance, they might recommend putting 30% of your long-term investments into large-cap U.S. equities, 30% into international equities, and 40% into intermediate-term U.S. bonds.

To execute that strategy, you’ve got two main options: buy individual stocks and bonds that match that allocation-or, more realistically, invest in mutual funds or ETFs that cover those categories. If you go the fund route (which I strongly endorse), you’ll have to decide whether to use actively managed funds or low-cost passive index funds.

Before we get into those choices-particularly the long-term underperformance of active management-I want to share a quick story about the importance of identifying the customer.

Who’s the Customer? 

Years ago, I managed a regional commercial banking division at a global bank. Our team of 16 bankers worked with hundreds of mid-sized businesses. To build relationships, we’d sometimes host events with high-profile speakers or educational sessions on topics like currency risk or interest rate hedging. These events were designed to thank and educate our customers: the financial decision-makers at these companies.

Now, keep that in mind as we shift gears.

Customers of Advisors, Advisors, and Asset Managers—Who’s Who?

During the 2008–2010 financial crisis, my employer acquired a major brokerage and investment firm. The idea was to broaden the range of services offered to both sets of clients: the bank’s commercial customers and the brokerage’s investor base.

One interesting area of synergy was employer-sponsored retirement plans-things like 401(k)s and 403(b)s. Before the acquisition, we had strong relationships with business clients, but barely any presence in managing their retirement plans. That changed overnight.

The Conference That Shifted My Perspective

Not long after the merger, I attended a conference hosted by the newly acquired brokerage arm. I expected something similar to our commercial banking events-customer-focused, with valuable insights.

What I found was completely different 

The event was held at a luxury resort. The main room was filled with booths run by asset managers, and the attendees were primarily financial advisors employed by the brokerage firm. It became clear: the asset managers had paid for this conference. Why? To pitch their products to the advisors in hopes they’d return home and recommend those funds to clients like you and me.

In other words, at this event, the financial advisor was the customer. Asset managers were doing the selling, not to individual investors, but to the advisors who would in turn influence our investment choices.

And in most cases, those advisors-and their firms-received a cut of the asset manager’s fees if they steered investors toward their products.

So who’s the real customer here?

A Common Practice—or a Conflict of Interest?

In a previous post, “Integrity, Trustworthiness, and Serving Your Best Interest Matters,” I wrote about how fragile trust is. Once lost, it’s hard to rebuild. And conflicts of interest-whether real or perceived—are one of the fastest ways to lose trust.

The traditional brokerage model, which operated under a “suitability” standard rather than a “best interest” standard, created room for the kind of conflicts described above. Did financial advisors recommend higher-cost, actively managed funds that paid commissions because they felt that these funds were in your best interest?

I experienced this firsthand. While working at the firm, I was encouraged to use their wealth management services. I asked if I could invest in the Vanguard Total Stock Market Index Fund, which offered broad U.S. market exposure for just 0.03% per year. The answer? “No, that’s not allowed.” I was willing to pay for financial planning advice-but not for expensive, underperforming funds. Was that industry norm? A conflict of interest? You decide.

The Illusion of Outperformance

Many investors are drawn to the idea of beating the market. I have friends who are convinced they can do it by picking the right stocks at the right time. But most don’t have any formal training in financial analysis or a deep understanding of the companies they invest in. They’re essentially guessing-and their occasional wins give them false confidence. I doubt their long-term results hold up against a simple index fund.

It’s easy to get swept up in the success stories: Apple, Amazon, Tesla. But those are the exceptions, not the rule.

As we discussed in the post, “The Haystack Has All the Winners You Need,” the research of Hendrik Bessembinder-and the 2024 SPIVA U.S. Persistence Scorecard-make it clear that trying to beat the market is statistically stacked against you.

Let’s look at what the numbers show.

The Skewed Reality of Stock Market Returns

Bessembinder’s team analyzed over 64,000 global stocks from 1990 to 2020. The findings were sobering:

-55.2% of U.S. stocks and 57.4% of international stocks underperformed U.S. Treasury bills.

-Just 2.4% of global stocks created all $75.7 trillion in net market wealth.

-The top five firms (Apple, Microsoft, Amazon, Alphabet, and Tencent) generated over 10% of that wealth alone.

What does that tell us? Most stocks don’t perform well-and the few that do are nearly impossible to predict.

Can’t Professionals Do Better?

If stock-picking is so hard, maybe we should rely on professionals-active fund managers-to find those rare winners.

Unfortunately, the data says otherwise.

The 2024 SPIVA Persistence Scorecard, published by S&P Dow Jones Indices, tracks how active managers perform relative to their benchmarks. The results? Not great:

% of Actively Managed U.S. Funds Underperforming Their Benchmark

Other key takeaways:

-Only 2% of large-cap funds remained in the top half over five years.

-Not a single top-quartile fund from 2020 stayed there through 2024.

The chance of consistent outperformance? Lower than a coin toss.

Why Active Management Fails

It’s not just bad luck. The failure of active management is built into the system:

–Positive Skewness: A few stocks drive most returns. Miss those, and your performance lags.

–High Failure Rates: Most stocks destroy value over time.

–High Costs: Active managers charge more and trade more-both of which eat into returns.

–Survivorship Bias: Underperforming funds often get merged or shut down, skewing the stats. The SPIVA report accounts for this, but many industry reports do not.

So What Should Investors Do?

Diversify-and do it using low-cost index funds. Here’s why that works: 

• Index funds capture the big winners automatically. 

• They don’t waste money chasing performance or trying to outsmart the market. 

• Bessembinder’s research shows that owning 50 to 100 random stocks dramatically improves your odds of beating Treasury bills. Even better: own the whole market through an ETF. 

This supports the Nobel Prize-winning insights of Harry Markowitz’s Modern Portfolio Theory. Funds tracking the S&P 500 or MSCI ACWI aren’t just simple-they’re smart. 

What This Means for You?

• Don’t chase hot funds. Odds are they won’t stay hot.
• Focus on probabilities, not possibilities. Betting on the next Amazon sounds fun, but it’s a long shot.
• Stick to broad, low-cost index funds or ETFs.
• Remember: most stocks underperform, but the market doesn’t-thanks to a few standouts.
• Stay invested. Missing just 20 of the best market days over 20 years can cut your returns dramatically-from 9.52% to just 2.63%, as we covered in “The Power of Staying Invested.”

Final Thoughts 

Markets reward discipline, patience, and broad diversification-not hunches or heroics. The message from Bessembinder’s global stock research and the SPIVA Scorecard is loud and clear:

You don’t have to beat the market to succeed. You just have to own it.

Forget the needle. Buy the whole haystack. Understand who is the customer-and keep it simple.