© 2019 Dow Jones & Company. All Rights Reserved. THE WALL STREET JOURNAL. Monday, October 7, 2019 |R1
I
n recent years, investors have been flocking to low-
cost index funds, driven by their long-term record of
outperforming higher-cost actively managed funds.
But the trend isn’t quite as strong for clients of
Wall Street brokers.
The difference is fairly clear-cut. A report re-
leased last month by Cerulli Associates shows bro-
kers at four major Wall Street firms have just 29%
of their clients’ managed-fund assets in passive index
funds—well below the 45% passive rate for independent
investment advisers.
The gap is even wider for regional and independent
brokerage firms, which have smaller average account
sizes and passive percentages of only 22% and 20%, ac-
cording to Cerulli, a research and consulting firm.
By comparison, passive funds account for about 40%
of all mutual funds’ and exchange-traded funds’ assets,
and in August they topped 50% of all U.S. stock funds’ as-
sets, according to Morningstar, the fund-research firm.
The four big firms in the Cerulli surveys areMorgan
Stanley, the Merrill unit ofBank of America,UBSandStock Medal
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SCOREBOARD
Third-quarter 2019 fund performance,
total return by fund type. More on R2.
U.S.
stocks*Intl.
stocks*Bonds
(intmd.)Source: Lipper*Diversified funds only, excluding sector
and regional/countryfunds–1.4% 2.1%
INSIDE
Wall Street
Brokers
Missed the
Memo
On Index
Funds
Even as passive investments thrive,
big brokers put just 29% of fund assets
in them. They see value in active funds.Wells Fargo&Co.
Securities-industry experts say
the difference can be explained
partly by Wall Street’s historical
sales culture, with brokers want-
ing to show clients their skill in
picking money managers. In addi-
tion, there’s the raw fact that
some brokers and their firms can
still get paid more in commissions
and other compensa-
tion with active funds
than passive ones.
Some critics go fur-
ther, noting that inde-
pendent advisers, for-
mally known as
registered investment
advisers, are largely paid by fees,
not commissions, and they are
held to a higher “fiduciary duty”
standard requiring them to put
clients’ interests ahead of theirs.
Meanwhile, brokers paid by com-
mission have only been required
to recommend investments that
are “suitable” for clients.
That means, critics argue, that
some brokers might be more in-clined to pick higher-cost invest-
ments that generate commissions
but that might not perform as well.
“It’s definitely possible that
registered investment advisers’
being subject to a fiduciary stan-
dard would lead them to choose
index funds more often than bro-
kers who do not have the same
standard,” says Nicole Boyson, a
finance professor at
Northeastern University
business school in Boston.
Dr. Boyson notes that in-
dex funds have histori-
cally tended to outper-
form actively managed
funds. Yet active-fund in-
vestors pay 4.5 times in fees
what passive-fund investors pay,
Morningstar says.
The 2019 Cerulli survey is
based on responses from 1,200
brokers and advisers. The active/
passive percentages apply to cli-
ent assets run by outside manag-
ers—mutual funds, exchange-
traded funds, commingled funds
Pleaseturntothenextpage71%
Big firms’
allocation to
actively run
fundsJOURNAL REPORT A QUARTERLY ANALYSIS
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