Happy Birthday, Mediocrity!

Happy Birthday, Mediocrity!

At the end of August, Vanguard Group’s First Index Investment Trust turned 40. While many people laughed at John Bogle as he rolled out low cost investing designed to match the index instead of beating it, the fact is that the S&P 500 Index Fund now stands at $252 billion in assets. Client sentiment has changed since the launch of indexing. Between the concept and the perception, our world evolved to embrace mediocre investment performance subsidized by low cost management.


Over the past four decades, the philosophy of matching the index instead of outpacing it grabbed the attention of many clients. While most managers do not beat the index, it’s problematic that too many indices are measured against the S&P 500. Many funds are not meant to beat the benchmark because the manager might reduce an exposure to undue risk, for example.


Of course, the advantage of indexing is to do so in a low cost manner. According to the Wall Street Journal, Vanguard has reduced investment fees by as much as 90 percent.1 In the end, whether it is cost or performance, indexing seems to have won out against the active manager. Even the U.S. Department of Labor mentions indexing as a viable alternative for retirement investors. 


So, if fees are near minimum and matching the index is a desired investment return, how can a financial professional add value to his/her financial planning practice?


The answer lies in getting clients to consider other things besides just return. We need to change our approach …

  • As our population ages, we must provide inflation-adjusted, after-tax income (not returns) to our clients
  • Conversations about longevity will become more important than conversations asset allocation
  • For more Americans, affording the same essentials 20 years into retirement will be more of a concern than how much equities they have in their portfolio
  • It will be more valuable to know our clients’ portfolios won’t be devastated if a health care event happens compared to knowing how much they earned in one year
  • Talking about how we can protect our clients’ legacy for the next generation will be more powerful than talking about how we reduce investment risk


Being able to execute on those value propositions will be more important in the future. Just as Vanguard changed the conversation to cost and return, we have to change the conversation to protection, income and longevity in order to add value in the long run.


Winning Strategy:

Look at how Vanguard has changed the dynamic of investing since 1976. Indexing drove the investing population to cost and little value. Drive your clients to valuable services like reducing longevity risks, creating legacy values for the next generation, and protecting their wealth. 


About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”


1“Wealth Adviser Daily Briefing: Index Funds turn 40, a ‘How-to’ for Foreign Home Buyers,” The Wall Street Journal, Sept. 1, 2016: http://blogs.wsj.com/moneybeat/2016/09/01/wealth-adviser-daily-briefing-index-funds-turn-40-a-how-to-for-foreign-home-buyers/