The Passive vs. Active Debate

Earlier this month, the good folks at Knowledge Wharton published an article on their website entitled 'If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?', linked here --> http://knowledge.wharton.upenn.edu/article.cfm?articleid=2702

While, we at this blog, don't have a strong opinion on the passive vs. active debate, the article does go through a somewhat balanced excercise of the pros and cons of each. That said, while it touches upon this a little in the beginning of the article, I don't think they are giving enough credit to one very important reason why Active management outsells passive to the degree it does.

In this author's opinion, the real reason is the distribution system. Having spent quite a few years employed to distribute actively managed mutual funds, I can tell you first hand that the distribution machine to sell active management is huge and filled with very effective sales professionals. Despite the quantitative data put forth in the article, active management will continue to outsell passive as long as they build in distribution fees (12b-1s) to pay the distributors.....registered reps.

Either way, I think the article is a good read. Thanks Wharton.

Final 408(b)(2) Regulations postponed......briefly

Just last week, February 11 to be exact, the Department of Labor announced that it intends to extend the applicability date for service-provider fee disclosure rules under section 408(b)(2) of ERISA. Disclosure requirements will now apply to contracts or arrangements in existence on or after January 1, 2012, rather than July 16, 2011.

At this point, nothing other than the effective date has changed. All covered service providers will still be required to provide extensive disclosures about their services and the compensation they expect to receive as well as identifying their fiduciary status.

This delay was made solely so that The Department of Labor can review the public comments that they requested previously in connection with the interim final rule, including comments on the types of service providers who should be covered and on whether the required disclosures should be presented in a standard format or not, and subsequently to allow time for implementation of any changes made based on those comments.

While this extension is sure to be welcomed by certain service providers, it isn't likely to provide any type of reprieve. For those hoping for the "good old days" to come back,.....well there's always hope.