The Myth of Active Management
The Myth of the Merits of Active Portfolio Management Is Alive and Well
(A version of this article was previously published inInvestor Magazine)
By Sue Gabor, CFP & J.R. Robinson
For decades, the investment industry has been trying to convince investors that skilled professional money managers can consistently beat the market through superior research, security selection and tactical decision-making.
For decades, the evidence has been saying otherwise.
Two articles published in August provide timely reminders that the active management story refuses to die. The Wall Street Journal recently published an article titled "Stock-Picking Funds Are Performing as Poorly as Ever." Financial Planning followed with "Why Active Investing, With a Losing Record, Still Has Its Believers."
The titles pretty much tell the story.
The Evidence Is Overwhelming
The debate over active versus passive investing is hardly new. Researchers have been studying the performance of professional money managers for decades. The conclusion has been remarkably consistent: Most actively managed stock funds fail to outperform comparable indexes over meaningful periods of time, particularly after fees and expenses.
The latest data offer little reason to change that conclusion.
According to the Wall Street Journal, just 27% of actively managed U.S. large-cap funds beat comparable passive alternatives during the 12 months ending June 30, 2026. Remarkably, that was actually better than their longer-term record. Over the previous decade, only 13% beat their passive benchmarks. The article also notes that active equity mutual funds have experienced net outflows every year since 2015, while index funds and ETFs have continued gaining market share.
Morningstar's broader Active/Passive Barometer tells much the same story. For the ten years ending December 31, 2025, only 21% of active strategies survived and beat their passive counterparts. Among U.S. large-cap funds, the success rate was just 10%.
S&P Dow Jones Indices reaches similar conclusions through its long-running SPIVA research. In 2025 alone, 79% of actively managed large-cap U.S. equity funds underperformed the S&P 500.
This is important because these are not isolated academic studies using obscure methodologies. Morningstar and S&P have been measuring active management for years, using thousands of funds and multiple market cycles.
The results keep coming back the same.
Yesterday's Winners Are Not Necessarily Tomorrow's Winners
Active management proponents sometimes respond that averages are irrelevant because investors simply need to identify the better managers.
That sounds reasonable until you try to do it.
Knowing which managers beat their benchmarks during the previous five or ten years is easy. Morningstar can tell you that. The problem is identifying the managers who will outperform during the next five or ten years.
Past winners frequently fail to repeat their success.
That creates two hurdles for investors. First, the active manager must outperform the benchmark by enough to overcome higher expenses, trading costs and, in taxable accounts, potentially greater tax inefficiency. Second, the investor or advisor must identify that manager before the outperformance occurs.
The second challenge is often conveniently overlooked.
If reliably identifying tomorrow's winning managers were easy, active management would have a much stronger empirical record.
"This Time Is Different"
One of the more fascinating aspects of the active-versus-passive debate is how the justification for active management changes with market conditions.
When markets become volatile, investors are told active managers will shine because they can protect portfolios during downturns. When markets become highly concentrated, as they have been recently, we are told active managers can avoid overvalued stocks. When correlations decline, stock pickers supposedly have more opportunities to distinguish winners from losers.
The current argument is that artificial intelligence, higher interest rates and greater dispersion among individual stocks have finally created a "stock picker's market."
There is just one problem. The stock pickers still aren't picking particularly well.
As the Wall Street Journal noted, dispersion among stocks has increased dramatically, theoretically creating exactly the environment in which active management should thrive. Yet active large-cap managers continue to lag their passive competitors.
Morningstar found something similar in its analysis of 2025. Despite wide differences in performance among sectors and investment themes, only 38% of active funds survived and outperformed their average passive peers.
If active managers struggle when conditions supposedly favor active management, investors should at least question the premise.
Follow the Money
Why, then, does active management remain so deeply embedded in the financial services industry?
One possible explanation is obvious: There is a great deal of money attached to it.
Large brokerage firms often have extensive relationships with mutual fund companies, separately managed account providers, private money managers and other investment product sponsors. Those relationships may involve revenue sharing, administrative fees, preferred-provider arrangements and other forms of compensation.
This is not conspiracy theory. It is a recognized regulatory issue.
The Securities and Exchange Commission has specifically identified third-party payments, revenue sharing, proprietary products and preferred-provider arrangements as potential conflicts of interest for broker-dealers and investment advisers. The SEC has also specifically discussed conflicts involving separately managed account programs and compensation received from program sponsors.
FINRA similarly warns firms about conflicts involving revenue and fee-sharing arrangements with fund managers.
That does not mean every recommendation of an active manager is inappropriate. It does mean investors should understand that the financial services industry has economic incentives that may help explain why active management remains so prominently promoted despite its disappointing long-term record.
A portfolio consisting primarily of inexpensive index ETFs is wonderfully simple. It is also difficult to monetize beyond the advisory fee.
Adding outside money managers, separately managed accounts, proprietary strategies and other layers of investment products creates more opportunities for someone in the financial services ecosystem to get paid.
Investors should understand that distinction.
Passive Investing Does Not Mean Doing Nothing
One misconception is that using index funds means abandoning portfolio management.
It does not.
There are still important decisions to make about asset allocation, tax efficiency, asset location, and withdrawal sequencing – all of which require a degree of nuanced consideration and competency.
Those are portfolio management decisions. Trying to guess which stocks will outperform the market is something different.
At our firm, we generally prefer broadly diversified, low-cost index funds and ETFs for the long-term growth portion of client portfolios because the empirical evidence supporting them is compelling. It also allows us to spend more of our time on areas where we believe financial planners have a better opportunity to add tangible value, including tax planning, retirement income planning, estate planning, insurance risk management and helping clients avoid costly financial mistakes.
I would much rather help a client make a sound Social Security claiming decision, reduce unnecessary taxes or correct an estate planning oversight than pretend I can predict which large-cap money manager will outperform the S&P 500 over the next decade.
The Burden of Proof Has Shifted
Perhaps 40 years ago investors needed to justify why they were abandoning professional stock pickers in favor of something as unsophisticated as an index fund.
Today, the burden of proof should be reversed.
After decades of SPIVA reports, Morningstar Active/Passive Barometers and academic research reaching broadly similar conclusions, investors should ask why they should pay more for active management in the first place.
That does not mean the S&P 500 is the answer to every investment question. It isn't. Nor does it mean every index fund is a good investment. There are now indexes tracking almost every conceivable corner of the markets, some of which are little more than active strategies masquerading as passive ones.
The lesson is simpler.
Markets are extraordinarily difficult to beat consistently. Costs matter. Taxes matter. Diversification matters. And investors should be skeptical whenever someone claims to possess a repeatable ability to identify tomorrow's winners.
The myth of active management remains alive and well.
The evidence supporting it is another matter.
Susan Gabor is a Certified Financial Planner (CFP®) and Chief Client Happiness Consultant at Financial Planning Hawaii and Fee-Only Planning Hawaii. She has more than 25 years of planning experience. J.R. Robinson is the owner and founder of FPH and FOPH.
Sources
- "Stock-Picking Funds Are Performing as Poorly as Ever," The Wall Street Journal, August 16, 2026.
- "Why Active Investing, With a Losing Record, Still Has Its Believers," Financial Planning, August 2026.
- Morningstar, U.S. Active/Passive Barometer, Year-End 2025.
- S&P Dow Jones Indices, SPIVA U.S. Year-End 2025 Scorecard.